UK: Third Time Lucky. The Code For Leasing Business Premises In England And Wales 2007

Last Updated: 15 June 2008
Article by Greg Thwaites

On the March 28, 2007 the Code for Leasing Business Premises in England and Wales 2007 ("the Code") was formally launched by Yvette Cooper, the Minister for Housing and Planning.

The Code aims to bring more equality into the landlord and tenant relationship and is "to be used as a checklist for negotiations before the grant of a lease and lease renewals."

This is the government's third bite at this particular cherry having previously failed to woo the industry with the Code of Practice for Commercial Leases 1995 and then the Code of Practice for Commercial Leases 2002.

This time around, however, it is prudent to proceed on the basis that the government will make good on their threat that "if the market does not deliver, we have identified legislative options".

The Code itself is broken down into 10 key areas of Lease Negotiations, Rent Deposits and Guarantees, Length of Term, Break Clauses and Renewal Rights, Rent Review, Assignment and Subletting, Service Charges, Repairs, Alterations and Change of Use, Insurance, Ongoing Management.

The provisions of the Code are too lengthy to set out here in full, however, certain of the provision are worthy of comment:

Length Of Term Break Rights And Renewal Rights

The Code provides that the only pre-condition of a break right should be that the main rent is up to date, that the tenant gives up occupation and that there are no continuing subleases.

Landlord resistance to this provision is anticipated as while it is usual for a tenant's solicitor to press to limit conditionality (if possible completely excluding the requirement that lease terms are complied with) the Code goes further still by referring only to the payment of the "main rent" and to giving up "occupation" rather than requiring the tenant to provide "vacant possession." The Code leaves items such as service charge disputes and clearing the premises to be dealt with as contractual disputes following the determination of the lease.

Rent Review

The Code provides that landlords shall on request offer alternative methods of review. Where a landlord is unable to offer an alternative method of review they shall give reasons.

We anticipate resistance to any method of review which is likely to result in the tenant paying less rent following a review.

In addition, where the premises form part of an estate or is part of an existing building it is unlikely that the landlord would wish to review parts of the building or estate on anything other than a uniform basis. This in itself would make an alternative method of review unattractive to a landlord of a multi-let building or estate.

Assignment And Subletting

The Code states that (save in respect of certain specified circumstances relating to an assignment within the same group) the lease shall not to refer to any specific circumstances for refusal of consent to an assignment.

In addition, the Code provides that an Authorised Guarantee Agreement ("AGA") shall not be required as a condition of assignment unless the assignee is either of a lower financial standing than the assignor or is resident or registered overseas, while for smaller tenants a rent deposit shall be acceptable as an alternative to an AGA.

These provisions of the Code represent a significant departure from the norm. A landlord will usually press to have a prescribed (but non-exhaustive) set of terms upon which it can refuse consent. This provides a greater level of certainty and limits the scope for dispute.

In addition, a landlord will usually press for a requirement that every assignor shall provide an AGA for their assignee. Accordingly, the requirement that an AGA may only be available in limited circumstances will be seen a shift in favour of the tenant.

Repair

Unless the Heads of Terms specifically stipulates otherwise the Code states that the tenant shall only be required to keep the premises in the same condition as at the date of the lease.

This turns on its head the current convention that unless the Heads state otherwise the tenant shall keep the premises in good and substantial repair.

While this may seem fair in short term leases (i.e. 5 years or less) we expect landlords to resist such a provision in longer term leases.

Alterations And Changes To Use

The Code states that prohibitions in respect of alterations and changes of use shall not be more restrictive than is necessary to protect both the value of the premises and the value of the landlord's adjoining premises. Further, internal alterations shall be notified to the landlord but provided that they do not affect services or systems of the building they shall not require consent.

This is a considerable relaxation of the current position which leaves the door open for the tenant to make structural alterations to the premises. Currently, this is usually absolutely prohibited save in long term leases.

In addition, a relaxed user clause may mean that the tenant can change the use of the premises to their benefit while the landlord is unable to share in this benefit by way of an increased rent until the next rent review.

Insurance

The Code provides that rent suspension shall apply where the premises are damaged by an uninsured risk other than where this is caused by a deliberate act of the tenant.

Traditionally, rent suspension arising from uninsured risks has been at the tenant's risk but landlords are increasingly willing to carry this risk.

Conclusion

The Code could put landlord and tenant relationships on a more equal footing but in the short term we believe it unlikely that landlords will embrace the Code. To achieve its goals, the government will almost certainly have to carry through its threat to introduce legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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