New RICS Code for Leasing Business Premises

June 3, 2019

The Royal Institution of Chartered Surveyors (“the RICS”) has recently been consulting on a new Code for Leasing Business Premises 1st Edition (“the Code”) in England and Wales (but not Northern Ireland). This consultation ended on 5 May 2019. It is the “1st Edition” because it is, for the first time, to be published as a new professional statement. The effect of this being the document sets mandatory professional, behavioural, competence or technical requirements which RICS members must not depart from. The Code and template heads of terms are to be used as a checklist for negotiations before granting a new lease or a lease renewal. The latest version of the Code, published in 2007, is perceived to have many failings and the RICS have put forward recommendations to improve the Code as well as the heads of terms used for, and the drafting of, new lease documents following their recent consultation.

Once the Code is implemented it is hoped that surveyors in Northern Ireland will follow it however there is nothing to compel such practice. Some of the elements of the Code are specific to England and Wales and as such have been left out of this piece (e.g. “contracting out” under the Landlord and Tenant 1954 Act).
The recommendations are as follows:

1. Negotiations and heads of terms:
a. Code is designed to contain mandatory requirements on RICS members (i.e. the practices set out below).
b. Negotiations must be approached in a constructive and collaborative manner.
c. Any agreement as to terms for vacant possession must be made “subject to contract”.

2. The premises:
a. Must be clearly defined including elements of structure of building.
b. Plan to be provided where lease is registrable.
c. Tenant to be given right to require landlord to grant easements/wayleaves to benefit the premises.

3. Length of term and break rights:
a. Length of term to be clearly specified.
b. Dates, periods of notice and pre-conditions for break rights to be clearly stated.
c. Unless there are specific reasons for strict pre-conditions a tenant break right should only be conditional on all rents being paid up to break date, giving up occupation and leaving no other occupiers in the premises. It is worth noting however that the requirement to leave no other occupiers in the premises suggests a break right can be frustrated by the presence of an unlawful trespasser.
d. The landlord to repay any overpaid rent, service charge or insurance where it has been paid for a period after the break date.

4. Rent deposits and guarantees:
a. The tenant must be informed if a rent deposit or guarantee will cover only rent or all tenant obligations.
5. Rent:
a. Heads of terms should clearly show amount of rent and instalment frequency, if VAT is chargeable, and if there is any rent free period or other inducement.

6. Rent review:
a. Review clause must be clearly expressed and allow for reviewed rent to be easily ascertained.
b. Rent to be reviewed on an open market basis.
c. Reviewed rent not to be any higher than current market rent.
d. No artificial assumptions are to be included in the rent review provisions for the purposes of securing greater rent increases.
e. There is to be no obscure formulae used to produce a greater rent increase than is proportionate.

7. Service charge, insurance costs and other outgoings:
a. Service charges are subject to a separate RICS code but the parties must take account of the said code in so far as reasonably practicable when drafting the lease.

8. Assigning, subletting, charging and sharing:
a. Landlords consent to assignment of whole is not to be unreasonably withheld or delayed. A reasonable ground for refusal is arrears of rent, service charge or insurance premium provided this non-payment is not subject to a separate ongoing dispute.
b. The assignee must procure a new guarantor or pay a rent deposit where the landlord reasonably requires.
c. Group sharing to be permitted.
d. Subletting of whole to be permitted with rent no lower than market rent and consistent with main lease.
e. Charge over tenant’s lease allowed without landlord’s consent where charge is in favour of a bank.

9. Repairs:
a. A schedule of condition is now to be entirely optional under the Code.
b. For newly built premises, where repair and service charge liabilities extend to the fabric/structure of the building, tenants should be given rights of enforcement in respect of inherent defects e.g. collateral warranties.

10. Change of use, alterations and fit-out:
a. If the lease is silent on the point, where reasonable to do so, the landlord can require removal of alterations at end of lease.
b. Tenant to be notified if there will be any initial fit out obligations (e.g. materials, system specifications etc) restricting how the tenant can fit out or use the premises.

11. Insurance and damage:
a. Insurance policy should be on normal market terms.
b. Full terrorism cover should be included but only if available at reasonable rates.
c. Details of landlord’s insurance to be provided to tenant on reasonable request.
d. Rent to be suspended if premises damaged by an insured risk, or unless where due to act or default of tenant, damaged by an insured risk.
e. Uninsured damage should allow for either party to terminate lease unless landlord agrees to rebuild at own cost.
f. Any discount on premiums to be passed on to the tenant by the landlord.

12. Management and operational performance:
a. Parties encouraged to share data and co-operate to improve operational efficiencies of premises.

13. Energy Performance Certificates:
a. Lease to state who is responsible for obtaining EPC.
b. Where tenant assigns a lease where no EPC was available for the tenant, they must obtain an EPC.

14. Landlord’s Title:
a. Where landlord’s title is subject to enforceable covenants preventing the landlord from complying with any provision of the Code it must be clearly explained to the tenant why this is the case.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.

Shane Conlan, Senior Solicitor, Property Team, Cleaver Fulton Rankin, Solicitors.