RICS draft professional statement - Code for leasing business premises in England and Wales, 1st edition

Code for leasing business premises in England and Wales, 1st edition

Part 3 Code for leasing business premises in England and Wales 2019

1 Negotiations and heads of terms

  1. Negotiations over the lease must be approached in a constructive and collaborative manner.
    1. A party that is not represented by an RICS member or other property professional must be advised about the existence of this code and its supplemental guide and must be recommended to obtain professional advice.
    2. The agreement as to the terms of the lease on a vacant possession letting must be recorded in written heads of terms, stating that it is 'subject to contract' and summarising, as a minimum, the position on each of the following aspects:
    3. the identity and extent of the premises (and requiring the landlord to provide a Land Registry compliant plan if the lease is registerable)
    4. any special rights to be granted, such as parking or telecom/data access
    5. the length of term
    6. whether the Landlord and Tenant Act 1954 will apply
    7. any options for renewal
    8. any break rights
    9. any requirements for a guarantor or rent deposit
    10. the amount of rent and frequency of payment
    11. whether the landlord intends to charge VAT on the rent
    12. any rent-free period or other incentive
    13. rent review frequency and the basis of review
    14. liability to pay service charge
    15. liability to pay insurance premiums
    16. liability to pay business rates
    17. rights to assign, sublet, charge or share the premises
    18. repairing obligations
    19. the initial use to be permitted
    20. rights to make alterations
    21. any initial alterations or fit-out and
    22. any conditionality of the letting, such as subject to surveys, board approvals or planning permission.
      1. At a lease renewal or extension, the heads of terms must comply with the above except for any terms that are stated to follow the tenant's existing lease subject to reasonable modernisation.
      2. Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests.

2 The premises

2.1 The identity and extent of the premises being let should be clearly defined, including which elements of the structure or fabric are included.

2.2 A lease plan should be supplied by the landlord if that is necessary or desirable for identifying the premises and in all cases where the duration of the lease will exceed seven years, where it should comply with the requirements for registration of the lease at the Land Registry.

2.3 The tenant should be granted all rights necessary for the intended use of the premises. This includes clear arrangements for any special rights such as parking or for electronic communication connections including, where necessary, the right to require the landlord to grant wayleaves for data cabling.

3 Length of term, renewal rights and break rights

3.1 The length of term should be clearly specified and any date when it is intended to start.

3.2 Where the landlord proposes that statutory rights of renewal under the Landlord and Tenant Act 1954 are to be excluded, the tenant should be notified at the outset in order to obtain early professional advice as to the implications.

3.2 Any break rights or options for renewal for either party should be clearly specified, including the dates (or range of dates) when a party can end the lease, the length of prior notice to be given and any pre-conditions for the break being effective.

3.3 Unless the landlord has special reasons for imposing stricter conditions, a tenant's break should be conditional only on there being no rent arrears, the tenant paying the basic rent up to the end date, giving up occupation and leaving no subtenants or other occupiers. Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry.

3.4 Leases should require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect. Repayment of service charges may be deferred until the service charge accounts are finalised.

4 Rent deposits and guarantees

4.1 Details of any rent deposit should include the amount (including where required any sum to cover VAT), the time it will be held, whether it will be security for only the rent or all the tenant's obligations under the lease and the circumstances in which the deposit will be returned to the tenant with any accrued interest.

4.2 Rent deposit agreements should provide that landlords will hold rent deposit funds in bank accounts designated for holding only rent deposits and that any bank interest will accrue for the tenant.

4.3 Details of any guarantee should include whether it will cover only the rent or all the tenant's obligations under the lease and the circumstances (if any) in which the guarantee will be released.

4.4 Landlords and managing agents should refer to the RICS help sheet Clients' money: General advice for firms (www.rics.org/uk/regulation1/firm-and-individual-guidance/protecting-clients-money/) for further information on the steps that should be taken when handling deposit funds.

5 Rent and rent review

5.1 The initial rent, the frequency of payment and whether the landlord intends to charge VAT on the rent should all be clearly stated, together with details of any rent-free period or other incentive.

5.2 Where the landlord proposes that rent is to be subject to review, the tenant should be notified of the proposed frequency and the method or formula of review at the outset in order to obtain early professional advice as to the implications.

5.3 Rent review clauses should be clearly expressed. Definitions of market rent should not result in a rent higher than the true market rent unless that has been expressly agreed by the parties, such as where that is agreed in return for a financial inducement. Provisions for indexed increases in rent should not contain obscure formulae designed to produce a greater increase than is proportionate to the increase in the index over the appropriate period or outside any agreed caps or collars.

5.4 Leases should allow either party to start the rent review process and should not impose time limits intended to prevent a review or set a new rent through inaction by either party.

6 Service charges, insurance costs and other outgoings

6.1 The landlord should indicate the range of main services, if any, that the landlord will provide and supply proper estimates of service charges, insurance payments and any other ascertainable outgoings (such as business rates) that the tenant will incur under the lease. Landlords should disclose known irregular events that would have a significant impact on the amount of future service charges.

6.2 Landlords should be aware of the RICS professional statement Service charges in commercial property, (1st edition) and, so far as practicable in the circumstances, service charge provisions in leases should be drafted in conformity with the mandatory provisions of that professional statement.

7 Assigning, subletting, charging and sharing

7.1 Leases should allow tenants to assign the whole of the premises with the landlord's consent, which is not to be unreasonably withheld or delayed. However, landlords may set out reasonable circumstances in which consent can be refused, such as where there are arrears of rents, service charges or insurance premiums that are not the subject of a legitimate dispute.

