RICS consultation on the new version of the Code for Leasing Business Premises

The RICS (Royal Institution of Chartered Surveyors) is currently consulting on the ‘Professional Statement: Code for Leasing Business Premises, 1st edition’ (the Code). The RICS notes that this professional statement builds on “the previous industry Code which did not have official RICS status and therefore no regulatory requirements attached”.

Background

The first code of its kind dates back to 1995, emanating from the early 1990s recession and the government’s attempt to help protect business tenants without damaging the property industry (and, in particular, the pension funds making up a significant proportion of property landlords). A review of the effectiveness of that code a few years later led to a new version in 2002. In 2007 we then had a further code on which this 2019 version is closely based.

Each time there has been a review there is an overwhelming conclusion that the level of awareness of rights and obligations within the tenant population is generally poor and, likewise, the awareness of a code of practice itself equally poor.

So, what will make a difference this time?

The answer proposed is to make some elements of the new Code mandatory.

Because the new Code will be an RICS professional statement, the provisions will be implemented by way of the professional standards that the RICS monitor and enforce in respect of its members.

It is worth noting that unrepresented landlords dealing with unrepresented tenants would not, therefore, be directly affected.

The detail…

The mandatory sections of the proposed Code are limited. Importantly for landlords, there are no requirements or restrictions on what lease terms must be agreed (some may recall the 2007 code was largely a response to avoid legislation banning upward only rent reviews). The mandatory elements are that:

• negotiations should be constructive and collaborative
• parties that are unrepresented by an RICS member or other property professional must be advised by those parties that are so represented of the existence of the Code and must be given a recommendation that they obtain professional advice, and
• heads of terms (HoTs) must deal with a prescribed list of 20 points and be clearly marked ‘subject to contract’ (renewal HoTs can be shorter if the relevant terms are to be carried forward, subject to modernisation).

For the majority of the professionally managed property industry there will be no issues with complying with these requirements, just a change in process relating to the form of HoTs. By mandating the scope of HoTs the industry might start to behave more consistently. Perhaps we will get to a more standardised approach. Indeed, one of the stated aims of the RICS is to improve efficiency in the legal formalities, and better quality HoTs will definitely assist with that. However, challenges will still arise if key commercial issues remain unresolved at HoTs stage and are instead left to be determined during the course of legal drafting.

For multi-let buildings and for portfolios, some landlord agents would be well advised to either ensure the longer form HoTs are consistent with other lease terms and/or the landlord’s own policies. Some landlords with large portfolios will have clear "house" views or more formal policies on terms they will insist on (or at least try to). These will usually be informed by a necessity or strong desire to have a consistent approach to issues that can arise (e.g. standard service charge arrangements). Other points will be born out of specific experiences that managers have had where they feel they need certain protections. At least with the new Code there will be a clear benchmark against which tenants and their advisors can test where landlords are seeking to deviate, and likewise landlords can more easily test where tenants are seeking to deviate from what they regard as a standard position.

For lease HoTs in a multi-let building scenario or for landlords that have more general requirements, letting agents may resort to including a caveat that the terms set out are "subject to the landlord's standard lease" or similar. If that happens then the stated aims of the new Code will be adversely impacted and could hinder rather than help by giving a false sense of hope to the tenant that they have an agreed position.

Comment

When acting for tenants we already experience some landlords and their solicitors ignoring or contravening (perhaps mistakenly) agreed positions in HoTs, so the new Code may not do much to advance that.

It must be accepted that in some cases it will be expedient to find a short cut that may, on the face of it, not be in the spirit of the mandatory elements of the Code. Ultimately there has to be a balance and there would no point in seeking to legislate against such realities. Related to this is the unending debate as to whether or not it is better to have long form or short form HoTs. There will always be divided opinion on that. At least the new Code would ensure that, for most transactions, there will be an enhanced starting point for lower- and mid-market transactions.

Presumably the only sanction available to a party who might feel aggrieved is to complain to the RICS, who could then decide to sanction the relevant member at fault. Is a tenant agent likely to blow the whistle on a landlord agent? They might feel there would be commercial repercussions if they did so.

Overall, there's nothing really to complain about with this new Code and there will surely be something for everyone to gain from this initiative, even if only marginally.

The consultation closes on 05 May 2019.