Commercial Property Focus - February 2009
The Code for Leasing Business Premises 2007
The British Property Foundation Code for
Leasing Business Premises was launched on 28 March 2007. It
was the result of a pan industry discussion between representatives
of all manner of Landlords and Tenants and the
Government.
The Code says its aim is to be used as a check
list for negotiations on both new Leases and Lease renewals.
To what extent, if at all, has this happened? How many Landlords
have adopted the Code? There is no doubt the code is Tenant
friendly. Is it the case that Landlords are scared of
adopting the Code as they think they will be offering their Tenants
too favourable terms which may impact upon their investment?
The Code is voluntary, and for the reasons set
out below, it is easy to see why a Landlord may avoid adopting
it. Even so, a large number of property companies, investors
and advisers have signed up to support the Code. Adoption of
the code by growing numbers in the property industry may ultimately
lead to an accreditation scheme or a kite mark arrangement for
compliant Landlords which could then be displayed on letting boards
or with the agents’ particulars. It is hoped that this would
give comfort to potential Tenants that a Landlord with this
accreditation is reasonable and one to deal with. The market
at the moment is a volatile place. Tenants are looking to
break their leases if they can and find more competitive and
flexible lease terms. Companies, following consolidation
exercises, are looking to minimise their exposure under their
current leasing arrangements. Tenant perception is one very
good reason why Landlords should be looking to implement the Code’s
recommendations. If a Landlord can actively market itself as
one employing the Code, a properly advised tenant may be more
likely to let premises from them.
Below are some of the main points in the Code
which are likely to trouble some Landlords, if they adopt the Code,
consider how they draft their leases and how they manage their
properties during the lease term. The changes are, in some
instances, considerable departures from the institutional lease
which is the norm and is widely understood
- The code contains draft Heads of Terms.
These are very thorough and because of their detail, potential
issues with the letting should be brought to the fore early on in
the transaction.
- The Code recommends limited break clause
preconditions. It states that as long as the Principle (not
Insurance or Service Charge) rent is up to date and vacant
possession is given, the Tenant should have the right to break. The
reason for the lack of extensive conditions to the Tenants ability
to break is that a Tenant should have this right notwithstanding
breaches of covenants during the lease term; these should and can
be dealt with after the lease has been broken
- The Code says Authorised Guarantee Agreements
(“AGA”) from existing tenants looking to assign should only be a
requirement on future assignments if the proposed tenant is either
of a lesser financial standing than the current tenant or the new
tenant is based overseas. This represents a large risk to
Landlords as by not asking for an AGA they are reducing the avenues
of recovery in the event of tenant default.
- In another departure from the institutional
lease terms, Section 5 of the Code says underlettings are to be
permitted at the market rent at the time of the proposed underlease
and not the passing rent under the head lease. The Industry
norm has been to insist the underlease rent is the greater of
either the market rent or the passing rent. If adopted, this
would give more flexibility to tenants, who may be able to under
let premises in circumstances where they were previously prevented
from doing by the restrictive underletting provisions in the
headlease relating to rent.
- The Code recommends that the dilapidations
should be served six months before the end of the Lease. How that
is going to work in practice is difficult to say, especially in the
case of damage caused during the last six months of the term,
after the schedule has been prepared
- Upon any application for consent under the
lease (assignment, underletting, alterations) the Landlord should
ask for any additional information within five days of the initial
request and then give an answer within 15 days of the full
information being provided. This should include an estimate
for costs. At the moment the timescales which dictate if a
Landlord is unreasonably delaying giving consent is based in case
law. The Code could give an aggrieved Tenant something to
hang any application to the Court on, should they seek a
declaration that a Landlord is unreasonably delaying consent.
If the Tenant could point to the fact the Landlord has adopted the
Code, the Court may use these timescales to make their
decision
There is certainly a growing awareness of the
Code but not, as yet, a positive shift towards compliance with
it. In addition to attitudes of Landlords and Tenants
generally towards adopting the Code, it is difficult to insert Code
compliant leases into buildings or estates with existing
non-compliant leases throughout. Existing Tenants will
no doubt ask why should they not receive the same preferable lease
terms?
There is definitely an interest in the Lease
Code but the reality is that until Landlords and their advisers use
a lease that is Code compliant as a starting point, little progress
will be made towards the goal of national compliance. Despite
everything we have said before, the ability in the current market
for Tenants to negotiate more favourable lease terms will only go
so far and tenant power on its own will not change the market; that
will ultimately require a shift in attitude by Landlords
Matthew Williamson,
Associate
matthew.williamson@weightmans.com