Sarah Bradford and Natalie Nolan from Waldrons Commercial Property Team have reviewed the proposed new ‘Lease Code’ for commercial leases (Code for Leasing Business Premises in England and Wales) published by The Royal Institution of Chartered Surveyors (RICS) which will replace the existing ‘Lease Code 2007’.The consultation on the new Code is underway and set to close on the 5th May 2019.
Unlike the Lease Code 2007 the new Code will not contain separate codes for Landlords and Tenants but will take the form of one universal Code.
Once finalised, it will be compulsory for landlords and agents who are RICS members to comply with certain parts of the Code and the rest of the Code will be used as ‘best practice’ guidance.
The elements of the Code which the RICS member landlords and agents must comply with are:
● Negotiations over the lease must be approached in a productive and cooperative manner.
● A party that is not represented by a RICS member or other property professional must be advised of the Code’s existence and recommended to obtain professional advice.
● When leasing property with vacant possession, the agreed terms for the proposed lease must be recorded in written heads of terms, marked “subject to contract”.
● The heads of terms must summarise the agreed position. Such as clearly defining the property to be let and ant special rights to be included such as parking.
● It will be the responsibility of the Landlords or their agent to ensure that the Heads of Terms are compliant and have been circulated before the draft Lease is circulated.
A template set of Code compliant heads of terms will be published alongside the Code, together with a supplemental guide explaining what parties need to consider when agreeing terms for a lease and the concepts proposed in the Code.
A particular area of the Code which is often cited in lease negotiations and which remains fundamentally unchanged in the proposed new Code relates to ‘break’ rights. The Code provides that tenant break options should only be conditional on two things:
● The tenant having no rent arrears and paying the basic rent up to the break date; and
● The tenant giving up occupation, free from any subtenants or third party occupiers.
The proposed Code does recognise that landlords may have special reasons for imposing stricter conditions, but gives no examples of acceptable reasons or conditions.
The proposed Code goes further than before in stating that the lease should provide for the landlord to reimburse the tenant for rent, service charge or insurance rent paid in advance for any period after the break date, although repayment of service charges may be deferred until after the accounts are finalised. Often, leases will be silent on this point which can result in tenants being unable to recover substantial sums which they have paid up front to comply with break conditions but which relate to the period after the break date when they no longer derive any benefit from the premises as was the case in the 2015 Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd Court case.
Sarah Bradford, Associate Director and Head of Commercial Property Team across Waldrons Black Country Offices is hopeful that that the Code will help both parties and will be used as a checklist when negotiating terms for new leases. It is likely to particularly helpful to those who are unfamiliar with commercial leases and the issues they should consider before agreeing to enter into a significant property commitment by taking on a lease.
If you have any questions on Commercial Leases or other Commercial Property matters please contact Sarah Bradford or Natalie Nolan in Waldrons Commercial Property Team on 01384 811811.
