At the end of March, the Government published “The Code for Leasing Business Premises in England and Wales 2007”, with the hope that it will “help the industry in its quest to promote efficiency and fairness in Landlord and Tenant relationships”. Whilst the Code is voluntary, that hope is given muscle by the very real threat that if the Government does not see the desired efficiency and fairness it will legislate.
There have been two previous editions of the Code, and the Government felt that they had not achieved the desired impact. Will this one be any different? Coupled with the threat of legislation and the fact that the Code is endorsed by the Association of British Insurers, British Council for Offices, British Property Federation, British Retail Consortium, Confederation of British Industry, Communities and Local Government, CoreNet Global, The Forum of Private Businesses, Federation of Small Businesses, Investment Property Forum, The Law Society of England and Wales, The Royal Institution of Chartered Surveyors and the Welsh Assembly Government, it would seem that there ought to be a chance. However, nearly four months on it does seem as though market forces coupled with tenants’ reluctance to pay more than the bare minimum, are blunting the Code’s effectiveness.
The Code only has ten key points and is designed to be understood by unrepresented tenants. The points include:
The landlord must state whether it is prepared to offer alternative lease terms to those put forward. This would include break clauses and the possibility of a form of review other than the traditional upward only. However, tenants must understand that there is a price to pay for such flexibility, which will almost certainly be reflected in a higher rent.
Tenants should be protected against the landlord’s default or insolvency. Yet still some landlords are insisting that a rent deposit is paid absolutely to them so the tenant has to “trust” them and their credit worthiness that the money will be returned. The very fact that a tenant has to provide a rent deposit often means that its negotiating position is not strong.
Break clauses and renewal rights
The Code states “The only preconditions to Tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and subleases”. Given that it is quite possible that a tenant may have paid an increased rent for the benefit of a break clause it seems particularly inequitable that a tenant could be “trapped” by a conditional break clause. The Code expressly states that a dispute over the state and condition of the premises and what has been left behind can be sorted out later as a damages claim (in the same manner as it would be at the end of the term).
The basic principle is that leases should have the benefit of the 1954 Act, but the Code acknowledges that there will be circumstances when this is not appropriate.
Assignment and subletting Landlords should not automatically require the current tenant to provide an authorised guarantee agreement on an assignment, such an agreement should only be provided if the proposed assignee when assessed, together with any proposed guarantor:
- is of lower financial standing than the assignor (and its guarantor) or
- is resident or registered overseas.
Any sublease which is excluded from the 1954 Act should not have to be on the same terms as the tenant’s lease. This would allow subleases to be granted with a schedule of condition and either to have no rent review or to have a rent review at a different date to that in the headlease. Again, it will be interesting to see how the funder/its valuer react to this. The principle that a sublease should be granted at market rent as opposed to the higher of market and passing rent is included in the Code, this is something which has already been embraced by many institutional landlords.
Landlords should “seek to observe the guidance of” the RICS Code of practice on service charges. This is based on transparency and the principle that the service charge is run on a “not for profit” basis. Some of the timings for the production of service charge estimates and end of year balancing certificates are seen as challenging.
The tenant’s repairing obligations should be appropriate to the term of the lease and to the condition of the property at the commencement of the lease. Unless the heads of terms state otherwise, the tenant’s repairing obligations should be simply to hand the property back in the same condition as it was in at the start of the lease. Whilst the average term of a lease now is significantly shorter than 20 years ago, the principle that all leases should be granted by reference to a schedule of condition is not one that many landlords or their funders will be familiar with.
Alterations and reinstatement
Internal alterations should not need consent unless they could affect the building’s services or systems. Landlords should only require tenants to remove permitted alterations at the end of the lease if it is reasonable to do so and if the landlord has given at least six months notice. Are there going to be many circumstances when it may not be reasonable for a landlord to require this? But who will decide whether or not it is reasonable?
The Code recommends that the rent suspension provisions should apply both to damage by an insured and by an uninsured risk and that if the property has not been reinstated by the end of the rent suspension period the tenant should be able to determine the lease. Whilst historically the main concern on uninsured risks was terrorism, flooding could become a real issue.
At one level it is hard to quibble with the Code’s principles. But, there are a number of fundamental changes to what, over the years, has been seen as an “institutional” lease and only time will tell if landlords are prepared not just to sign up to complying with the Code’s provisions but also to adhere to them and also whether tenants will accept that in return for greater flexibility they have to pay a higher rent. Market forces are also bound to determine the parties’ behaviour.