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Lease Code Professional Statement – have your say

Property / 09 April 2019

The Code for Leasing Business Premises in England and Wales, commonly known as the Lease Code, was introduced in 2007 to ‘increase awareness of property issues’ and help business tenants negotiate fairer terms in their leases.

Although the Lease Code provides a useful framework for parties to agree their lease terms, the Code is not compulsory.  Some landlords consider it too ‘tenant-friendly’, so have been disinclined to promote it or follow its recommendations.  Despite the Code’s aims, therefore, the Code has largely been ignored in practice.

The Royal Institution of Chartered Surveyors (RICS) – with the government’s support – is now seeking to convert the Lease Code into a formal Professional Statement to encourage more widespread adoption of the Code’s principles, and has launched a consultation on its proposals.  This is a fresh attempt to seek the industry’s views following an initial consultation in April 2018.

The proposed Professional Statement will stand alongside an updated version of the Lease Code and will require all RICS surveyors to:

  1. negotiate leases in a ‘constructive and collaborative manner’;
  2. ensure that any party who is not represented by an RICS member or other property professional during lease negotiations is advised about the Lease Code’s existence and is recommended to obtain professional advice; and
  3. record the agreed lease terms in written head of terms (marked ‘subject to contract’) summarising the position on a minimum of twenty specific points; this requirement will also apply to lease renewals and extensions, although it will be acceptable where appropriate to address any point by stating ‘as per existing lease, subject to reasonable modernisation’. 

The updated draft Code contains a detailed template for recording heads of terms, which ‘should ideally be used to make the work of solicitors more straightforward when drafting the actual lease’(!) Additionally, it includes a checklist to satisfy the proposed minimum heads of terms requirement, plus more extensive guidance on the most important terms of a business lease and what their impact may be: for example (i) the likely occupancy costs for the tenant (rent, VAT, rates, service charge, ongoing maintenance, etc.); and (ii) why security of tenure under the Landlord and Tenant Act 1954 might reasonably be excluded from the lease.

Under the proposals, landlords and their agents must ensure that compliant heads of terms are in place before the initial draft lease is circulated.

As lawyers, we understand the need for landlords and tenants to strike a reasonable balance in their lease negotiations: landlords have an investment and rental income stream to protect, whilst tenants need to be able to trade effectively from the premises without being constrained by unduly onerous financial or practical obligations.  We do, on occasion, see tenants with supposedly ‘agreed’ heads of terms which the landlord has imposed without any negotiation or apparent willingness to discuss more flexible or alternative terms.  Equally, we see landlords frustrated that their tenant doesn’t see the value in being advised professionally on the proposed heads of terms.  On that basis, the Professional Statement is perhaps a welcome move to try to level the playing field – helping to ensure that landlords and their agents ‘play fair’ when offering their premises for rent, and that tenants are actively encouraged to seek advice.

Nevertheless, some landlords may be uncomfortable about the proposals, as there may be instances where it is simply not practical for them to adopt the Code.  Tenants, too, who simply want to get into occupation and start trading, may not be interested in negotiating the finer detail of the Code’s recommendations.

The RICS consultation closes on Sunday, 5 May 2019.  We would encourage anyone with an interest in negotiating business leases to read the proposals and respond to the consultation here.

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