7.2 Leases should also provide that, if in each case the landlord reasonably requires, the assigning tenant is to provide an authorised guarantee agreement (AGA), any existing guarantor is to guarantee that the assigning tenant complies with the AGA, and/or the assignee is to procure a new guarantor or rent deposit.

7.3 Except where the particular circumstances justify (such as where the landlord wishes to control tenant mix in shopping centres or parades or protect turnover rents), leases should allow corporate tenants to share the premises with other companies while they are in the same corporate group and do not create a subletting.

7.4 Leases should allow tenants to sublet the whole of the premises and should allow subleases of parts, if appropriate without security of tenure, and in each case with the landlord's consent, which is not to be unreasonably withheld or delayed and at rents not less than market rent. Subleases should be required to be on terms consistent with the tenant's own lease, except subleases that are to be excluded from statutory renewal rights and subleases of only part of the premises may be granted on different terms where appropriate.

7.5 Leases should allow tenants to grant a bank or other reputable lending institution a charge over the lease, without the landlord's consent needing to be obtained unless the lease is to contain step-in rights for chargees.

7.6 Paragraphs 7.1 to 7.5 do not prevent landlords from imposing stricter provisions where justified by the particular circumstances, such as lettings of short duration or on concessionary terms, or leases of retail units where the tenant's business or brand may affect the character or value of the centre or parade or the amount of any turnover rent. Any such provisions should be on reasonable terms, for example a provision for surrender of the lease instead of assigning should apply only if the landlord is willing to pay its market value.

8 Repairs

8.1 Leases should impose tenant's repairing obligations appropriate to the length of the term, the condition of the premises and the financial terms.

8.3 If the tenant's repairing obligations are to be limited to the initial condition of the premises, a schedule of condition will normally be required and the parties should agree which party is responsible for the cost of obtaining it.

8.4 Where the premises are or will be newly built, a tenant taking on direct or indirect responsibility for repairs should be given rights for the enforcement of the defect liabilities of the main building contractor (and, so far as that contractor does not have design liability, those responsible for design), either directly through warranty deeds or statutory third party rights or by the developer being obliged to enforce its remedies.

9 Change of use, alterations and fit-out

9.1 Leases should give landlords control over alterations and changes of use that are no more restrictive than are necessary to protect the value of the premises and any adjoining or neighbouring premises of the landlord, and this may differ between different types of property.

9.2 Where the landlord intends to prohibit certain changes of use or the making of certain alterations, or to require a licence from the landlord before they can take place, the tenant should be notified at the outset in order to obtain early professional advice as to the implications. This does not apply to normal provisions against changing the use outside the existing use class under planning law.

9.3 Landlords should not normally prohibit, or require their consent to be obtained for, internal non-structural alterations that do not affect the character, value, stability, building services or energy efficiency performance of the building, but may require the tenant to carry out such works properly and without causing damage or nuisance and to give written details to the landlord.

9.4 Except where, as a term of a consent for alterations, the parties have agreed that certain alterations are to be removed at the end of the lease, leases should allow the landlord, where it is reasonable to do so, to require the tenant to remove alterations at the end of the lease and make good. Leases should require the parties to identify the required works in sufficient time before the end date to enable the tenant to comply with any such obligation.

9.5 The tenant should be notified at the outset if the landlord intends to impose any obligations for an initial fit-out that might involve material cost or might restrict how the tenant can fit-out or use the premises. The heads of terms and the lease should set out any agreed minimum requirements, including materials, system specifications and any capital contributions.

10 Insurance and damage

10.1 Where the landlord will insure the property, leases should provide that the policy will be on normal market terms, that full terrorism cover will be provided if it is available at reasonable rates of premium and that the landlord will insure with reputable insurers and provide details of the insurance to the tenant on reasonable request.

10.2 Leases should state that rent suspension will apply if the premises or any landlord's areas or services serving them are damaged by an insured risk or, other than where due to an act or default of the tenant, an uninsured risk. If the lease limits the period in which rent is to be suspended, either party should be allowed to terminate the lease if reinstatement of significant damage is not completed within that period.

10.3 Leases should state that if the whole or a substantial part of the premises premises or any landlord's areas or services serving them are so damaged by an uninsured risk as not to be capable of normal use by the tenant, either party should be allowed to terminate the lease unless the landlord agrees to rebuild at its own cost.

10.4 Landlords should pass on to tenants the benefit of discounted premiums and should disclose to tenants whether the landlord benefits from insurance commissions.

11 Management and operational performance

11.1 Leases of parts of multi-let buildings should contain provisions, appropriate to the characteristics of the building, that encourage cooperation between the parties to improve operational efficiencies in the building and to share available data.

11.2 Consideration should be given to including in the lease other 'green' provisions, see examples in the Better Building Partnership's Green Lease Toolkit (www.betterbuildingspartnership.co.uk/green-lease-toolkit).

12 Energy Performance Certificates (EPCs)

12.1 Leases should state which party is responsible for obtaining any EPC that may be needed during the lease term.

12.2 Landlords should be required to act reasonably if they reserve the right to choose which EPC assessor the tenant may use.

13 Landlord's title

13.1 Where the landlord's title (freehold or leasehold) is subject to enforceable covenants that prevent the landlord from complying with any provision of this Code, the landlord should act in conformity with those covenants but if challenged should explain the position to the tenant.

13.2 The landlord should be responsible for obtaining any consent for the grant of the lease required from a superior landlord, mortgagee or other third party.