Leasing business premises – the new draft code

The current code was issued by the Royal Institute of Chartered Surveyors (RICS) in 2007 and provides a framework for creating a fairer balance between landlords and tenants and flexibility within commercial leases.

The 2007 code is the third edition and is a voluntary arrangement which seeks to encourage and promote a level playing field in regards to commercial lease negotiations.

Whist the code can be helpful, particularly for those smaller commercial landlords and tenants, on the whole there has been poor uptake within the industry. Therefore RICS have drafted and recently finished their consultation period on a new code (the professional statement for leasing business premises).

Much of the new code mirrors that of the 2007 code with the following additions:

• Mandatory requirements which must be adhered to by agents and landlords who are members of RICS

The mandatory requirements are, firstly, to ensure lease negotiations are dealt with in a ‘constructive manner that displays integrity and respect’ by all parties and secondly, provide comprehensive heads of terms which confirm the following:

• the identity and extent of the premises
• any special rights to be granted
• the term
• break rights and rights of renewal
• guarantor or rent deposit requirements
• rent including confirmation of any rent free period and frequency of payment
• rent review dates and mechanism (RPI, market etc.)
• the landlords position in regard to VAT
• alienation rights
• repairing obligations and alteration rights
• any initial alterations or fit out
• service charge liability
• permitted use
• insurance liability

As parties to a lease and their legal advisors can attest heads of terms are the most effective way to ensure that everyone is on the same page from the outset and can remove prolonged negotiations once the lease has been drafted. In addition the above are what you would expect to see in any standard head of terms and therefore ensuring the same are used in every case should be encouraged.

• Voluntary requirements

The remaining contents of the new code deals with voluntary requirements which are based on best practice advice which can only be departed from for a ‘justifiable good reason’ (which currently remains undefined). Whilst these do not amount to departure from the current principles contained in the 2007 code; the feeling is that adhering to the same will be expected and closely monitored.

Going forward we are yet to see how the draft will be affected by the consultation period however; landlords should be reviewing their heads of terms to ensure they are new code compliant and tenants should ensure they receive the information they are entitled to under the code.

If you would like any advice in relation to a lease over business premises please contact a member of our commercial property team.