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Update on lease negotiations to benefit commercial businesses

Published: 15/02/2020

In February 2020 RICS has launched new industry requirements to support businesses in negotiating their commercial leases effective from 1st September 2020. This mandatory for RICS members professional statement, Code for Leasing Business Premises, aims to make the process of lease negotiations faster, more transparent and fairer.

The statement and code allow to ensure that landlords, tenants and guarantors who RICS members are advising have a clear understanding of the commitments that they are entering into. This also enables negotiations to proceed properly so that each party can make an informed decision about whether to proceed on the terms that they negotiate.

The best practice in negotiation lease terms is as follows:

The premises
  • The identity and extent of the premises being let should be clearly defined, including which elements of the structure or fabric are included.
  • A lease plan should be supplied by the landlord for attaching to the lease if that is necessary or desirable for identifying the premises and in all cases where the duration of the lease will exceed seven years, where it should comply with the requirements for registration of the lease at the Land Registry.
  • The tenant should be granted all rights necessary for the intended use of the premises. This includes clear arrangements for any special rights such as parking or for electronic communication connections including, where necessary, the right to require the landlord to grant wayleaves for data cabling.

 Length of term, renewal rights and break rights
  • The length of term should be clearly specified and any date when it is intended to start.
  • Where the landlord proposes that statutory rights of renewal under the Landlord and Tenant Act 1954 are to be excluded, the tenant should be notified at the outset in order to obtain early professional advice as to the implications.
  • Any break rights or options for renewal for either party should be clearly specified, including the dates (or range of dates) when a party can end the lease, the length of prior notice to be given and any pre-conditions for the break being effective.
  • Unless the parties have agreed stricter conditions in the heads of terms, a tenant’s break should be conditional only on the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers. Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry.
  • Leases should require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect. Repayment of service charges may be deferred until the service charge accounts are finalised.

Rent deposits and guarantees 
  • Details of any rent deposit should include the amount (including where required any sum to cover VAT), the time it will be held, whether it will be security for only the rent or all the tenant’s obligations under the lease and the circumstances in which the deposit will be returned to the tenant with any accrued interest. 
  • Rent deposit agreements should provide that landlords will hold rent deposit funds in bank accounts designated for holding only rent deposits and that any bank interest will accrue for the tenant. 
  • Details of any guarantee should include whether it will cover only the rent or all the tenant’s obligations under the lease, the amount of any cap on the guarantor’s liability and the circumstances (if any) in which the guarantee will be released. 
  • Landlords and managing agents should refer to the current edition of Client money protection, RICS professional statement for further information on the steps that should be taken when handling deposit funds. 

Rent and rent review 
  • The initial rent, the frequency of payment and whether the landlord intends to charge VAT on the rent should all be clearly stated, together with details of any rent-free period or other incentive. The initial rent may be a fixed sum or expressed as a certain sum per square foot or square metre, in which case the method of measurement should be stated. 
  • Where the landlord proposes that rent is to be subject to review, the tenant should be notified of the proposed frequency and the method or formula of review at the outset in order to obtain early professional advice as to the implications.
  • Rent review clauses should be clearly expressed. Definitions of market rent should not result in a ‘headline rent’ unless that has been expressly agreed by the parties, such as where that is agreed in return for a financial inducement. Provisions for indexed rent reviews should not contain obscure formulae designed to produce a greater increase than is proportionate to the increase in the index over the appropriate period or outside any agreed caps or collars. 
  • Leases should allow either party to start the rent review process and should not impose time limits intended to prevent a review or set a new rent through inaction by either party. 

Service charges, insurance costs and other outgoings 
  • The landlord should indicate the range of main services, if any, and provide proper estimates of service charges and insurance payments. The landlord should also disclose the types of other outgoings (such as business rates) that the tenant will incur under the lease. Landlords should disclose known irregular events that would have a significant impact on the amount of future service charges.
Assigning, subletting, charging and sharing 
  • Leases should allow tenants to assign the whole of the premises with the landlord’s consent, which is not to be unreasonably withheld or delayed. Landlords may set out circumstances in which consent can be refused, such as where there are arrears of rents, service charges or insurance premiums that are not the subject of a legitimate dispute, or where the assignee has insufficient financial strength, but all such circumstances should be reasonable and appropriate. 
  • Leases should also provide that, if in each case the landlord reasonably requires, the assigning tenant is to provide an authorised guarantee agreement (AGA), any existing guarantor is to guarantee that the assigning tenant complies with the AGA, and/or the assignee is to procure a new guarantor and/or rent deposit.  
  • Leases should contain tenant’s repairing obligations appropriate to the length of the term, the condition of the premises and the financial terms. 
  • If the tenant’s repairing obligations are to be limited to the initial condition of the premises, a schedule of condition will normally be required and the parties should agree which party is responsible for the cost of obtaining it.
  • Where the premises are or will be newly built, a tenant taking on direct or indirect responsibility for repairs should be given suitable protection against inherent construction defects for an appropriate period.

Change of use, alterations and fit-out 
  • Leases should give landlords control over alterations and changes of use that are no more restrictive than are necessary to protect the value of the premises and any adjoining or neighbouring premises of the landlord, and this may differ between different types of property. 
  • Where the landlord intends to prohibit certain changes of use or the making of certain alterations, or to require a licence from the landlord before they can take place, the tenant should be notified at the outset in order to obtain early professional advice as to the implications. This does not apply to normal provisions against changing the use outside the existing use class under planning law. 

Energy Performance Certificates (EPCs) 
  • Leases should state which party is responsible for obtaining any EPC that may be needed during the lease term. 
  • Landlords should be required to act reasonably if they reserve the right to choose which EPC assessor the tenant may use. 

The full Code for Leasing Business Premises can be found here.

If you would like to find our more about signing a new commercial lease, please speak to our Lease Advisory Team.