The new code of practice for commercial leases.

March saw the publication of the Code for Leasing Business Premises in England and Wales 2007. This third version of the code builds upon the second version, issued in 2002, and on Reading University’s report on the impact of the 2002 code.

The latest code is made up of three parts, as follows:

Landlord Code

The Landlord Code makes a number of recommendations as to how the parties should conduct themselves during lease negotiations as well as during the term of the lease. This is similar to the approach adopted by the 2002 code but seeks to spell it out in a clear, concise and authoritative way. However, herein lies one of the code’s weaknesses as the absence of legal language leaves huge scope for interpretation.

It is fair to say that institutional landlords may be reluctant to adopt several of the recommendations made by the Landlord Code such as offering alternatives to upwards-only rent reviews and assuming the risk in the case of damage by uninsured risks (by allowing a tenant to terminate its lease).

Occupier Guide

The Occupier Guide is aimed at tenants who are unlikely to obtain professional advice during negotiation of lease terms and during the course of the lease itself. The guide provides a tenant with a number of “tips” although does raise the point that the code does not provide all of the protection that a tenant may need and that advice from a qualified surveyor and lawyer should be sought.

The code is silent as to whether a codecompliant lease would have to observe both the Landlord Code and Occupier Guide – whilst this may be appropriate in certain instances, the shift in burden upon the landlord may prove too great for a number of institutional landlords and lenders.

Model Heads of Terms

These provide the parties with a checklist of issues to be agreed at the negotiation stage. If detailed terms can be agreed at the outset then this should expedite the process without the need to agree commercial terms during the course of negotiating the lease. We may see the industry adopt the Model Heads of Terms in a similar way that CPSEs have been adopted as model pre-contract enquiries.

It is clear that the industry is keen to ensure any code is voluntary rather than take the gamble of letting the Government provide a legislative solution. The code is backed by a number of significant bodies (such as the CBI, IPF and RICS). It will be the industry’s willingness to observe the recommendations of the 2007 code that will dictate whether, instead of a fourth code, we will see the introduction of legislation decreeing what is acceptable in commercial leases.

The full text of the 2007 Code can be found at:  www.leasingbusinesspremises.co.uk