RICS code for leasing business premises
The RICS has launched a new Code for leasing business premises (1st Edition February 2020).
The Code will be effective from 1 September 2020 and will take effect as an RICS Professional Statement. The full Code can be viewed on the RICS website. Key provisions of the Code are set out below.
Part 1: Introduction
The objectives of the 2020 Code are stated as improving the quality and fairness of negotiations on lease terms and promoting the use of comprehensive heads of terms to make the legal drafting process more efficient.
The 2020 Code takes the form of an RICS Professional Statement, and accordingly, whilst the Code is similar in content and form to the 2007 Code for Leasing Business Premises, unlike the previous 2007 Code, compliance with the 2020 Code will be mandatory for RICS members. The 2020 Code will apply to the majority of business premises let for a period of more than six months (with the exception of premises only used for housing plant and equipment or advertising media).
Part 2: Mandatory requirements
The Code sets out the following mandatory requirements for RICS members when entering into a lease of business premises:
- Negotiations: Lease negotiations must be approached in a constructive and collaborative manner.
- Unrepresented parties: Any party not represented by an RICS member or other property professional must be advised of the existence of the Code and its supplemental guide and must be recommended to obtain professional advice.
- Heads of terms: Transaction terms must be recorded in writing, subject to contract and must summarise, as a minimum, the following:
- Identity and extent of the premises (to be shown on a Land Registry compliant plan if registerable) together with any special rights to be granted.
- Length of term including details of any renewal or break rights and whether the Landlord and Tenant Act 1954 will apply or be excluded.
- Guarantor or rent deposit requirements.
- Amount of rent, any rent free period, frequency of rent payments and frequency and basis of any rent review.
- Liability for payment of service charge and insurance premiums business rates and VAT.
- Ability to assign, sublet, charge or share the premises.
- Repairing obligations, permitted use, alterations and reinstatement obligations.
- Conditions of the letting, such as subject to survey, board approval or planning permission.
The mandatory requirements will also apply to lease renewals and lease extensions except for any terms that are stated to follow the tenant’s existing lease subject to reasonable modernisation.
Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests.
The landlord, or its letting agent where relevant, will be responsible for ensuring that heads of terms complying with the above provisions are in place before the initial draft lease is circulated.
An optional template heads of terms is set out as an appendix to the Code together with a checklist against which non template heads of terms may be checked.
Part 3: Lease negotiation best practice
The remaining provisions of the 2020 Code, set out in Part 3, are not mandatory but, instead, set out good practice and include matters to consider when negotiating heads of terms and the lease itself.
Whilst it is recognised that there may be “exceptional circumstances in which it is appropriate to depart from these provisions” RICS members that do so may be required to justify their decisions and actions. It is therefore probable that, in time, tenants will look to the provisions of Part 3 as standard terms for commercial lettings.
Key points of “good practice” are set out below:
- Premises: The identity of the premises should be clearly defined, a lease plan should be provided and the tenant should be granted all necessary rights for the intended use of the premises (such as car parking and where necessary rights to run data cabling).
- Length of term, renewal rights and break rights: The length of term and any break provisions should be stated. The tenant should be notified with sufficient time to take professional advice as to the implications of excluding the 1954 Act (where relevant). Unless the parties have agreed stricter terms in the heads of terms, any tenant’s break should be conditional only on vacant possession and the payment of basic rent up to the break date and any advance payments of rent, service charge or insurance rent for the period after the break takes effect should be repaid to the tenant.
- Rent deposits and guarantees: Rent deposit provisions should state whether the deposit is security for the rent, or all of the tenant’s obligations under the lease and should set out the circumstances in which the deposit will be returned to the tenant with any interest accrued.
- Rent and rent review: Leases should allow either party to start the rent review process. Tenants should be made aware of the method or formula for review where appropriate to allow time to take professional advice and the review should not result in a “headline rent”. If a review is index linked the formula for review should not be designed to give a disproportionate increase outside of any agreed cap or collars.
- Service charges, insurance costs and other outgoings: Landlords should disclose known irregular events that may have a significant impact on the amount of future service charge. Landlords should have regard to the provisions of the RICS professional statement Service Charges in Commercial Property.
- Assigning, subletting, charging and sharing: Leases should contain standard provisions for assignment of whole, underletting of whole or part (where appropriate) charging and sharing with group companies.
- Repairs: Repairing obligations should be appropriate to the length of the lease and the condition of the premises.
- Change of use, alterations and fit out: Controls on alterations and change of use should be “no more restrictive than are necessary to protect the value of the premises and any adjoining or neighbouring premises of the landlord”. Where reinstatement of alterations is required this should be stated in the heads of terms.
- Insurance and damage: Where the landlord insures, full terrorism cover should be provided (where available on reasonable terms) and the lease should make adequate provision for damage caused by both insured and uninsured risks.
- Management and operational performance: Provision should be made to encourage co-operation between the parties to a lease to improve operational efficiencies and share available data. This may include “green” provisions such as those set out in the BBP Green Lease Toolkit.
- Energy Performance Certificates: Leases should state which party is responsible for obtaining any EPC that may be needed during the lease term and the landlord should be required to act reasonably if it reserves the right to choose the EPC assessor that the tenant is to use.
- Landlord’s title: Where there is a superior lease that prevents the landlord from complying full with the Code the landlord should comply with the terms of the superior lease but, if challenged explain the position to the tenant.
Part 4: Appendices
Part 4 of the 2020 Code includes Appendix A comprising the template heads of terms and checklist mentioned above and Appendix B a non mandatory supplemental guide for landlords and tenants including a checklist of occupancy costs intended to assist occupiers particularly those that may not be familiar with standard lease terms and terminology.
A full copy of the 2020 Code can be accessed here.