Updating the Code for Leasing Business Premises

The Royal Institution of Chartered Surveyors (RICS) is consulting on a new edition of the Code for Leasing Business Premises (the Code).

The third edition of the Code was published in 2007. It sets out best practice for landlords when negotiating the terms of a new commercial lease with a tenant, highlighting the key points that should be agreed between the parties. The Code aims to promote fairness between the parties when agreeing the terms of a lease.

Key changes

At present, adopting the Code is voluntary. The new Code will become an RICS professional statement. This means that RICS members will be required to observe the mandatory requirements of the Code when negotiating the terms of a new lease. The mandatory requirements do not relate to the terms of the lease but set out the spirit in which the landlord should approach agreeing its terms. These requirements are:

• to approach negotiations in a constructive and collaborative manner;
• to advise unrepresented parties about the existence of the Code and to recommend that they obtain professional advice;
• to record the agreement in written heads of terms on a “subject to contract” basis that summarise, as a minimum, the position on the terms of the lease set out in the Code; and
• On a lease renewal or extension, to ensure that the heads of terms set out the position on the terms of the lease required by the Code unless those terms are stated to follow the tenant’s existing lease, subject to reasonable modernisation.

The main part of the Code includes recommended practice in relation to key lease terms such as the length of the term, break clauses, rent reviews, repairing obligations, alterations and insurance. There are no major changes to these key terms from the current Code although the new Code is less prescriptive in its tone and takes into account changes in market practice and law. For example, the new Code:

• no longer refers to the landlord offering alternative terms for rent review if requested to do so by the tenant, possibly one of the least observed requirements of the current Code;
• states that following the exercise of the break clause, the tenant should be entitled to a repayment of rent paid in advance that relates to the period after the lease comes to an end, recognising recent cases that have said that the tenant is not entitled to be repaid unless the lease requires repayment;
• states that the landlord can require reinstatement at the end of the term where it is reasonable to do so – the current Code says that the landlord should not require reinstatement unless it reasonable to do so.  The change in emphasis is subtle but important as it is less hostile to the idea of reinstatement; and
• includes new provisions that relate to energy performance certificates, co-operating to improve the operational efficiency of buildings and sharing data on lettings of part, recognising the growing importance of energy efficiency and green leasing;
• for the first time recognises that reasonable provisions restricting assignment of the lease can be included, including if the tenant has not paid the rents and there is no legitimate dispute about them; and
• says that landlords can require authorised guarantee agreements on an assignment of the lease where it is reasonable to do so rather than, as the current Code does, specifying circumstances where an authorised guarantee agreement may be requested.

Overall, the new version of the Code is slightly more landlord-friendly although not markedly so.  The new Code will also incorporate standard heads of terms, a checklist and guide to the Code that, currently, are published separately to the Code.

Responding

A copy of the proposed Code can be downloaded from the RICS website here. If you want to comment on the terms of the new Code, responses should be made direct to the RICS by Sunday 5 May 2019.