The RICS (Royal Institution of Chartered Surveyors) have released its new Code for leasing business premises (1st edition, February 2020) (‘the New Code’) which comes into force from 01 September 2020. The objective of this new code is to improve the quality and fairness of negotiations on lease terms to promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient.
The RICS Code was created with the aim to fundamentally improve transparency and fairness in the negotiation of commercial leases. In previous versions of the Code, this has been achieved by highlighting different aspects of best practice within the lease negotiation process. The New Code goes a step further, by becoming an RICS Professional Statement, consequently, compliance with aspects of the New Code will be mandatory for RICS Members.
The Code sets out the following mandatory requirements for RICS members:
- Lease negotiations must be approached in a constructive and collaborative manner.
- An unrepresented party must be advised of the existence of the code and its supplemental guide and must be recommended to obtain professional advice.
- There must be written heads of terms, stating that it is ‘subject to contract’ and summarising, as a minimum, the following:
- The identity and extent of the Premises (and requiring the landlord to arrange the provision of a Land Registry-compliant plan if the lease is registerable)
- Any special rights to be granted, such as parking or telecom/data access
- The length of term and whether the Landlord and Tenant Act 1954 will apply or be excluded.
- Any options for renewal or break rights
- Guarantor / rent deposit requirements
- The amount of rent, frequency of payment and whether exclusive of business rates
- Whether the Landlord intends to charge VAT on rent
- Any rent-free period or other incentive, any rent reviews including frequency and basis of review
- Liability to pay service charge and/or insurance premiums
- Rights to assign, sublet, charge or share the premises
- Repairing obligations
- The initial permitted use and whether any changes of use will be allowed
- Rights to make alterations and any particular reinstatement obligations
- Any initial alterations or fit-out [if known] and
- Any conditions of the letting, such as subject to surveys, board approvals or planning permission
- At a lease renewal or extension, the heads of terms must comply with the above 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 those provisions are in place before the initial draft lease is circulated.
The Code includes, as an Appendix, template heads of terms which comply with the above provisions.
The remaining provisions in the New Code are laid out in Part 3 and are not mandatory but instead indicate best practice. Whilst these provisions aren’t mandatory and RICS have stated ‘there may be exceptional circumstances in which it is appropriate for a member to depart from these provisions’ RICS members should read these provisions carefully as they may be required to justify their decisions and actions should they depart from these provisions.
Examples of the Code’s good practice are:
- Where the landlord proposes that rent is to be subject to review, the tenant should be notified of the proposed frequency and the method or formula of review at the outset in order to obtain early professional advice as to the implications.
- Where the landlord proposes that statutory rights of renewal under the Landlord and Tenant Act 1954 are to be excluded, the tenant should be notified at the outset in order to obtain early professional advice as to the implications.
- Unless the parties have agreed stricter conditions in the heads of terms, a tenant’s break should be conditional only on the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers. Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry.
- The landlord should indicate the range of main services, if any, and provide proper estimates of service charges and insurance payments. The landlord should also disclose the types of other outgoings (such as business rates) that the tenant will incur under the lease. Landlords should disclose known irregular events that would have a significant impact on the amount of future service charges.
- Leases should provide that if in each case the landlord reasonably requires, the assigning tenant is to provide an authorised guarantee agreement (AGA), any existing guarantor is to guarantee that the assigning tenant complies with the AGA and/or the assignee is to procure a new guarantor and/or rent deposit.
- Where the landlord will insure the property, leases should provide that the policy will be on normal market terms, that full terrorism cover will be provided if it is available at reasonable rates of premium, and that the landlord will insure with reputable insurers and provide details of the insurance to the tenant on reasonable request.
Appendix B contains a non-mandatory supplemental guide for landlords and tenants, including a checklist for occupancy costs
These provisions will improve the lease negotiation process as all parties are encouraged to adopt a collaborative and constructive approach from the start. Now that mandatory provisions have been introduced, regulated businesses may wish to review their standard heads of terms and leases to ensure they are compliant with the New Code.
We have reviewed this article in light of the recent developments of COVID-19 and whilst RICS have not made any changes to the code itself, they have created the ‘RICS Response to COVID-19’ which contains useful information for professionals and SMEs.
Further information can be found here: https://www.rics.org/uk/news-insight/latest-news/coronavirus-and-rics-events/