New commercial property Code

At launch on 28 March 2007 the housing minister Yvette Cooper thanked the Working Group for its efforts in producing the new Code for Leasing Business Premises. Cooper challenged the property industry to adopt it willingly, and made clear that the option of legislation remained if it did not.

Some may feel that legislation is the best option. The new Code is still voluntary. There was widespread ignorance of the previous version. However, there is also a genuine fear that the 'law of unintended consequences' may apply if legislation is passed. For instance, would rent reviews be replaced with shorter leases, with no review? Alternatively, would annual indexation of rents follow instead? On alienation, would landlords simply refuse assignment or underletting altogether?

The new Code is the result of discussions between all sections of the property industry '“ owners, occupiers and advisers, large and small '“ and has transparency and flexibility at its heart. It consists of three parts. The first sets out a list of requirements for a 'Code compliant' lease under 10 headings.

The second is an occupier's guide. This has been designed to help tenants to agree a document that meets their needs. The third part is a model heads of terms which landlords and tenants can use as a checklist. It will also enable lawyers to prepare documents more easily.

It may be too much to expect that tenants will have a choice of property '“ one with a Code compliant lease and the other non-compliant, and that that will of itself encourage landlords to comply.

However, there are definite benefits to both sides of the industry in adopting the Code. The Code itself is flexible in making clear that landlords will still be Code compliant even if particular leases are not. In such a case, the landlord must explain why it cannot comply.

Code requirements include:

• Rent review '“ alternatives to upward-only reviews, such as indexation or a threshold review, should be made available on request. No 'headline' rents, and either party should be able to start the rent review process;
• Break clauses '“ breaks conditional on strict compliance with all lease terms are outlawed. It is arguably negligent for a tenant's solicitor to allow a such a provision. Equally it is in neither party's interest for a property to stay empty while arguments continue about whether the tenant has complied with conditions. There is an imbalance between the consequences of not paying a last minute demand for a £150 insurance payment and an extra five years' rent, rates and service charge costs.
• Alterations '“ consent should often not be needed for internal non-structural alterations. Landlords should only require reinstatement where reasonable and should give at least six months notice if they do require it. Similarly schedules of dilapidation should be given at least six months before the end of the lease.
• Disposals '“ the Code recommends fewer 'hoops' for tenants to jump through on assignment, and sublettings should be at market (not passing) rent, in line with the British Property Federation subletting declaration. Further flexibility should be given in the term of an underlease if it is granted so as to exclude renewal rights.
• Repairs '“ a need to consider whether a full repairing lease is appropriate. This will depend on the length of the lease and the state of the property. The Code does not require a schedule of condition in all cases. That would be impracticable. However it is not too much to expect that heads of terms are clear on what is required if full repair is what is negotiated. If the overall deal is sensible, for example a lengthy rent-free period, a full repair lease of a run-down property is no problem. The Code does not prevent the parties agreeing something which works for them.
• Service charges '“ the Code refers to the 2006 Service Charge Code, which calls for ' not for profit' management and fees which reflect the work done.
• Insurance '“ the policy should represent value for money. Tenants should not be expected to pay while a property in unusable nor where the damage is by an uninsured risk, for example terrorism. Mutual breaks are required here unless the landlord agrees to reinstate at its cost. Landlords must disclose insurance commission.
• Consents '“ landlords must consider applications for consent within a sensible timescale.

Benefits for landlords and tenants

The new Code represents a real opportunity for landlords and tenants to work together so that both achieve their goals. Assuming the Code is followed, the benefits will include:

• There will be greater trust between owners and occupiers;
• Transactions should complete more quickly with less room for conflict;
• Tenants will therefore trade more quickly. Christmas trade is invariably vital.Landlords' rent will come on stream earlier;
• Greater flexibility on subletting should reduce the number of unoccupied properties. Proposed budget changes for rating of unoccupied property will make this even more important; and
• Occupiers will be able to carry out decisions with less red tape.

There are two major issues with granting consent to alterations: the time take to receive consent and the cost of having it. The latter often bears no relation to work proposed.

Consider the costs incurred by a large chain needing consent to alter its fascia sign/corporate colours. At 'only' £1,000 a time, a 500-store chain has wasted £500,000 in unnecessary administrative charges, not to mention their own lawyer's fees and management time.

Small business tenants have a better chance of understanding the basics before it is too late. Business failures do landlords no good either.

What are the benefits for lawyers?

The possibility of significant omissions from the lease should be reduced. Heads of terms sometimes cover no more than the address of the property, the identity of the parties, the rent and the length of the lease. Lawyers are therefore without instructions when drafting the lease.

They have no idea, for instance, what rights are needed for extract ventilation or for a fire escape. Also, is the property for use only as a shop or restaurant or does it include living accommodation above? Does the landlord need to keep rights to enable the rest of the building to be used properly?

The model heads of terms in the Code should help to redress such omissions.

In these days of fixed fees, it cannot be a benefit for deals to be prolonged any longer than necessary. Production of documents which are likely to be signed without months of correspondence must help.

Client satisfaction will increase if deal times are reduced. This may necessitate some forward planning and early discussion as to client's requirements. However, anything which allows us to know our clients better is what we should be looking for.

It might have been acceptable for negotiations to take three months for a lease of 25 years, but with an average lease of six-and-a-half years, the same time is now equivalent to 4 per cent of the total rent.

Better liaison with agents will help everyone. For instance, early issue of a Land Registry compliant plan must be good news, as well as timely production of service charge estimates and percentages. These basic efficiencies are likely to provide repeat business, a successful tenant, a renewed lease and a happy landlord.

Questions for lawyers

To what extent do we take detailed instructions before sending out draft leases once the heads of terms are received?

What might the consequence be if, instead of the tough draft of the past, lawyers sent out, on instructions, and following advice, drafts which might be acceptable with minimal amendments?

Both parties and their lawyers working together to achieve on time delivery of a decent product '“ property and lease '“ is the challenge.

There is nothing in the new Code which a well advised tenant will not expect to achieve. Those who drafted the Code would not have achieved their purpose if that was not the case.

The new Code arguably provides a platform for lasting improvement.

For a copy of the Code visit www.leasingbusinesspremises.co.uk