The code of practice for commercial leases – proving compliance

Citation

Dowden, M. (2002), "The code of practice for commercial leases – proving compliance", Journal of Property Investment & Finance, Vol. 20 No. 6. https://doi.org/10.1108/jpif.2002.11220fab.001

The code of practice for commercial leases – proving compliance

Malcolm DowdenCharles Russell Solicitors

The new revised Code of Practice for Commercial Leases in England and Wales came into effect on 22 April 2002. It contains 23 recommendations; the first ten for negotiating new leases and the remainder for the ongoing landlord and tenant relationship, including lease renewals under the Landlord and Tenant Act 1954. A review of the effectiveness of the Code on the market is due to take place in two years' time with an interim review after 12 months.

Although the Code is voluntary it was launched with a clear message from government that if it is not taken seriously then legislation (particularly to prevent upwards-only rent reviews) will follow.

The key recommendations on an initial letting are:

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  Landlords should consider offering tenants various lengths of term with a range of appropriate rents.

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  Landlords should (wherever possible) offer price-adjusted alternatives to upwards-only rent reviews and funders should not insist upon upwards-only rent reviews.

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  Tenants' repairing covenants (or contributions through service charge) should reflect the length of term and condition of the premises.

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  Alienation and alteration covenants should (where possible) not be overly restrictive. In particular, it is recommended that landlords should seek authorised guarantee agreements only where the financial standing of the assignee is "lower" than that of the outgoing tenant at the date of the assignment.

Assuming that landlords wish to comply with a Code that professes to reflect current "best practice", then the question of proof must be addressed. How will compliance be shown? What evidence will be available, and where will it be found?

The Code urges landlords to offer alternatives to upwards-only rent reviews and in so doing it acknowledges that the transfer of risk might well be reflected in a higher initial rent. Tenants may well elect to pay a lower initial rent in return for an upwards-only review. Unless it could be shown that a tenant made its selection from a range of options, then those charged with monitoring the industry's response might conclude that the Code had little or no impact and that landlords were continuing to impose upwards-only reviews.

Similar issues may arise in the context of restrictions on alienation and alterations. The Code recommends that "unless the particular circumstances of the letting justify greater control", the only restriction on assignment of whole should be obtaining landlord's consent (not to be unreasonably withheld). In particular, it urges landlords to consider requiring authorised guarantee agreements only where the assignee is of lower financial standing than the assignor at the date of the assignment. The key (and, some might say, the weasel) words are "unless the particular circumstances … justify". If a landlord does decide, and the tenant agrees, to include an automatic requirement for an authorised guarantee agreement then it would be sensible to record the particular circumstances that were considered to justify such a requirement.

Landlords should also be aware of the connection between the Code for Commercial Leases and the Guide to Good Practice on Service Charges in Commercial Leases. Recommendation 20 states that Landlords should "observe" the Service Charge Code. As with the Leases Code, the Service Charge Code is an aspirational, rather than a prescriptive document. Most landlords and managing agents will subscribe to its objectives and broad recommendations but will not necessarily follow it on all points of detail. It includes some areas that are hotly negotiated (for example, the recommendation that receipts from car parking and other revenue-generating activities should be credited to the service charge account). Where the terms of the completed lease do not wholly implement the recommendations of the Service Charge Code then evidence of negotiations/commercial trade-offs that led to the final form ought to be retained to show "observance", if not necessarily wholesale adoption, of that Code.

Completed leases will not be the place for such evidence. Leases are generally drafted on the basis of heads of terms that constitute the lawyers' initial instructions. Consequently, the draftsmen will usually have no information as to the range of alternatives offered to the tenant. Even if that information were available, there would be little to be gained by bulking out leases with details of terms that had been offered and rejected. Leases are long enough when they restrict themselves to the terms that were actually agreed.

Landlords and/or their agents would be well advised to check and if necessary revise their existing policies on the retention of correspondence and records of negotiation. Relevant materials must be readily to hand to ensure that the monitoring exercise does not indicate that the Code, like its 1995 predecessor, has been ignored. The industry must guard against a situation in which the government is moved to legislate on the basis of an erroneous or partial understanding of the market.