_Don’t fall foul of new rules about leasing business premises

Emily Seager from Knight Frank Newcastle, says if you’re a landlord or a tenant of a commercial property, there are new rules governing how you negotiate lease terms, that you need to be aware of.

Emily Seager September 28, 2020

To bring more clarity and fairness to negotiations around what should be included in a lease, RICS has introduced the ‘Code for Leasing Business Premises’ - which came into force on 1 September.

If RICS members fail to comply with the new rules they could face legal or disciplinary consequences.
Here’s all you need to know about the new requirements – in a nutshell - and how they could affect you.

What’s changed?

RICS has introduced 16 minimum mandatory requirements that must be discussed and included in the summary of agreed terms for the new lease (the Heads of Terms), before a draft lease is circulated.

RICS has also brought out some guidance which helps landlords and tenants that are not represented by a surveyor or solicitor, to more-easily understand their obligations and risks. Negotiated terms should aim to produce a fair balance between both parties - reflecting their respective commercial interests.

The 16 aspects that must be included, are:

1. The identity and extent of the premises (including a Land Registry-compliant plan if the lease is registerable)
2. Any special rights to be granted e.g. parking or telecom/data access
3. Length of term
4. Options for renewal or break rights
5. Requirements for a guarantor and/or rent deposit
6. Rent amount, frequency of payment and whether it’s exclusive of business rates
7. If the landlord intends to charge VAT on the rent
8. Any rent-free period or other incentive
9. Rent reviews, their frequency and basis of review
10. Service charges and/or insurance premiums
11. Rights to assign, sublet, charge or share premises
12. Repairing obligations
13. Permitted use and whether changes of use are allowed
14. Rights to make alterations and reinstatement obligations
15. Initial alterations or fit-out (if any)
16. Any conditions of the letting e.g. surveys, board approvals or planning permission

In addition, the Code states that:

• negotiations must be approached in a constructive and collaborative manner;
• and if a party is not represented by a RICS member or other property professional, the other party (or its agents) must tell that party that the Code exists and recommend that they get professional advice.

The Code includes both mandatory and 'best practice' sections.

Does this apply to all leases?

Yes, it applies to the vast majority of business premises being let in England and Wales, except the following:

• Agricultural lettings
• Property that is only used to house plant and equipment e.g. electricity transformers or advertising media e.g. hoardings
• Premises being let for six months or less
• Property that will be wholly sublet by the tenant

It applies to all new leases and also lease renewals and lease extensions (except where terms are being carried over from the original lease). It does not mention whether it applies to lease restructures where the lease term is not extended as part of the agreement.

I’m a landlord – how will this affect me?

The Code puts the onus to comply with the new rules firmly on the landlord so, now more-than-ever, you need to ensure you are being well-advised by a RICS property professional.

The new rules are likely to help avoid protracted legals and ensure less deals fall through during this stage. This is because the tenant will now be much more aware of what their liabilities will be under the lease - before it gets into solicitors’ hands.

More thrashing out of the details at the negotiation stage, means a potential cost-saving for you because the lease, in theory, should spend less time with your lawyer.

You, or your agent, may have a standard set of Heads of Terms for new leases that needs revisiting to make sure it complies with the Code.

I’m a tenant – how will this affect me?

The new rules will make it much easier for you to understand exactly what you are signing-up to, well before the lease enters the legal stage and you start incurring additional fees.

The new guidance around the requirements is layperson-friendly so will be extra helpful to you if you are not a property professional.
Because more details about your liabilities under the lease will be spelt out in black and white, you will be less at risk of any unexpected costs arising during - and after - your lease ends.

In summary

The new rules are a positive step forward because they promote transparency and fairness during negotiations around the leasing of business premises.

If you are a landlord or tenant about to enter into a new lease, lease renewal or lease extension, make sure you are being advised by a RICS property professional who can ensure negotiations around the Heads of Terms for the lease tallies with the new Code.

Remember, the landlord (or its letting agent) is responsible for ensuring that Code-compliant Heads of Terms are in place before the initial draft lease is circulated.

Emily Seager, a partner at Knight Frank has over 15 years’ lease advisory experience specialising in rent reviews, lease renewals, lease regears and third party dispute resolution representation. She heads up Knight Frank Newcastle's specialist lease advisory team and acts for landlords and tenants on all types of commercial property in the North East.