News & Events

The Law Society’s Business Lease and the Code for Leasing Business Premises

12/05/2008

The third edition of the Code for Leasing Business Premises in England and Wales was launched, with the endorsement of the Law Society among many other bodies, in March 2007 and is the latest attempt by the property industry at voluntary regulation. It is available at www.leasingbusinesspremises.co.uk. The Law Society has now published a new, 2008, edition of its Business Lease, designed to comply with the Code. There are not a large number of changes and, with one exception, they are not substantial. This is unsurprising as the Law Society’s lease was always intended to strike a fair balance between landlords and tenants.

Rent review

The Code requires landlords to offer alternatives to the traditional upwards only rent review, if requested, unless there are good reasons not to do so. The most significant change to the lease is that there is now a choice between a traditional upwards only rent review to market rent and a rent linked to the Retail Prices Index (RPI). When drafting the lease, you have to opt to use the index-linked review and state how often the review is to take place (eg annually, every three years, every five years). If you do nothing, the upwards only review is the default, as that is still the most common form of rent review seen in the market.

As a general point, the RPI is not an accurate reflection of market rents for commercial property. It is, however, probably the most commonly used index because it is readily available (see www.statistics.gov.uk) and likely to continue to be published in some form throughout the term of the lease.

The RPI clause does not contain a base rent, so, in theory the rent could go down. However, historically the RPI has never dropped.

The “adjusted rent” under the RPI clause is “the initial rent payable under this lease (after any rent free period has expired)” multiplied by the RPI at the review date and divided by the RPI at the start of the lease. Note that rent concessions other than initial rent free periods (eg stepped rents) are not covered. If there is a stepped rent the formula will not work as intended. For example, assume a rent of £100 in year 1, £110 in year 2, £120 in year 3 and an RPI review on the third anniversary. The “initial rent” in the formula will be £100 to be multiplied by the increase in the RPI since year 1. That will almost certainly not be what the parties intended and specific drafting will be necessary.

Assignment

The previous edition of the lease was already Code-compliant in allowing assignment of the whole with consent, not to be unreasonably withheld and without any pre-conditions. The requirement for an authorised guarantee agreement has, in the new edition, been amended so that this is only necessary if the landlord reasonably requires it and:

• The assignee and any guarantor are of a lower financial status than the assignor; or

• The assignee is based overseas.

Alterations

Small amendments have been made to the alterations provisions to reflect the requirements of the Code. The lease now provides:

• No structural alterations or additions are allowed;

• Alterations which will affect the services or systems (eg the heating, air-conditioning or sprinkler systems) require the landlord’s consent, which is not to be unreasonably withheld;

• The tenant must notify the landlord of any alterations it makes which are permitted but which do not require consent (ie non-structural alterations not affecting the building systems).

At the end of the lease the tenant is required to remove all unauthorised alterations. In the case of other alterations (whether those which required consent or those which did not) the landlord is to give at least six months’ notice if it reasonably requires their removal. (A shorter period of notice is allowed if reasonable, eg if alterations are made in the last six months of the lease.).

Insurance

The lease now makes it clear that the landlord is to insure the building “on reasonable terms”. In addition, where the building is unusable because of damage by an uninsured risk (the most obvious example might be terrorism and a topical one – in some localities – might be flooding), the rent is suspended and there is a mutual break right after two months, unless the landlord has agreed to reinstate the property. The tenant has no obligation to repair damage caused by uninsured risks, unless the damage is the tenant’s fault.

Other provisions

Service charge – The Code requires landlords to provide information about the service charge costs during the negotiations and to be aware of and seek to observe the Code of Practice on Service Charges in Commercial Property (see www.servicechargecode.co.uk for the 2006 version). The service charge code is more about the management of the service charge than lease drafting and therefore no changes have been made to the lease.

Repairs – Under the Code, repairing obligations should be appropriate for the length of the lease and the state of the property and, in particular, the tenant should only be required to return the property at the end of the lease in the same condition as it was at the start. The lease required no alteration to be Code-compliant – it already stated that the tenant needs only “maintain the state and condition” of the property.

Execution – The reminder of companies’ forms of execution has been updated to include the new method of execution by a director in the presence of a witness which is introduced by s.44 of the Companies Act 2006 from 6 April 2008.

Using the lease

The Law Society Business Lease is designed for relatively short terms of simple buildings.

You must not alter the text of the lease. Set out any amendments or variations at the end. It is vital that solicitors licensed to reproduce the text on their own systems (instead of using a commercial electronic product) abide by this requirement and do not produce a document which purports to be the Law Society lease but which is not.

Emma Slessenger was a member of the Law Society Business Lease Working Party and has been a member of the Conveyancing and Land Law Committee since 1998.
'Emma Slessenger is the real estate professional support lawyer counsel at Allen & Overy LLP'

This article was written on behalf of the Law Society's Standard Business Leases Working Party.

© Emma Slessenger February 2008
1056 words

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