Code for leasing business premises 2020 – a tool for your toolbox
First published in Independent Practitioner Today in January 2021
The Royal Institution of Chartered Surveyors recently published an updated Code for Leasing Business Premises, effective from 1 September 2020, which independent practitioners will need to be aware of when negotiating leases whether as a landlord or as a tenant.
The objective of the Code is to improve the quality and fairness of negotiations on lease terms and to promote the issue of comprehensive heads of terms which should in turn make the legal drafting process more efficient.
Heads of terms are the commercial terms of the lease agreed in principle between the parties and the Code includes a useful template to follow. The template also functions as a useful checklist and ‘road-map’ to orient the uninitiated towards the issues they should be thinking about ahead of negotiations.
The Code will be relevant to current and prospective landlords, tenants and agents involved in negotiating heads of terms and leases. A 2007 iteration of the Code was a fair attempt to summarise broad principles and provide guidelines and “tips” for negotiations. The big difference between the old and the new is that the 2020 Code now includes mandatory requirements which are compulsory for RICS members. Examples of some of the mandatory requirements are as follows:
- Lease negotiations must be approached in a constructive and collaborative manner
- An unrepresented party must be advised about the existence of the Code and its supplemental guide and must be recommended to obtain professional advice. This has the obvious benefit of ensuring that negotiations can be efficiently done, but also ensures that no one party can immediately bamboozle the other with legalese and industry know-how.
- A comprehensive set of minimum requirements for heads of terms (see the Code for details)
- Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests
In addition to mandatory requirements, the Code also includes provisions indicating (but not mandating) good practice and these include not only matters to be covered by the parties and their agents when negotiating heads of terms, but also by the parties and their legal advisors in the negotiation of the lease itself. One issue of particular note for prospective tenants is in relation to tenant break options (i.e. a tenant’s right to bring the lease to an end at a specified point before the end of the lease term). The Code states that (unless agreed in the heads of terms) the tenant’s break option should only be conditional on the tenant paying all basic rent up to the date of the break, giving up occupation and leaving no subtenants or other occupiers behind. This is useful as the conditions attaching to a tenant’s break are often subject to extensive negotiation and can cause real problems later on if not properly considered at the outset.
The 2020 Code is generally far more comprehensive that the 2007 Code and is aimed at assisting those that might not find leases relevant to their daily practice. For example, the 2007 code has a very basic introduction to lease negotiations, providing some terminology for the uninitiated on who a Landlord is, or a Tenant. It even explains what Heads of Terms are so that parties can understand the basics. However, what the 2020 Code adds is detail to ensure that even a party that is new to lease negotiation, and even property transactions as a whole, could use the 2020 Code as a complete guide without the need to refer to a plethora of other documentation.
The 2020 Code goes some way towards creating a level playing field from the outset of negotiations at which stage parties are often unrepresented. Those without experience in the world of leases and property more generally can look to the Code for guidance and gain a broad understanding of the issues that need to be considered. The Code should not be substituted for seeking professional advice (from a surveyor and solicitor as required) and the Code makes clear that both parties should be encouraged to obtain advice from property professionals.
Where the 2007 Code had tips for the reader and felt more of a “try to do it this way” approach, the 2020 Code reads more formally than the 2007 Code given the introduction of mandatory requirements. The It is a welcome addition to the industry and should at the very least assist prospective landlords and tenants who are less than familiar with lease negotiations.