In the current climate in which many occupiers may be looking to renegotiate the terms of their existing leases, the provisions of the new Lease Code may be helpful in highlighting key points to consider when approaching discussions with landlords.
Background
The new Lease Code was published by the RICS in February 2020. It does not come into force until 1 September 2020 but will nevertheless provide a useful reference guide for tenants looking to renegotiate lease terms.
The Lease Code will apply to almost all lettings of business premises in England and Wales. A the key point to note is that parts of the Lease Code will be mandatory for RICS members in England and Wales, including registered agents and landlords.
The objective of the new Lease Code is to improve the quality and fairness of negotiations of lease terms and to promote the use of detailed heads of terms to ensure that terms are fair and balanced. This will also help make the legal process of agreeing leases more streamlined.
Mandatory requirements
The mandatary requirements that must be complied with by RICS registered agents and landlords in lease negotiations 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 Lease Code and its supplemental guide and must be recommended to obtain professional advice.
- There must be written heads of terms (subject to contract) summarising the position on specific terms – these include the identity and extent of the premises; length of the lease term; whether the Landlord and Tenant Act 1954 (security of tenure) will be excluded; any break rights; any requirements for a rent deposit or guarantor; the amount of rent and payment terms; any rent free period; any rent reviews; VAT; liability to pay service charge and/or insurance contributions; rights to assign, underlet, charge or share the premises; repairing obligations; permitted use; rights to carry out alterations and reinstatement requirements and any conditions to the letting (such as board approval, surveys).
- The same requirements apply to heads of terms on any lease renewal or extension, except where the terms are stated to follow the 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 will be responsible for ensuring that heads of terms complying with these provisions are in place before a draft lease is issued.
Helpfully, the Lease Code includes a checklist so that you make sure that the mandatory requirements have been included in the landlord’s heads of terms.
Good practice guidance
The remaining provisions of the Lease Code set out good practice guidance for landlords and letting agents in negotiations of heads of terms, as well as matters to be considered by landlords and tenants and their legal advisers in negotiating the lease itself. The following may be of particular interest to occupiers, especially if renewing or extending an existing lease in exchange for rent concessions in the current market:
- Unless stricter conditions have been agreed in heads of terms, a tenant’s break option should only be conditional on paying basic rent, giving up occupation of the premises and leaving no subtenants or other occupiers.
- Leases should also require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break is exercised.
- Rent review clauses must be clear and not result in a “headline rent”, unless specifically agreed (for example, if the landlord has paid a financial inducement).
- Landlords should have regard to the RICS’ statement on service charges in commercial property so that service charges conform with the principles and mandatory provisions of that statement.
- The landlord should only be able to require an authorised guarantee agreement (AGA) from an assigning tenant, a guarantee for any AGA, a rent deposit or new guarantor on assignment if this is reasonable.
- A landlord should only be able to require a tenant to remove alterations at the end of the term if it is reasonable to do so (unless agreed otherwise in the heads of terms).
- Leases should include provisions for damage by an uninsured risk, as well as by insured risks.
These requirements are not mandatory but if challenged a regulated landlord or letting agent may have to justify any departure from these to the RICS.
Conclusion
Parts of the Lease Code will become mandatory for landlords and agents to comply with from 1 September 2020; in the meantime the Lease Code sets out helpful guidance which may be useful when considering negotiation or renegotiation of lease terms in the current market. Please feel free to contact us at heads of terms stage to see if we can assist with negotiations and so that we are ready to deal with the documentation once terms are agreed.
