1 May 2018

RICS family fortunes:- our survey says…

On 12 April 2018, the consultation on the 1st edition of the RICS professional statement: Code for leasing business premises (the “Revised Code”) closed. The Revised Code is set to replace the current voluntary 2007 Code for Leasing Business Premises in England and Wales (the “2007 Code”). Whilst the consultation may give rise to some changes, assuming the Revised Code broadly remains as proposed, what are the key points for surveyors to note?

  1. The Revised Code has some mandatory requirements. The 2007 Code is voluntary, and is often given only cursory attention in lease negotiations, if at all. Under the Revised Code, RICS members must ensure that written heads of terms (“HOTs”) are made available, and that those HOTs set out the position, as a minimum, on certain aspects of the proposed letting (but without mandating the detail of what the position must be). The list is below, and the Revised Code includes a HOTs template.
  2. A failure to comply with the Revised Code has professional “bite”. There is no carrot or stick to ensure that the 2007 Code is adopted although, arguably, reference to the 2007 Code can accelerate negotiation in certain areas. In contrast, the Revised Code forms part of a RICS professional statement.  For RICS members, a departure from the requirements of a professional statement risks “legal and/or disciplinary consequences”. In particular, a court is likely to take account of any departure from those requirements in the context of a professional negligence claim.
  3. The Revised Code might not stipulate what the position in HOTs must be, but it does emphasise what it should be. The Revised Code contains best practice statements, which RICS members should comply with, unless there is “justifiable good reason”.  It is a curious position because arguably, if in departing from those best practice statements, a RICS member is enhancing the position of a client in the negotiation, it is acting with “justifiable good reason”. There is no doubt that many will have commented to this effect in responding to the consultation and so clarity will hopefully follow.
  4. Do the “best practice statements” go above and beyond the 2007 Code? There are differences, and whilst clarity is required in certain areas such as repair and 1954 Act renewal (which will hopefully arise through the consultation process- it is interesting to note that the BPF has published their response to the consultation), there are certain provisions worth noting now.
    1. Break clause:  Unsurprisingly,  following the well-publicised “Marks & Spencer v BNP Paribas” break clause case, which went all the way to the Supreme Court, the Revised Code states that sums paid in advance should be refunded to a tenant if they relate to the period after the break date. The Revised Code clarifies that landlords may however defer any refund of service charge until after the year-end reconciliation.
    2. New buildings: In respect of repair, the Revised Code goes further  than the 2007 Code, such that where a lease is being taken of a new building, the tenant should expect remedies in relation to defects (whether directly through obligations on the  landlord  to rectify, or indirectly through the provision of collateral warranties from the professional team). This is often overlooked in HOTs, and inevitably leads to negotiation down the line. Therefore, in many respects, it is a useful reminder. However, from a landlord perspective, before making such an offer, a surveyor should always check first with the client/ solicitors whether collateral warranties are available and, if so, from whom and on what terms (usually in a standard, non-negotiable form).
    3. Insurance: The Revised Code and 2007 Code both state that landlords should disclose any commission. However, the Revised Code goes further, stating that landlords should pass on the benefit of any premium discounts. Inevitably, landlords’ solicitors can expect that their counterparts will be pushing for this tenant benefit, referring to the Revised Code.
    4. Energy Efficiency: Unsurprisingly, now that minimum energy efficiency standards apply, the Revised Code makes reference to energy efficiency provisions. In particular, it states that HOTs should identify any obligations in relation to energy efficiency “that might involve material cost or limit how the tenant can fit-out or use the premises”. The Revised Code also refers to “co-operation between the parties to improve energy efficiency” and sharing data and information. Inevitably, it is landlords who will be seeking to include these provisions and so, arguably, the Revised Code makes it all the more important to agree the position up-front. Consequently, if there is no reference to such provisions in HOTs, tenants’ solicitors will no doubt try to use this oversight as leverage in lease negotiation, if landlords then seek to include provisions to this effect in the drafting.
    5. Wayleaves: It is worth noting that the Revised Code makes no reference to connectivity, which seems unusual given that associated negotiation can often prolong the leasing process. Interestingly, the BPF response to the consultation (as above) identifies this, and suggests that landlords should provide information up-front in heads of terms (including Wired Certification, if applicable).

The consultation has only just closed so it is perhaps premature to draw conclusions. Arguably, as it stands, the Revised Code lacks any additional “bite” above and beyond the voluntary existing code. However, the industry will note further RICS announcements, particularly on best practice, with interest. There may be a “sting in the tail”, dependent on the RICS position as to what constitutes a “justifiable good reason”. In any event, irrespective of how much professional “bite” the Code has, tenants and their solicitors will no doubt leverage the Revised Code in negotiation. Landlords’ solicitors can expect to increasingly be asked to justify why clients are insisting on a provision that is not compliant with the Revised Code.

“The agreement as to the terms of the lease must be recorded in written heads of terms, containing, as a minimum, the position on each of the following aspects:

  • the identity and extent of the premises
  • any special rights to be granted
  • the length of term
  • rights of renewal
  • any break rights
  • any requirements for a guarantor or rent deposit
  • the amount of rent and frequency of payment
  • whether the landlord intends to charge VAT on the rent
  • any rent-free period or other incentive
  • rent review dates and the basis of review
  • rights to assign, sublet, charge or share the premises
  • repairing obligations
  • liability to pay service charge
  • the use to be permitted
  • rights to make alterations
  • any initial alterations or fit-out
  • liability to pay insurance premiums”.

Edward is an associate in our Commercial Real Estate team.

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