The Code for Leasing Business Premises in England and Wales 2007 (The Code) is the third edition of the Code published as a voluntary agreement between professional and industry bodies.
Although the Code is not binding, it represents the results of discussions between representatives of landlord, tenant and government to provide a framework within which a tenant can reasonably expect a landlord to offer a lease. The Code is more robust than the two previous editions in 1995 and 2002. The Code encourages the property industry to address issues of inflexibility in commercial lease terms and for the industry to regulate itself as opposed to have government intervention.
The Code, since its inception, has had no "real teeth" and unless the market begins to actively adopt the Code, will remain an aspirational document.
Landlords have been able to dictate the terms on which leases are offered for some time and perhaps in this current economic climate, tenants will have a greater ability to influence lease negotiations and insist that landlords adhere to the Code to bring about a fairer balance between landlords and tenants as well as introduce greater flexibility in commercial leases.
The Code comprises a primary and two supporting documents
The Leasing Business Premises: Landlord Code is the primary document (Landlord Code). The Leasing Business Premises: Occupier`s Guide (Occupier Guide) and Leasing Business Premises: Model Heads of Terms) are the two supporting documents.
The Code addresses the terms that are fundamental to tenants (and landlords) these include:
- Rent deposit and guarantee deals with the amount of deposit, length of time held, proper interest rate, protection against insolvency of landlord and conditions regarding deposit release.
- Length of term and break clause states that the only pre-conditions for a tenant to exercise its break ought to be that (1) main rent is paid to date, (2) tenant gives up occupation and (3) there are no continuing sublease. As opposed to the more onerous preconditions usually found in leases for the tenant to give up vacant possession and not be in material breach of any tenant covenants. The Code makes allowance for these three pre-conditions because each party will still be able to claim damages from the other for antecedent breach of covenant without preventing the tenant from validly exercising its break.
- Rent review provides that headline rent should not be included and that landlords offer alternative methods of reviewing the rent with both parties having the ability to start the review process.
- Assignment and subletting The only requirement for assignment should be landlord`s consent not to be unreasonably withheld or delayed without any specific circumstances for refusal (save in respect of assignment to a group company), no automatic requirement for authorised guarantee agreements (AGA). If subletting is allowed the sublease rent should be the market rent at the time of the subletting (as opposed to the sublease rent being the higher of passing rent and market rent).
- Service charges Landlords should provide best estimates of service charges and other outgoings payable by tenants. Disclosure of known irregular events that would have a significant impact on the amount of future service charges and compliant with RICS 2006 Code of Practice on Service Charges in Commercial Property.
- Repairs The premises must be returned to the landlord at the end of the lease in the same condition as they were in at its grant.
- Alterations and change of use Landlords` control should not be more restrictive than is necessary to protect the value of the landlords` interest. Internal non-structural alterations should be notified to landlords (no consent required unless they could affect the services or systems in the building) and removal of alterations should be required, only if reasonable.
- Insurance Policy terms should be fair and reasonable, with reputable insurers, disclosure of any commission, rent suspension should apply if the premises are damaged by an insured or uninsured risk, termination of lease if reinstatement not completed during period for which loss of rent is insured.
- Management Schedules of dilapidations ought to be served at least six months before end of the term and applications for consent dealt with within specific timeframes.
Tenants should have more information at the preliminary stages of the lease negotiations to avoid unnecessary surprises later on once tenants have instructed solicitors and started incurring costs in relation to the proposed letting.
Landlords should make offers in writing clearly stating the length of the term, break rights, security of tenure, rent review, rights to assign, subletting and share occupation, repairing obligation, VAT status of premises, rent deposit proposals including information about the amount, duration and repayment, best estimate of service charge to include other outgoings tenant will be liable for; extent of demise, plan showing demise, in relation to costs a clear break down as to who is liable to pay, cost proportions, whether there are restrictions regarding permitted use, or hours of use.
If a landlord subscribes to the Code, it needs to inform the tenant and must also point out any departures from the Code, with reasons. Code compliant lease may assist tenant`s solicitors in keeping costs down by not having to heavily negotiate the leases to make them more acceptable to tenants.
The Occupier`s Guide seems to go further than the Code and in so doing favours the tenant to a greater degree. It is not clear whether a Code compliant lease needs to comply with only the Code or the Occupier`s Guide as well.
Some of the points raised in the Occupier`s Guide are issues that a tenant`s solicitor would raise during the course of the lease negotiation process as part of the due diligence exercise which would include:
- requesting planning information,
- obtaining landlord`s confirmation that planning obligations been met,
- obtaining insurance details from landlord ,
- make enquires regarding the service charge to include asking for details of any irregular expenditure that would significantly impact on the future service charge,
- Rent deposit monies to be held in an escrow or stakeholder account,
- Service charge - ensure that the landlord bears the service charge cost for any unlet units in the building ( so that this cost is not passed to the tenants),
- Repairing obligation amended to take the length of the term of lease, nature of letting, age and condition of premises into account
The Occupier`s Guide suggests further terms (favouring the tenant) such as:
- on rent review the landlord ought to offer alternatives as opposed to upward rent review only;
- asking for provisions for tenant to cancel the AGA if defined conditions met or after a period of time of even suggest a rent deposit as opposed to AGA for smaller tenants
- prepare and attach a photographic schedule of condition to the lease in respect to the repairing obligation;
- with regard to tenant`s default suggesting that the landlord should afford the tenant an opportunity to remedy any breach before the landlord takes action against the tenant
Some of the more pro-tenant proposals may not be acceptable to many Landlords.
From a tenant`s perceptive the Code is a good starting point and the Occupier`s Guide provides helpful information to focus a tenant`s mind regarding many issues and express terms in leases that are not necessary covered in any great detail in standard heads of terms. This approach to conducting lease negotiations, from the outset, in an open and constructive manner will assist both parties to establish the terms and basis on which the lease is to be granted, require less time negotiating the actual lease and speed up the transaction time as well as hopefully assist in keep costs down in the process.
- See paragraph 2 of the Landlord Code
- See paragraph 3 of the Landlord Code
- See paragraph 4 of the Landlord Code
- See paragraph 5 of the Landlord Code
- See paragraph 6 of the Landlord Code
- See paragraph 7 of the Landlord Code
- See paragraph 8 of the Landlord Code
- See paragraph 9 of the Landlord Code