A new RICS code that governs the approach taken to lease negotiations for business premises in England and Wales comes in to force this September, and contains a number of mandatory instructions.
At a time when businesses are likely to be getting back to office working, and potentially reviewing their office needs following a prolonged period of ‘closure’, this Code could be put to the test immediately.
This code is undoubtedly good for tenants, because it promotes fairness and transparency, as well as providing a clear reference point for starting negotiations.
The mandatory bits
The mandatory requirements put an emphasis on landlords making sure that tenants go into negotiations with their eyes open. It states that parties who don’t have an RICS expert representing them, must be advised of the code and its content, and that a landlord provides a Land Registry compliant plan for any lease longer than seven years. It is also clear that lease negotiations must be carried out in a collaborative and constructive way, with the aim of achieving terms that are fairly balanced for both parties and take into consideration the commercial interests of both the landlord and tenant.
There is also a mandatory requirement for break rights to be set out in the heads of terms. These written heads of terms must also cover some key issues and be in place and provided to the tenant ahead of it receiving the first draft of the lease itself.
Best practice recommendations
Whilst the rest of the Code is not mandatory, there is a potential obligation for RICS members to explain why they have deviated from the best practice set out, if they have not followed the Code.
Many of the changes set out in Part 3 have the potential to make a real impact on the make-up of commercial property leases going forward, so it is important to understand what they are. It is also worth noting that the recommendations form a base point, and that more complex conditions can be set out in the heads of terms, but these will need to be made clear and agreed upon in advance.
Emphasis is placed on making the early exit of premises more beneficial to tenants, with conditions of break clauses being limited to payment of rent, giving up occupation and leaving no subtenants. This should see less landlords seeking to impose onerous vacant possession, material compliance or fully compliant conditions on breaks.
The issue of demise is often a sticking point at lease end, and there is now a greater need to pre-determine what will constitute the demise of a building or unit. It is also recommended that leases should now allow tenants to leave alterations in place, unless it would be reasonable for the landlord to request its removal. This leaves it open to ambiguity as to when it may be ‘reasonable’ to request reinstatement and will probably require expert input and ‘case law’ to set the boundaries. It would also have been good to see more reference to M&E services in here.
Impact on future leases
On the whole this new Code makes recommendations, not obligations, but the fact that not following them has to be justified, it is reasonable to expect them to be adhered to by the majority of RICS members. We can therefore expect to see some key changes to the structure of leases as the Code begins to be implemented.
Normally changes such as these take a while to trickle through, but with the likelihood of a flurry of lease negotiations expected to take place once the impact of COVID-19 on occupiers starts to settle, the changes could have a quicker impact than normal.