Mandatory requirements introduced by the Royal Institution of Chartered Surveyors (RICS) in the new Lease Code will be effective from 1 September 2020.
What is the RICS Lease Code?
The RICS Lease Code was introduced to improve the negotiation process on lease terms. The Code, along with the template heads of terms accompanying it, is intended to serve as a means of benchmarking good practice in agreeing the terms of a letting. It aims to promote a fair balance between each party’s commercial interests and ensures each party has a clear understanding of what they are entering into in order to make an informed decision as to whether they proceed on the proposed terms.
In February 2020 a new Code for leasing business premises was introduced and will become effective from 1 September 2020. There have been several variations of the Code since its introduction in the 1990s and whilst the previous 2007 code was voluntary (and considered by some to be inadequate), for the first time, certain provisions of the Code are mandatory on all RICS regulated firms and surveyors. RICS have stated that there may be good reason to depart from these provisions. However, justification for this decision may be required by RICS.
Who does the RICS Lease Code apply to?
The RICS Code 2020 will apply to all lettings of business premises in England and Wales with the exception of the following:
- agricultural lettings;
- premises used only to house plant (e.g. electricity transformers or telecoms);
- premises used for advertising media (hoardings);
- premises intended to be wholly sublet by the tenant;
- premises being let for a period of six months or less.
What are the mandatory requirements?
Part 2 of the RICS Code provides:
- Lease negotiations 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 about the existence of the Code and its supplemental guide and must be recommended to obtain professional advice.
- There must be written heads of terms in relation to vacant possession lettings, stating that the agreement setting out the terms of the lease is ‘subject to contract’ summarising the position on a number of specified aspects including:
- the identity and extent of the premises (including a Land Registry compliant plan if the lease is for a term of over seven years)
- any special rights to be granted, such as parking or telecom/data access;
- the length of term and whether the Landlord and Tenant Act 1954 will apply or be excluded (so it is clear whether or not the tenant benefits from security of tenure);
- any options for renewal or break rights;
- any requirements for a guarantor and/or rent deposit;
- the amount of rent, frequency of payment and whether the rent is inclusive or exclusive of business rates;
- whether the landlord intends to charge VAT on the rent;
- any rent-free period or other incentives;
- any rent reviews including frequency and basis of review;
- liability to pay a service charge and/or insurance premiums;
- rights to assign, sublet, charge or share the premises;
- repairing obligations;
- the initial permitted use and whether any changes of use will be allowed;
- rights to make alterations and any particular reinstatement obligations;
- any initial alterations or fit-out (if known) and;
- any conditions of the letting, such as subject to surveys, board approvals or planning permission.
- At a lease renewal or extension, the heads of terms must comply with the above list except for 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, with consideration being given to their respective commercial interests.
- The landlord or its letting agent will be responsible for ensuring that heads of terms complying with the Code are in place before the initial draft lease is circulated.
What are the good practice provisions?
Part 3 of the Code aims to promote good practice, not only in the initial negotiations of the heads of terms but also when parties and their legal advisers are negotiating the lease itself. Unlike the mandatory provisions specifying what the parties ‘must-do’, the good practice provisions specify what the parties ‘should do.’ Whilst these are not mandatory, a justifiable reason must again be given from departing from the good practices.
- a plan should be supplied by the landlord for attaching to the lease, if necessary, for identifying the property;
- (unless agreed otherwise in heads of terms) a tenant’s break right should only be conditional on the tenant paying all basic rent payable before the break date, giving up occupation and leaving no subtenants or other occupiers;
- where the landlord proposes the rent is subject to review, the tenant should be notified of the frequency and the method by which it is reviewed;
- a tenant should be permitted to assign the whole of the premises with the landlord’s consent (not to be unreasonably withheld or delayed);
- sharing of premises with other companies in the same corporate group should be permitted in leases, without creating a subletting;
- leases should contain tenant’s repairing obligations appropriate to the length of the term and condition of the premises;
- leases should provide for insurance and reinstatement damage caused to the premises by an uninsured risk, not just insured risks.
The Code includes a template head of terms however, if agents should prefer to continue using their own existing templates, there is also a checklist outlining the minimum requirements for Code-compliant heads of terms.