RICS Code for Leasing Business Premises
This article was published on: 23rd September 2020Matt Pugh
RICS have now published the first editions of its Code for Leasing Business Premises (“the Code”), which became effective as of 1 September 2020. The Code is designed to assist all relevant parties and advisors with best practice for the drafting of commercial leases.
It holds the status of a RICS Professional Statement, meaning it sets out mandatory requirements for RICS members and RICS regulated firms.
Part 1: The Introduction
The Code has four parts and begins by explaining the objective of the Code and the regulatory requirements of RICS members. The Code was created “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.”
The Code applies to lettings of premises in England and Wales to tenants who will carry on a trade, profession, or other business activity. It does not apply to agricultural lettings, premises used for housing plant and equipment (e.g. telecoms), advertising media, premises that are intended to be wholly sublet or premises being let for no more than six months.
Part 2: Negotiations and Heads of Terms
- Mandatory Requirements
This guidance sets out mandatory professional, behavioural, competency and/or technical requirements from which RICS members must not depart. Members must:
- Approach negotiations in a constructive and collaborative manner
- Advise an unrepresented party of the existence of the Code, its supplemental guide and recommend they seek professional advice
- Record agreed terms in “subject to contract” HOTs for vacant possession lettings, containing the position on specific terms set out at para 1.3 “as a minimum”
- Record the same heads of terms for lease renewals/extensions except where existing terms are recorded as “subject to reasonable modernisation”
- Aim to negotiate terms which achieve a fair balance to each parties’ commercial interests
- The landlord or its agent is responsible for preparing compliant heads of terms before circulating a draft lease.
2. Best Practice
Part three forms the bulk of the Code and is designed to cover the preparation and negotiation of the lease itself, not just the heads of terms. RICS guidance on best practice suggests they expect members to follow this as closely as possible, and if there are exceptional circumstances in which a RICS member has to depart from the provisions, they may be required to justify their actions.
The Code provides the following guidance on several aspects of a typical commercial lease:
- Should be clearly defined and a plan supplied for identification.
- The tenant should be granted all rights necessary for the intended use of the premises.
Length of term, renewal rights and break rights
- The length of term and start date should be clearly specified
- Any exclusion from the 1954 Act should be identified at an early stage
- Break rights or options for renewal should be clearly specified, including dates
- Break conditions should be stated (e.g. paying all rent, giving up vacant possession etc)
- Landlords should be required to pay back any rent, service charge or insurance premiums paid by the tenant after a break takes effect.
Rent deposits and guarantees
- Any rent deposits held should be clearly detailed, including the amount, any VAT, the time it will be held for, whether it is security for rent only or for all obligations, and the circumstances in which the deposit will be returned with any accrued interest
- Landlords should hold rent deposit agreements in designated bank accounts and any interest should be payable to the tenant
Rent and rent review
- The lease should clearly state the initial rent, the payment due date and frequency, whether the landlord intends to charge VAT and if there are any rent-free periods or other incentives.
- The tenant should be notified of any rent review clauses, their frequency, method and formula at the outset
- Either party should be permitted to start the rent review process, and a lease should not impose time limits intended to prevent a review or set a new rent through inaction by the parties
- Market rent definitions should avoid resulting in a “headline rent” unless that has been expressly agreed by the parties.
Service charges, insurance costs and other outgoings
- The lease should indicate the range of services and provide proper estimates of service charges and insurance payments.
- The landlord should disclose the categories of outgoings that the tenant will incur under the lease with any known irregular events that would have a significant impact on future service charges.
The Code also covers guidance on alienation, repairs, change of use, alterations and fit-out, insurance and damage; management and operational performance and other terms.
The final section of the Code contains template heads of terms and a checklist. It also has a supplemental guide for the parties, containing additional information.
The template covers all elements that the Code recommends including in the heads of terms and is a useful starting point for negotiating parties/members. The appended guidance is intended to be a supplement to the Code and is not intended to be mandatory. It seeks to assist occupiers and is for information purposes only.
The Code contains useful guidance for negotiating members and holds added weight due to the mandatory nature of many of its requirements.
Those mandatory requirements are not always prescriptive and are open to interpretation. An agent will, for example, be under an obligation to aim to achieve a fair balance of commercial interests. That obligation is clearly going to be tempered by an agent’s duty to act in his/her client’s best interests.
Agents should ensure they have a good working knowledge of the Code and could be caught out by failing to advise unrepresented parties of its existence. It might also work well as a reference guide for negotiating terms, given the specific list of “best practice” points to raise and record in discussions and in heads of terms.
In reality, we would expect the majority of professionals to be complying with the spirit and requirements of the guidance already, and this document will likely reinforce best practice which is already taking place in a codified form.
Author: Rebecca Parker, Paralegal