The Code for Leasing Business Premises in England and Wales 2007
By John Martin - Director of property law research at Pinsent Masons.
6 April 2007
Introduction
The long anticipated replacement for the 2002 edition of “A Code of Practice for Commercial Leases in England and Wales” has now been launched under a changed title, and in a more condensed form. This was against the background of a far from veiled threat of Government intervention from Housing and Planning Minister, Yvette Cooper, if landlords fail to support the 2007 edition, which again is voluntary.
(At the end of February 2005, the Government released the final report from Reading University entitled Monitoring the 2002 Code of Practice for Commercial Leases. In relation to awareness, the researchers were of the opinion that only 22% of tenants knew about it. Consequently, they considered that the 2002 edition was having little direct impact on lease negotiations, but they argued that it was part of wider pressure from Government that was helping to encourage increased flexibility and choice.)
The new package, which is endorsed by the ABI, the BCO, the BRC, the CBI, the BPF, the IPF, the RICS, the Law Society among other bodies, comprises three items, namely:The Landlord Code, comprising ten sets of requirements to be met by landlords
The Occupier Guide, made up of thirty seven specific tips for tenants, and
Model Heads of Terms, which can be completed on line and downloaded. There is a dedicated web site for the new code: www.leasingbusinesspremises.co.uk.
The authors, the Joint Working Group on Commercial Leases under the chairmanship of Philip Freedman CBE, have the stated aim that the 2007 edition will be used as a checklist for negotiations before the grant of a lease and on lease renewals. They urge that landlords are transparent about any departures in a particular case and the reasons for them. They also issue a reminder, in the context of existing leases, of the BPF declaration in relation to applications for consent to sublet where there is an existing lease covenant requiring subleases to be at the higher of the passing rent and the market rent.
The landlord code
The ten topics covered are: -
1. Lease negotiations
2. Rent deposits and guarantees
3. Length of term, break clauses and renewal rights
4. Rent review
5. Assignment and subletting
6. Service charges
7. Repairs
8. Alterations and changes of use
9. Insurance
10. Ongoing management
Some of the more controversial requirements are these:Landlords must state whether alternative lease terms are available and must propose rents for different lease terms if requested by prospective tenants.
The only pre-conditions to tenants exercising break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases.
Landlords should on request offer alternatives to their proposed option for rent review priced on a risk-adjusted basis.
Assignment of the whole should generally be allowed subject only to the landlord’s consent not to be unreasonably withheld.
If subletting is allowed the sublease rent should be the market rent at the time of subletting.
An AGA should be required on assignment only when the proposed assignee, when assessed together with any proposed guarantor, is of lower financial standing than the assignor or is resident or registered abroad.
Landlords should seek to observe the RICS Code of Practice on Service Charges in Commercial Property in drafting new leases and on renewals.
Unless expressly stated in the heads of terms tenants should only be obliged to give the premises back at the end of their lease in the same condition as they were in at its grant.
Landlords must always disclose any insurance commission they are receiving.
Rent suspension should apply if the premises are damaged by an insured or an uninsured risk.
At least six months before the termination date landlords should provide a schedule of dilapidations. Some of these particular requirements represent a departure from current leasing practice and may not easily be taken on board by landlords.
The occupier guide
The authors stress that this is not a substitute for professional advice and tenants are encouraged to seek such advice as soon as possible. The tips are wide-ranging and follow the order of the topics in the Landlord Code. Their nature suggests that they are aimed at small businesses. However, tenants who are professionally advised should have little need to pay regard to them, and those who are not cannot afford to rely only upon these tips alone.
Model heads of terms
Any attempt to secure agreement on a standard form set of heads of terms should be encouraged, as should the approach to lease negotiation that seeks to settle all issues of commercial importance before the lease is drafted. These provide a workable checklist for most lease negotiations but will undoubtedly need to be supplemented in the case of high value or complex lettings.
Crucial questions
There are a number of crucial questions to be asked in determining whether the 2007 edition will have any greater impact than its two predecessors. They are:How will it be disseminated?
Is it realistic to expect it to apply to existing leases?
Is there scope for it to influence subleases?
How much impact can it have on renewals?
Are tenants likely to be willing to pay increased rents for greater flexibility?
What is the real sanction for non-compliance?
Will there be effective monitoring?
Conclusion
Those landlords who are most likely to observe the Landlord Code are the financial institutions and the major property companies, such as those who have already signed up to the earlier BPF declaration on applications to sublet. In their cases, tenants will have little need for the Occupier Guide and the Model Heads of terms will often need to be tailored.
The Model Heads of Terms are most likely to be valuable to tenants in the case of lettings by small or private landlords and, ironically, they are the landlords who are least likely to see any advantage in observing the requirements of the Landlord Code.
© John Martin 2007
(To coincide with the launch, PLC Property has published three new documents, which are being made available free of charge, to promote discussion of the new code:PLC have also launched a discussion forum on the new Lease Code. Click here.)
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