On the 11th May 2020 I presented an online RICS seminar to 750 people on the new code for Leasing Business Premises.
This was a new experience for me talking to people from all over the world from behind a computer screen. There was no visual feedback mechanism and I just had to hope that my message was getting across. My message was simple “This code is good for landlords and tenants”.
As I explained in my talk I am in favour of this publication which contains mandatory provisions for the first time. I am in favour of the new code because my background was managing commercial property for and on behalf of major landlords and I have seen some of the difficulties that un-represented occupiers have found themselves in. Primarily these problems were because they signed up a lease without fully understanding the implications of all of the clauses that they had signed up to. This code also benefits landlords and their agents because they will benefit from securing tenants that have fully considered the implications of signing a lease.
Some examples I have experienced: An unrepresented tenant that didn’t realise that VAT was payable on their rent and they couldn’t afford to pay the 20% extra each quarter. An unrepresented tenant that thought that they didn’t have to pay any Service charge or Insurance during their rent free period. An unrepresented tenant that didn’t realise that they had inherited the disrepair and maintenance obligations when they took on a full repairing and insuring lease of a dilapidated premises. These situations are of course bad for the tenants but also a major problem for landlords and their agents who may have to relet their premises at great cost if tenant such as these don’t work out .
One reason I set up McNeil Commercial was because I felt sorry for these occupiers and others who didn’t benefit from getting good independent advice from a RICS member before signing a lease.
I understand how much business owners put into running their own businesses. My family have all had their own businesses at one time or another, my grandfather had television shops in the 1970’s, my mother and uncle had their own businesses (various) which included a fish and chip shop, a general store and insurance brokerages and so I appreciate how difficult it is to run a business and that one thing businesses all hate is nasty surprises to do with their properties.
This 1st edition code for leasing business premises was published on 1st February 2020 has the status of a professional statement. It is effective from 1st September 2020 and applies to lettings of premises in England and Wales to tenants who will carry on trade, professional or business activities. There are some exceptions to the code for example it doesn’t apply to agricultural lettings or to premises that will only be used for housing plant and equipment (such as electricity transformers or telecoms) or advertising media (such as advertising hoardings). It also doesn’t apply to premises that are intended to be 100% sublet by the tenant, or to premises being let for a period of less than six months.
Here are some of the mandatory requirements contained in the new RICS professional statement:
- Negotiations over the lease must be approached in a constructive and collaborative manner.
- A party that is not represented by an RICS member or other property professional must be advised by the other party or its agents about the existence of the code for leasing business premises and must be recommended to obtain professional advice.
- The agreement as to the terms of the lease on 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 various constituent aspects contained in the professional statement.
- At a lease renewal or extension, the heads of terms must comply with clause 1.3 of the code except for any terms that are stated to follow the tenant’s existing lease subject to reasonable modernisation.
- Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests.
- The landlord, or its letting agent, will be responsible for ensuring that heads of terms complying with this provision are in place before the initial draft lease is circulated.
The remaining provisions of the lease code indicate what should be good practice. These cover matters that should be discussed between the parties and their agents in negotiations that lead to heads of terms and also matters that need to be covered by the parties solicitors to get the heads of terms into a final lease. Heads of terms are in my experience four or five pages long and even where the heads of terms are comprehensive in scope and detail there is still a lot of work for the solicitors to do to translate that basic agreement into a final lease which may be 50 pages or 150 pages or even longer.
The objective of this latest RICS publication is to improve the quality and fairness of negotiations on lease terms and to promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient. Comprehensive heads of terms should result in the legal process progressing far more smoothly.
I have seem lots of examples of leasing transactions getting bogged down with solicitors because a tenant was unrepresented and basic matters were simply not discussed with the landlords agent prior to solicitors being instructed. Delays often result in solicitors fees being higher than anticipated and completion of the lease taking far longer than it should. Solicitors end up negotiating basic terms that should have been done by a tenant and landlord (or their agents) before the solicitors get involved. The new code, will in my opinion, help to prevent this from happening going forward and that is a good thing for both landlords and tenants.
Comprehensive heads of terms help to ensure that a prospective tenant knows what they are getting into. For example I was brought in to assist a business at a very late stage when they were in the process of taking on a lease of shop premises. The business owner said to the building owner that they were interested in taking a lease and the building owner landlord didn’t even provide them with heads of terms but instead sent them a 50 page lease and asked them to sign it!
No discussions had taken place between the parties (and neither were represented by RICS members) other than agreement about the lease length, the amount of rent payable and that the tenant was to get 3 months rent free. The business owner called me and asked me “to cast an eye over the lease to check everything was ok and above board”. Of course this call immediately rang alarm bells (as I have experienced this situation several times before) and I quickly explained the various onerous obligations and liabilities that the landlord was trying to offload onto the business owner via the proposed new lease. Once I explained what this meant for the business owner he quickly put the brakes on the transaction so that we could do proper due diligence about what he was about to sign up to before he instructed solicitors.
An important point to remember is that this new statement and code do not prescribe the outcome, but seek to make it fair and balanced by identifying the terms that are usually important and encouraging both parties to obtain advice from property professionals.
This enables negotiations to proceed properly so that each party can make an informed decision about whether to proceed on the terms that they negotiate. I say to my clients how do you know how much rent you are prepared to pay on a premises whether it is office, retail, industrial or leisure when you don’t know what the other lease terms are? I try and negotiate the rent as the last item i.e. after I have negotiated all of the other lease terms. The rent is a function of all of the other lease terms, it may be higher on a shorter or more flexible lease or lower on a lease that has more frequent rent reviews or where the tenant is being asked to do more in terms of maintenance or where other property occupancy costs are higher than normal.
The lease code and the accompanying template heads of terms and checklist should be used as a reminder for negotiations before the grant of a new lease and also at the time of any lease renewal. Both the template heads of terms and the checklist cover the minimum items that need to be discussed, considered and negotiated between a prospective tenant (or their agent) and the landlord (or their agent). They are designed to assist RICS members in ensuring that landlords, tenants and guarantors who they are advising have a clear understanding of the commitments that they are entering into.
As I say above I welcome the introduction of the new code which in my opinion will balance out negotiations and make the process smoother and more efficient and help to mitigate nasty surprises.
The above requirements represent a basic extract and summary from the document. A full copy of the code for leasing business premises can be found via this link on the RICS website: https://www.rics.org/globalassets/code-for-leasing_ps-version_feb-2020.pdf
Lease acquisition and lease consultancy are key services provided by McNeil Commercial Limited so get in touch by email : firstname.lastname@example.org or by phone 07914245609 if you have any questions about how we can help.