The new RICS Code for Leasing Business Premises (“the 2020 Code”) which was launched on 1st February 2020 comes into effect on the 1st September 2020 and replaces the 2007 Lease Code. Unlike previous editions the 2020 Code, for the first time, imposes some mandatory obligations on RICS members (previous versions gave practitioners guidance as to best practice but such guidance was not mandatory).
The defined objective of the 2020 Code is to promote fairness in terms of the negotiation of the Heads of Terms and also separately the drafting of the lease and ancillary documentation. How this is achieved through the latest Mandatory requirements and suggested best practice provisions are considered below.
Mandatory Requirements – Negotiations and Heads of Terms
- Negotiations over the lease must be approached in a “constructive and collaborative manner” (the 2020 Code).
- Any party not represented by an RICS member or other property professional must be advised by the other party or its agent about the existence of the 2020 Code and must be recommended to obtain professional advice.
- The agreed terms of the proposed lease of premises with vacant possession must be recorded in writing, be subject to contract and should as a minimum state the position as to the basic terms of the proposed letting. The basic terms include but will not be limited to the:-
a) Extent of the demised premises.
b) Rights to be reserved and granted.
c) Length of the term and whether the Landlord and Tenant Act 1954 will apply or be excluded.
d) Options to renew or break rights.
e) Requirements for a guarantor and / or rent deposit.
f) Level of rent, the frequency of the rental payments and any rent free periods.
g) VAT position and whether the Landlord has made a VAT election.
h) Details as to the potential service charge and insurance premium contributions liability.
i) Repairing obligations.
j) Permitted use (and whether any changes will be allowed).
k) Position regarding alienation and the Tenant’s ability to assign, sublet or share occupation.
The negotiations should aim to produce letting terms that “achieve a fair balance between the parties having regard to their respective commercial interests” (the 2020 Code).
The above provisions will also apply at a lease renewal or lease extension save for any terms that are stated to follow the tenant’s existing lease – subject to reasonable modernisation.
Part 3 of the 2020 Code
Part 3 of the 2020 Code does not impose mandatory requirements on the parties but instead advises as to what would be considered best practice for the drafting of the lease itself. A full review of these provisions is beyond the scope of this bulletin but generally speaking this part of the 2020 Code advises and warns against such traps as headline rent review clauses, unfair time limits, inappropriate break option conditions and onerous clauses in favour of the Landlord in relation to the alterations, alienation and user clauses.
Exemptions to the 2020 Code
The mandatory and good practice provisions of the 2020 Code will not apply to the following:-
- Agricultural Tenancies.
- Tenancies for a term of not more than 6 months.
- Tenancies of premises that will be subject to an Underlease of whole.
- Tenancies of premises to be used only for the storage of plant and machinery etc.
- Advertising hoardings.
If you require any further information in relation to the 2020 Code or in relation to any commercial property enquiry please do not hesitate to contact Daniel Moore or Barnaby Heap of Moon Beever.
Finally the 2020 Code can be accessed by clicking here.