Decoding The Commercial Lease

With the recent publication of the Law Commission report, clearly moves are afoot in the residential leasehold world to balance out the disparity between the rights of landlords and those of their tenants.

Time will only tell what is finally put on the platter for general consumption on that planet.

But let us travel deeper into the universe and visit planet ComZog, commonly known on Earth as the commercial leasehold world.

Landlords have been up against it on ComZog for some time and clearly the force is no longer with them.

They have had to endure attacks from various factions including, ’Emperor Online Shopping, the Merciless’ and ’Brexit Tactical Command’.

Then the tragedy of a pandemic, which the world is still finding a challenge to defeat, and the economic and social consequences of which we are only just beginning to understand. 

During the pandemic we have all come to understand that to survive we must primarily acknowledge that we are all in this together.

One such consequence is a positive shift in the relationship between the commercial landlord and the commercial tenant.

While the government has felt it necessary to put in place temporary protective measures for the tenant, in most cases both landlord and tenant have talked, negotiated and come to terms collegiately, mutually seeking and achieving a reasoned and temporary solution to the challenges they both face, to survive.

It is to be hoped that this fresh approach to leasing commercial premises, with both parties meeting one another halfway, will replace the outmoded big fish, little fish procedure where the landlord dictates all.

The new Code for leasing business premises from the Royal Institute Chartered Surveyors (RICS), effective 1 September 2020, would appear to endorse this fresh approach and open a window to the future of commercial lease negotiations.

The code applies to commercial lettings in England and Wales, with particular emphasis on the contents of heads of terms.

It contains elements that are both mandatory, for RICS members, and those that are recommended as best practice.

However, the legal practitioner may also wish to adopt the code to improve the quality, fairness and uniformity of their lease negotiations.

The mandatory requirements are that: 

• Lease negotiations must be approached in a constructive and collaborative manner.
• An unrepresented party must be advised about the existence of the code and its supplemental guide and must be recommended to obtain professional advice.
• There must be written heads of terms, subject to contract, summarising the position on a number of specified aspects including the identity and extent of the premises; length of term; whether the Landlord and Tenant Act 1954 will be excluded; break rights; guarantor or rent deposit requirements; amount of rent, any rent-free period, rent reviews, VAT; liability to pay service charge and insurance premiums; rights to assign, sublet, charge, share; repair; permitted use; alterations and reinstatement; conditions of the letting such as subject to survey, board approval.
• The same requirements apply to a lease renewal or extension, except for any terms that are stated to follow the tenant’s existing lease, subject to reasonable modernisation.
• Negotiations should aim to produce letting terms that achieve a fair balance between the parties, having regard to their respective commercial interests.
• The landlord, or its letting agent, will be responsible for ensuring compliant heads of terms are in place before the initial draft lease is circulated.

The code’s recommended best practice proposals are:

• Where the landlord proposes that the lease is to be contracted out of the Landlord and Tenant Act 1954 the tenant should be notified at the outset so that they can obtain early professional advice as to the implications.
• Unless stricter conditions have been agreed in the heads of terms, a tenant’s break should be conditional only on the tenant paying the basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers. Landlords should be required to repay rent paid by the tenant for any period after a break takes effect.
• Definitions of market rent should not result in a ‘headline rent’, unless that has been expressly agreed by the parties, such as in return for a financial inducement.
• The service charge provisions in leases should be drafted in conformity with the core principles and mandatory provisions of the statement.
• The requirement for an authorised guarantee agreement (AGA) from an assigning tenant, or a guarantee for the AGA, or a new guarantor or rent deposit should be where the landlord reasonably requires.
• A lease should allow the tenant to leave alterations in place unless it is reasonable for the landlord to require their removal. The heads of terms can provide for a more onerous reinstatement obligation.
• Leases should cater for damage to the property by an uninsured risk as well as insured risks.
• Consider inclusion of ‘green’ provisions such as those in the Better Building Partnership’s Green Lease Toolkit.
• Landlords should act reasonably if they reserve the right to choose which energy performance certificate assessor the tenant may use.

Exceptions to the code are commercial premises:

• that are used for housing plant and equipment, for example telecoms;
• advertising media, for example hoardings;
• where they are to be wholly sublet by the tenant;
• being let for no more than six months 

In a bid to boldly go forward in the commercial world it is proposed that a fresh and enlightened approach, as offered by the code, may prove to be a useful and adaptable tool in reinvigorating the beleaguered High Street.