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Business Lease Code – impact so far?

Caroline Sutcliffe, a solicitor in our Retail team comments on the impact of the Lease Code one year after its publication.

The Code for Leasing Business Premises in England & Wales 2007 was published in March 2007. The Code’s objective is to assist landlords and tenants in maintaining efficient and fair relationships while optimising flexibility and choice. The Code represents the Government’s third attempt at a voluntary document for assisting negotiations and replaces the 2002 Code, which was widely ignored.

What is the Business Lease Code?

The Code is made up of three parts. The first consists of 10 requirements to make a Lease ‘code-compliant’. The second is an Occupiers’ Guide designed to facilitate tenants to agree a document that meets their needs, while the third part is a model Heads of Terms, which parties can use as a checklist.

The 10 requirements forming the basis of the Code are lease negotiations, rent deposits and guarantees, length of term break clauses and renewal rights, rent review, assignment and sub-letting, service charges, repairs, alterations and user, insurance and ongoing management.

The provisions of the Code
One of the more contentious issues in a lease is repair. This is an area which is also contentious in the Code. To follow the Code on repair is to provide for something rather different to what typically has been agreed in the market place.

The Code proposes a significant onslaught against the concept of ‘full repairing leases’ by specifying that repairing liabilities should be appropriate to the length of term. With the length of the average lease currently being less than six years, it effectively means that normal long-term repairs should be shelved in most cases and short-term ‘patching and making good’ should be substituted.

Generally speaking the Code is fair and reasonable. None of the provisions are rocket-science and almost invariably, they simply state the position which a well advised tenant would expect.

What are the benefits to landlords and tenants?
The potential benefits are:

• Relationship - greater trust between parties and good start to what potentially could be a long-term business relationship
• Speed – transactions should complete quickly and there is less room for conflict, therefore tenants trade more quickly and landlords stream of rental income will commence earlier
• Badge - landlords gain pride at being seen to be fair and reasonable
• Reduction of litigation – The Code seeks to achieve a fair and reasonable lease. An inflexible and onerous lease is most likely to lead to disputes in the courts
• Costs – if the landlord drafts a landlord-biased lease as a starting point then the costs incurred in negotiating the lease to a more acceptable middle ground will be increased

Is the Code being used?
Generally there appears to be a growing awareness of the Code, but not a significant shift to compliance with it yet. The Government has not officially said over what period it will monitor the Code. The Code is written in a plainer and more concise language than its predecessors making it more accessible and user-friendly. Most of the content will already be good practice for many landlords and the past few years have shown how practices that once seemed radical, become standard over time. But a barrier to compliance appears to be the fact that the Code is voluntary and for that reason is difficult to use as an argument in lease negotiations.

Conclusion
Even though the Code is not being used to a great extent in its own right, it is a useful starting point for landlords and tenants and practitioners as to what is ‘fair and reasonable’ in the market place, although as has always been the case, a lot depends on the bargaining power of the parties and covenant strength of the tenant. While there is a general interest in the Code and a desire on the part of both the landlord and the tenant to comply, the reality is that until landlords and their advisers use a precedent lease that is Code-compliant as a starting point, little progress is likely to be made towards the goal of non-compliance. The property industry, however, has been thrown down the gauntlet by the Government to adopt the Code willingly and it has been made clear that they will legislate if market practices do not alter. Watch this space.

For further information on the Code and other commercial landlord and tenant issues, please contact Caroline Sutcliffe on 0116 257 4445 or email: caroline.sutcliffe@harveyingram.com