New Code for commercial leases

The new Code of Practice for Commercial Leases in England and Wales 2007 was released today. This code has been drawn up by the RICS and other representatives of landlords, tenants and the Government.

Much of the code has been leaked in the property press and, as anticipated, it is phrased in terminology that is more strenuous than in the past. It is much shorter than its predecessor and is accompanied by a Guide for Occupiers and Heads of Terms Checklist intended to encourage the parties to discuss key issues at the outset of the transaction. The code provides amongst other things for the following:

• Break clauses

The only pre-conditions to a tenant exercising its break clause should be that the tenant is up to date with the basic rent, that it gives up occupation and it leaves behind no continuing sub-leases.

• Rent review

Landlords should on request offer alternatives to upwards only rent reviews, priced on a risk-adjusted basis. These might include up/down reviews to open market rent with a minimum of the initial rent, or another basis such as annual indexation.

• Assignment and sub-letting

Assignment of the whole premises should be permitted subject only to obtaining the landlord’s consent which is not to be unreasonably withheld or delayed. Authorised guarantee agreements should not be required on assignment unless either the proposed assignee, together with any proposed guarantor, is of lower financial standing than the assignor plus any guarantor, or the proposed assignee is resident or registered overseas. For smaller tenants, a rent deposit should be acceptable as an alternative. If sub-letting is permitted, the minimum rent should be the market rent at the time of sub-letting.

• Repairs

The tenant’s repairing obligations should be appropriate to the length of term and condition of the property. Unless expressly stated in the heads of terms, the tenant should only be obliged to give the premises back at the end of the lease in the same condition as they were at its grant.

• Service charges

Landlords are required to provide best estimates of service charges, insurance payments and any other outgoings. Landlords should be aware of the RICS 2006 Code of Practice on Service Charges in Commercial Property and seek to observe its guidance in drafting new leases and on renewals.

Note there is no requirement to comply with the service charges code. The Government may be disappointed as it was hoped to tie the code on commercial leases in with the service charges code.

• Insurance

The terms of any insurance policy taken out by the landlord should be fair and reasonable, represent value for money and be placed with reputable insurers. Landlords must disclose any commission they are receiving for insurance. Rent suspension should apply to the premises if damaged by an insured or uninsured risk other than where caused by a deliberate act of the tenant. If rent suspension is limited to the period for which loss of rent is insured, the lease should allow the landlord or the tenant to terminate the lease if reinstatement is not completed within that period.

The code also requires landlords to seek to provide full terrorism cover where available. If the whole premises are damaged by an uninsured risk so as to prevent occupation, the code requires the tenant to be allowed to terminate the lease unless the landlord agrees to rebuild at its own cost.

• Tenant’s application for consent

When receiving applications for consent, landlord should seek any additional information within 5 working days of receiving the application. Landlords should consider what other consents will be required, for example from superior landlords or mortgagees and seek these. Decisions on consents for alterations should be made within 15 working days of full information being provided.

For a link to the Code please click here.