New Mandatory and Good Practice Requirements

The Commercial Lease Code 2020 The Code for Leasing Business Premises, England and Wales (1st edition, February 2020) (‘the Code’) updates the Code for Leasing Business Premises in England and Wales 2007.

The Code is a ‘RICS professional statement’ which means that the mandatory requirements within the Code (which relate to negotiations and heads of terms), must be followed by members of, or firms regulated by, the Royal Institution of Chartered Surveyors (‘RICS’). This differs from the 2007 commercial lease code which was voluntary.

The Code also contains good practice provisions which should be followed save in exceptional circumstances. Where RICS members depart from these good practice requirements, they must justify their decisions.

The aim of the Code is to make sure that the parties go into the lease negotiations (whether at the grant of a lease or renewal) with a full set of heads of terms which clearly outlines each party’s responsibilities before the initial draft lease is circulated. It aims to make the negotiations of the heads of terms clearer and fairer. This in turn aims to make the legal drafting more efficient.

Agents which are RICS members must follow and observe the Commercial Lease Code. As a landlord, if you are a RICS member or RICS regulated firm (where you have chosen to be regulated by RICS and work to RICS standards), you must also follow the Commercial Lease Code. The Commercial Lease Code does not bind landlords who are not regulated by RICS (unless the provisions of the lease incorporate the Commercial Lease Code).

Mandatory Requirements

The Code sets out mandatory requirements regarding the lease negotiations and has a template heads of terms attached which should be used if the landlord or its agent is a RICS member or regulated by RICS or the lease is intended to be compliant with the Code.

The mandatory requirements require the negotiations to be approached in a constructive and collaborative manner, and where a party is not represented by a RICS member, they should be given a copy of the Commercial Lease Code and advised to obtain professional advice.

Good Practice Requirements

As stated above, the ‘good practice requirements’ are not mandatory, but RICS members are expected to follow these unless a departure from these requirements can be justified. The changes to the Commercial Lease Code worthy of note are:

1. Alienation. There are several changes to the alienation provisions:

a. The whole of the lease can be assigned with the consent of the landlord which must not be unreasonably withheld or delayed;

b. A landlord can require an authorised guarantee agreement (‘AGA’) on assignment if reasonably required;

c. A landlord can require other pre-conditions before assignment but only where reasonable and appropriate;

d. The whole of the lease can be charged to a bank or other reputable lending institution without landlord’s consent (landlords may refuse this if it is a short term lease);

e. Sharing occupation with a group company is permitted subject to certain conditions;

f. Subletting of whole should be permitted and may allow subleases of parts, (if appropriate without security of tenure) subject to landlord’s consent not to be unreasonably withheld or delayed and at a rent not less than market rent.

The alienation provisions are subject to the proviso that a landlord can depart from these terms if, for example, it is a short-term lease.

2. Alterations. For leases of whole, landlord’s consent should not be required for internal nonstructural alterations that do not adversely affect the character, value, structural stability, statutory compliance or energy efficiency performance of the building.

3. Reinstatement of alterations. Landlords can request for certain alterations to be reinstated at the end of the term if reasonably required. Under the Code, landlords had to give 6 months’ notice to a tenant requiring reinstatement, but the Code does not refer to a specific period of notice.

There have been updates to the code compliant lease templates, to incorporate the changes made by the Code.

New longer term business lease templates, which comply with the Code, have been added to the document portfolio.