Consultation on revised Lease Code: what does this mean for landlords?

Recommended best practice

The proposed Code contains mandatory requirements and sets out an expectation or recommended best practice which should be followed. The mandatory requirements must be complied with by agents and landlords who are RICS registered. If the landlord is not a RICS member, but is being represented by an agent who is registered, the agent must ensure that the landlord is advised of the requirements. Members should only depart from the recommendations if it is for a justifiable good reason; however, further clarification is required as to what constitutes “justifiable good reason”. More importantly for landlords, it is not clear whether commercial reasons alone would be sufficient to justify a departure from the best practice statements.

Where members depart from the statement, there may be legal and/or disciplinary consequences and failure to act in accordance with the statement may result in a finding of negligence against a surveyor.

Proposed Code

The statement comprises:

• the agreement as to the terms which must be written in heads of terms
• recommendations on best practice for lease provisions
• an updated template for heads of terms which mirrors the proposed Code
• heads of terms checklist which can be used where landlords and agents wish to use their own form of heads of terms

updated occupier’s guide; as with the 2007 Code this is aimed at tenants and describes the main factors to be considered when agreeing a lease.

Key points

It is mandatory to provide certain information in the heads of terms, and as a minimum the heads of terms must state the position on the following:

• the extent of the premises and the elements of the structure to be included
• detail of any special rights e.g. parking
• the duration of the lease
• if renewal rights under the Landlord and Tenant Act 1954 are to apply. As under the 2007 Code, the lease should have rights of renewal unless there is good reason to exclude them. The proposed Code notes that this might apply in the case of short-term leases and states that the landlord should give reasons for excluding.
• details of any break provisions. As under the 2007 Code, tenant’s break clauses should only be conditional upon paying the rent and giving up occupation and leaving no subtenants.
• if there is a requirement for a rent deposit or guarantee
• the amount of rent, frequency of payments and if VAT is payable
• the length of any rent-free period and the basis of the rent and frequency. The recommendations in the proposed Code differ slightly from the 2007 Code, although it takes a similar approach. Landlords should explore possible alternatives to upwards only reviews to market rent, particularly for longer term leases. Leases should allow either party to start the rent review process. Time limits which intend to prevent a review or set a new rent through inaction by either party should not be imposed.
• the tenant’s right to assign, sublet, charge or share the premises. The recommendations in the proposed Code vary slightly from the 2007 Code in some respects. Assignment of whole subject to consent should be permitted, although it may set out reasonable circumstances where consent may be refused. There can be a requirement for an outgoing tenant to provide an authorised guarantee agreement, but only if reasonable at the time.
• if there is to be a service charge provision
• the extent of the tenant’s repairing obligations. As with the 2007 Code, the repairing obligations should be appropriate to the length of the term and the condition of the premises. However, the proposed Code also provides that if a schedule of condition is required the heads of terms should state which party is responsible for the cost of obtaining it.
• the use or range of uses, any restrictions on changing the use and any restrictions to be imposed on different types of alterations and detail any initial or fit-out alterations to be carried out
• whether the tenant is to contribute towards the insurance premiums; the provisions are largely similar to the 2007 Code but additionally provide that landlords should give the tenant the benefit of any premium discounts.

whether the tenant is to have any obligations regarding energy efficiency, for example that involve material cost or limit how the tenant can fit out the premises.

The next steps

Following the consultation period, RICS intends for the revised Code to replace the existing Code for Leasing Business Premises in England and Wales 2007 (the 2007 Code), which was first published on 28 March 2007.

It remains to be seen what the outcome and enforceability of the practice statements will be. If they are to be enforceable, where will the liability lie? Despite the uncertainty, there are elements of the best practice statements that are likely to cause concern to landlords and their agents, e.g. if retail landlords are required to offer leases with statutory renewal rights as standard they could be prevented from regulating tenant mix.

The revised Code will include an updated occupier’s guide which is aimed at tenants and which explains the main factors that a tenant should consider when agreeing a lease.