Royal Institute of Chartered Surveyors issue new draft code for leasing business premises

The Royal Institute of Chartered Surveyors (RICS) have just finished their consultation period where they invited professionals’ views on a new draft code, labelled a “Professional Statement” (“the New Code”) for leasing business premises. This will replace the existing Code for Leasing Business Premises 2007. Many of the provisions of the New Code overlap with the existing code, but one major difference is that the 2007 code is voluntary, whereas the New Code will include:

1. mandatory requirements; and

2. voluntary recommendations on best practice advice, which can only be departed from if there is a “justifiable good reason” for doing so (which has not yet been defined).

The objective of the New Code is to improve the quality and fairness of initial negotiations between Landlords and Tenants on lease terms, and to promote the issuing of comprehensive heads of terms, in an attempt to make the legal drafting process more efficient, and to avoid negotiations on key terms at a late stage in the transaction.

The consultation document advises that the lease code and the accompanying model heads of terms should be used as a checklist for negotiations, before the grant of a new lease, and at the time of any lease renewal. In addition, landlords should be transparent about any departures from the New Code and the reasons for that departure.

The draft Code can be found here and is the document RICS were seeking views on. In overview, the document is in three parts:

• The Lease Code which sets outs RICS’ mandatory rules
• Appendix A containing template heads of terms, mirroring sections of the Lease Code
• Appendix B containing the occupier guide, and aimed at tenants to provide them with information as to the main factors they should consider when agreeing a lease.

The mandatory requirements include:

• That negotiations over the lease must be approached by all parties in a constructive manner that demonstrates integrity and respect;
• The agreement as to the terms of the lease must be recorded in written heads of terms which must include the following as a minimum:

- the identity and extent of the premises being let including details of any special rights to be included, such as car parking;

- the length of term, renewal rights and break rights;

- whether there is any requirement for a rent deposit or a guarantee;

- The amount of rent and the instalment frequency. Also, whether the landlord intends to charge VAT on the rent, whether there is any rent-free period or other inducement and the basis of any rent review and the review dates; and

- the tenant’s rights to assign, sublet, charge and share the premises.

Whilst many of the provisions within the new code have not changed drastically from the 2007 Code, since they are now contained in a Professional Statement, they are likely to be more closely monitored to ensure landlords are not deviating from them. The New Code aims to address a change in market practice, and create a more transparent and equal bargaining position between landlords and tenants by making the code a Professional Statement. It is hoped that some of the unanswered questions such as what does “justifiable good reason” mean, will be answered before the New Code is implemented.

Failure to act in accordance with the Professional Statement, may result in legal/disciplinary consequences such as a finding of negligence against a professional. However, there is no definitive guidance as to what the sanctions for non-compliance include yet.

For Landlords, it would be worth taking a review of your template Heads of Terms or Leases, to ensure that they will contain all of the information required by the New Code, and that they follow the recommendations for best practice.

For Tenants, it is worth taking note of the Landlord’s obligations under the Code, to ensure you are being given all of the information you are entitled to before entering into a new lease, or renewing your existing lease.

If you have any questions on the Professional Statement or the forthcoming New Code, please get in touch with our Commercial Property Team on 01603 610911.