What is the key RICS Professional Statement on leasing/letting practices?
RICS Code for leasing business premises, 2020
When does RICS Code for leasing business premises, 2020 become effective?
1st September 2020
What is the aim of RICS Code for leasing business premises, 2020?
- Improve the quality and fairness of negotiations on lease terms
- Promote the issue of comprehensive heads of terms to make the legal drafting process more efficient
What are the FOUR sections of the RICS Code for leasing business premises, 2020?
Part 1: Introduction
Part 2: Mandatory requirements (Negotiations and heads of terms)
Part 3: Lease negotiation best practice
Part 4: Appendices
(Appendix A - Template heads of terms and checklist; Appendix B - Guide for landlords and tenants)
What does the RICS Code for leasing business premises, 2020 say with regards to the negotiations of heads of terms?
- Must be approached in a constructive and collaborative manner
- An unrepresented party must be advised about this code and must be recommended to obtain professional advice
- The agreed terms of a lease must be recorded in written heads of terms and must summarise the position on a number of aspects
- Negotiations should produce letting terms that achieve a fair balance between the parties commercial interests
What items must be addressed in the heads of terms according to the RICS Code for leasing business premises, 2020?
- Identity and extent of the premises
- Length of term and whether it is outside or inside the Landlord and Tenant Act 1954
- Options for renewal or break rights
- Requirements for a guarantor and/or rent deposit
- Amount of rent, frequency of payment and whether exclusive of business rates
- Whether the landlord intends to charge VAT on the rent
- Any rent-free period or other incentive
- Any rent reviews including frequency and basis of review
- Liability to pay service charge and/or insurance premiums
- Right to assign, sublet, charge or share the premises
- Repairing obligation
- Initial permitted use and whether any changes of use will be allowed
- Rights to make alterations and any particular reinstatement obligations
- Any initial alterations or fit-out (if known)
- Any condition of the letting, such as subject to surveys, boards approvals or planning permission
What is contained within Appendix A of RICS Code for leasing business premises, 2020?
Template head of terms and a checklist, which can be used should the landlord wish to use their own form of heads of terms document
What is contained within Appendix B of RICS Code for leasing business premises, 2020?
- Guide for landlords and tenants
* Supplemental to the professional statement and does not hold mandatory status
What is a lease?
A binding contract in law that sets out the terms and conditions of the tenancy between parties and defined their rights and obligations
What do rental guarantees typically cover?
Usually make the guarantor liable for the rent and the tenant’s other obligations, including service charge payments and repairs
Do tenants have to pay VAT on rental payments?
Depends if the property is ‘opted for VAT’ by the landlord
What does it mean to ‘assign’ a lease?
Transfer the lease to another party who takes over occupation and responsibility for the lease obligations
What does it mean to ‘sublet’ a property?
Existing tenant continues to hold the lease and pay rent to the landlord but sublets the space to another party, from whom the tenant will in turn collect rent
What is an AGA?
- Authorised guarantee agreement
- Requires the tenant who assigns a lease to guarantee the performance of the lease obligations by the party to whom the lease is assigned
What provisions can there be in the lease to mean that a tenant does not require an AGA to assign a property?
- If the new tenant is financially strong enough
* If the new tenant pays an appropriate rent deposit and/or provides suitable guarantor
What is a ‘schedule of condition’?
- Record of the condition of the property
- Written description of the property or a set of photographs or both
- Referred to in the lease and attached to it or kept with it
What should be the only condition on a tenant being able to exercise a break option, according to the RICS Code for leasing business premises, 2020?
Should only be conditional on the rent having been paid
What details with regards to the rent deposit should be included in the lease, according to the RICS Code for leasing business premises, 2020?
- Amount (including whether it will include VAT)
- Time it will be held
- Whether it will be security for only the rent or all the tenant’s obligations under the lease
- Circumstances under which the deposit will be returned to the tenant with any accrued interest
What details with regards to the rent review should included in the lease, according to the RICS Code for leasing business premises, 2020?
- Proposed frequency of rent review
- Method of rent review
- Definitions of market rent should not result in a “headline rent” being adopted
What details with regard to the service charge and insurance payments should the landlord provide an indication of, according to the RICS Code for leasing business premises, 2020?
Should provide an estimate of service charges and other insurance payments
What is said with regards to assignment in RICS Code for leasing business premises, 2020?
Leases should allow tenant to assign the whole of the premises with the landlord’s consent, which is not to be unreasonably withheld or delayed
If a tenant’s repairing obligation are to be limited to the initial condition of the premises, what is required according to the RICS Code for leasing business premises, 2020?
