Lease Code 2020: a move toward making the legal drafting process more efficient

The Royal Institution of Chartered Surveyors (RICS) have announced the introduction of the Code for Leasing Business Premises, England and Wales, 1^st edition (the “Lease Code 2020”) to take effect from 1 September 2020.

The Lease Code 2020 is intended to “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”.

What lettings will the Lease Code 2020 apply to?

The Lease Code 2020 will apply to most lettings of business premises in England and Wales other than:

1. Agricultural lettings;
2. Premises used as advertising hoardings or for plant / equipment;
3. Premises which will be wholly underlet by the tenant;
4. Leases of less than 6 months in length.

Is the Lease Code 2020 binding?

The Lease Code 2020 replaces the Code for Leasing Business Premises in England and Wales 2007 (the “Lease Code 2007”).  Whilst the Lease Code 2007, which was a voluntary set of “best practice” standards to be followed in lease negotiations, the Lease Code 2020 is a Professional Statement, certain elements of which will be mandatory and binding on RICS members or RICS regulated firms.

Mandatory elements of the Lease Code 2020

The mandatory elements of the Lease Code 2020 are set out in part 2 and provide:

1. Parties must adopt a constructive and collaborative approach to Lease negotiations;
2. Where a party to a Lease negotiation is not represented by a RICS member or other property professional they must be advised of the existence of the Lease Code 2020 and its supplemental guidance, and must be advised to seek professional advice;
3. A landlord or their letting agent must ensure that Heads of Terms containing a minimum level of detail are produced for all new lettings, before the initial draft lease is circulated. The Heads of Terms must contain a minimum level of detail to allow parties to decide whether to enter into the lease, and the Lease Code 2020 contains a template set Heads of Terms which can be utilised for these purposes.

Best practice elements of the Lease Code 2020

The remainder of the Lease Code 2020 sets out best practice standards that should be followed by RICS members / RICS regulated firms in the preparation and negotiation of leases. Whilst such standards are not mandatory, and parties are able to depart from them, RICS may require them to justify any such departure.

Notable matters include:

1. Break Options – unless otherwise specifically agreed at Heads of Terms stage a tenants break option should be conditional on payment of rent and returning the Property free of subtenant’s / occupiers only. Any stricter conditions require specific agreement.
2. Rent Deposits – rent deposit agreements should provide that the landlord will hold the rent deposit in an account designated for holding rent deposits only. They should also specify whether the deposit is held as security for the tenants obligation to pay rent only, or to cover all obligations under the lease.
3. Rent Reviews – where a lease is to contain a rent review the basis of the review should be notified to the tenant at the outset, so they can take early advice as to the implications. The lease should allow either party to start the rent review process.
4. Underletting – leases should allow tenants to sublet the whole, or part (if appropriate) with landlord consent, and should allow tenants to charge a lease without landlord consent unless the underlease is to contain step-in rights for the lender.
5. Landlord & Tenant Act 1954 – where a lease is to be excluded from the security of tenure provisions of the Landlord & Tenant Act the tenant should be informed of this at the very outset, to allow them sufficient time to take advice on the implications.
6. Service Charge – service charge provisions should be drafted to conform with the RICS Professional Statement “Service Charge in Commercial Property”.
7. Reinstatement – unless an absolute requirement is specifically agreed at Heads of Terms stage landlords should only require a tenant to remove any alterations at the end of the term where it is “reasonable” for them to do so.
8. Uninsured Damage – leases should allocate responsibility for damage caused by uninsured risks (as well as insured).
9. Forfeiture – landlords should allow tenants a chance to remedy any default (without loss to the landlord) before seeking to forfeit a lease.

Conclusion

Increased engagement by all parties at negotiation stage is to be welcomed, and the introduction of a “checklist” of matters to be included within Heads of Terms will streamline the process of drafting documentation for solicitors.  From a practical perspective the best practice elements of the Lease Code 2020 will require landlords to engage with their agents at an early stage, to ensure due consideration is given to covenants / obligations that they may previously have taken for granted.

However, given the Lease Code will not be binding on non-RICS members, unless adopted more widely as an industry standard, the practical impact of the changes may be more limited in the short term.

To view a copy of the Lease Code please click here.

For further information, or to arrange a review of documentation to ensure it remains compliant with the Lease Code 2020 please contact Danielle Dale at Sintons on 0191 226 7854 or danielle.dale@sintons.co.uk.