Schedule of condition
Depending on the prevailing market conditions and strength of the tenant covenant, what can the landlord request for additional security if there is a tenant with a weak covenant strength?
- Rent deposit
* Guarantor/personal guarantee
What should the landlord do when holding a rent deposit?
- Personal to the tenant and attached to the lease as a separate deed
- Legally documented in a rent deposit deed
- Money held in a separate bank account
- Interest retained by the tenant
- Agreed terms for the release of the monies
- Details of the release mechanism to be stated in the deed
- Can include top up mechanisms for rent review uplift
What information would you typically request from a tenant when looking to assess their suitability?
- Bank, accountant and two trade references
- Previous/existing landlord’s reference
- 3 years audited accounts
- Business plan
- Credit rating
What test can you use to assess the financial suitability of a tenant?
Profits test: net profit for the proposed tenant’s business must be 3 times the rent for 3 consecutive years
(or the net asset value of the business must be more than 5 times the rent)
What are the main lease terms that impact on the value of a property?
- Lease length / term certain
- Break clauses
- Repairing obligations
- User clauses
- Rent review pattern and mechanism
- Security of tenure provisions (whether lease is inside or outside the Landlord and Tenant Act 1954)
- Restrictive lease clauses
- Planning use
What are the key things to consider when it comes to break clauses in a lease?
- Whether it is mutual or in favour of one party
- Whether time is of the essence
- What the required notice period is
- Whether there is a penalty to be paid if the lease is terminated
- Whether the right to break the lease is dependent on preconditions being met
What are the typical conditions that are required to be met for a tenant to have the option to break their lease?
- Compliance with their covenants
- Payment of all rent and other sums due
- Vacant possession
When is an occupier going to be more willing to consider a pre-let?
- If there is a market shortage
* They need specific facilities
What is the main advantage of a tenant pre-letting?
They can have a bespoke building designed to suit their needs
What is the main disadvantage of a tenant pre-letting?
There is a level of risk in the event of the developer or contractor not performing
When a tenant pre-lets a building, what documents would typically be attached to an Agreement to Lease?
- The Lease in a pre-agreed form, which shall be executed once the developer has fulfilled its obligations - usually Practical Completion of the work
- Licence for Alterations - to allow the tenant to undertake fitting out works
- Specification and plans of the proposed scheme
- Developer’s guarantee/bond if dealing with a weak covenant
- Warranties - any tenant taking an FRI lease will want collateral warranties form the professional team, main contractor and any sub contractors
If a landlord is seeking to limit a tenant making changes to the property, what will they typically require?
Licence to Alter
What did the changes in 2020 to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations require letting agents to do?
- Letting agents have to register with HMRC within 12 months of May 2020 if they let individual properties for more than the equivalent of €10,000 per month
- Where they undertake lettings of properties for more than €10,000 per month, they will have to undertake CDD check on landlords and tenants on any new letting or subletting
- EDD will have to be undertake when any red flags occur
Why might a freeholder not be supportive of a tenant subletting the property?
- If they let it below market rent, it could set a new rental tone for the area. Leaseholder is simply trying to reduce their liability and so may accept below market rent
- Sub-tenant may not perform the covenants of the lease e.g. repairing obligations
What different types of alienation provisions can there be in the lease?
Assignment: transfer the lease
Sublet: under-let the premises
Sharing occupation: share occupation of the premises with a third party e.g. concession stand within a retail store
Charging: charging the lease to a lender i.e. used as security for a debtor
When calculating what a property should be let for, would you do this on a headline basis or net effective basis?
Typically would calculate it on a headline basis but having regard to the tenant incentive granted
On what grounds can a landlord reasonably refuse permission for a tenant to sublet or assign their interest?
- Landlord must be satisfied that the assignee is able to pay the rent and comply with the lease covenants in the case of an assignment
- Where a landlord owns numerous units, they are entitled to consider the type of business of the proposed tenant and whether it complies with their tenant mix policy
- A landlord can refuse consent if the tenant will adversely affect the landlords existing rights and interest in the property
After you have instructed solicitors, is there anything you would do to ensure that the leasing completes?
- Ensure that conditions are met e.g. planning permission
- Offer firms other services e.g. a building surveyor to conduct a schedule of condition
- Answer any queries which the solicitor may have e.g. CPSEs
What is an engrossment?
An engrossment is the final printed version of a lease that is then executed by the parties
What typically occurs with the engrossment of the lease?
There will an engrossment of the lease and an engrossment of the counterpart lease. The tenant ends up with the lease executed by the landlord and the landlord ends up with the counterpart executed by the tenant