A code that lacks strength

A new voluntary code of practice for commercial landlords was finally published in March after housing minister Yvette Cooper threatened to intervene if landlords failed to give their suppport.

The Code for Leasing Business Premises in England and Wales 2007 (2007 edition) replaces the 2002 edition of A code of practice for Commercial Leases in England and Wales and consists of three pieces:

• The Landlord Code, comprising 10 sets of requirements to be met by landlords;
• The Occupier Guide, made up of 37 specific tips for tenants; and
• Model Heads of Terms, which can be completed on-line and downloaded.

Much has been written about the content of the 2007 edition (see (2007) 151 SJ 734, 08.06.07). But the core document is clearly the Landlord Code.

It would be unreasonable to adopt an over-legalistic approach to ascertaining exactly what the Joint Working Party on Commercial Leases intended when compiling the Landlord Code.

However, it might be assumed that as on its face a number of departures are allowed for the remaining requirements are absolute. (This assumption is supported by the fact that the Model Heads of Terms require a simple statement as to whether or not the lease is to be Code compliant.) Subsequent events suggest otherwise.

The Commercial Landlords Accreditation Scheme (CLAS) was launched by the British Property Federation (BPF) on 22 July 2007, again with the support of the government. It was devised by the Owners' and Occupiers' Property Forum (OOPF) headed by consumer rights expert, Sir Bryan Carsberg.

The BPF believes that landlords who subscribe to CLAS will have a marketing advantage in terms of letting premises.Landlords joining CLAS as members consent to be bound by five basic rules, enforceable by means of an agreed disciplinary process. They are to:

• inform prospective occupiers at the earliest possible moment that they are members;
• provide any prospective small business occupiers (those eligible for small business rate relief) with the 2007 edition;
• abide by the Landlord Code;
• communicate to the occupier if there are any requirements that cannot be fulfiled and explain why this is the case; and
• provide a written complaints procedure and a point of contact to handle any complaints.

Complaints that reach CLAS's standards board and are upheld may result in one of the following sanctions:

• private reprimand;
• public reprimand;
• suspension from the scheme; or
• withdrawal of scheme membership.

Nevertheless, it seems to be the intention of the OOPF that members will be able to opt out of any specific requirements of the Landlord Code (subject to disclosure and explanation) and not just those requirements where the Landlord Code expressly anticipates a departure, for example, in relation to the tenant's repairing obligations. (The fear apparently was that without this ability, landlords would not subscribe to CLAS.) This apparent concession waters down the value of the Landlord Code generally in the eyes of tenants, particularly as CLAS is otherwise likely to provide the main sanction for complying with the 2007 edition.

Which specific requirements of the Landlord Code are landlords anxious to take advantage of the concession likely to seek to avoid?

The only pre-conditions to tenants exercising break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases.

Concerns have long been expressed on behalf of tenants that where a break right is subject to pre-conditions requiring compliance with lease terms, the benefit of the break right is at risk. (Break rights are in the nature of options and so their provisions are strictly construed and similarly strict compliance is required.)

Against that, landlords often see a commitment to compliance with repairing obligations in particular as part of the consideration for the grant of the break right.By way of damage limitation, landlords who comply may now increasingly seek to make a break right personal to the original tenant.

(On the issue of continuing subleases, tenants must always be conscious of the impact of the Landlord and Tenant Act 1954. See, for example, PW & Co v Milton Gate Investments Ltd [2004] L&TR 8.)

Assignment of the whole should generally be allowed subject only to the landlord's consent not to be unreasonably withheld.

One of the main purposes of the Landlord and Tenant (Covenants) Act 1995 was to abolish the concept of privity of contract in respect of post-enactment leases.

In return, landlords were to be given a greater degree of control over assignments of leases by the introduction of a new regime under which the parties to a lease could specify in advance the tests that would need to be satisfied before consent to an assignment had to be granted.

The Association of British Insurers' (ABI) Working Party on the 1995 Act, in its January 1996 report, made a number of recommendations in this respect that have largely been accepted ever since.

Cynics might argue that this requirement appears to be an attempt to revert to the pre-1996 position, without re-instating the concept of privity of contract.

An authorised guarantee agreement should be required on assignment only when the proposed assignee, when assessed together with any proposed guarantor, is of lower financial standing than the assignor or is resident or registered abroad.

Anecdotal evidence suggests that on market lettings landlords are consistently successful in negotiating lease provisions entitling them to call for an AGA automatically on every assignment of the lease. (The position differs on lease renewal under the Landlord and Tenant Act 1954. See Wallis Fashion Group Limited v CGU Life Assurance Limited [2000] L&TR 520.)

This is in line with the recommendations of the ABI Working Party, and once more has been seen as some further compensation for the abolition of the concept of privity of contract in leases.

If this approach is to be displaced, perhaps a more appropriate test would have been whether the financial standing of the assignee was likely to be sufficient to enable it to comply with the tenant's covenants in the lease.

Landlords should seek to observe the RICS Code of Practice on service charges in commercial property in drafting new leases and on renewals.

On 26 June 2006, the RICS launched Service Charges in Commercial Property: RICS Code of Practice. This is based upon the second edition of Service Charges in Commercial Property '“ A Guide to Good Practice, which was published in October 2000 under the auspices of leading industry bodies, and from 1 April 2007 has superseded it.

While the Guide was voluntary, it is suggested that the new Code of Practice will have more prominence by virtue of its status as an official RICS guidance note. The stated intention of the new guidance is to remove service charges from the arena of conflict and in particular introduce the concept of 'not for profit, not for loss'.

Where there are existing leases of other parts of the investment, this simply may not be practicable. Considerable drafting problems also have to be overcome if the RICS Code of Practice is to be incorporated expressly into the lease.

Unless expressly stated in the heads of terms tenants should only be obliged to give the premises back at the end of their lease in the same condition as they were in at its grant.

This runs counter to the concept of a full repairing and insuring lease and most landlords would probably only make this concession in the case of very short leases, or lettings pending refurbishment or redevelopment.

Even then, for the tenant's position to be secure, the state of repair at the commencement of the letting must be recorded by means of an agreed schedule of condition or similar.

Landlords must always disclose any insurance commission they are receiving.

This requirement will bring forward what is now the common debate on who should benefit from a commission arrangement. The question of entitlement to commission has become a vexed problem. A tenant will usually expect to reimburse the net amount of the premium while a landlord will argue that the commission should accrue to the landlord since it is only because of the landlord's overall insurance arrangements that it is available.

(It is just worth mentioning that in Williams v Southwark London Borough Council [2000] EGCS 44 the court found that a so-called commission of 20 per cent represented payment for the landlord handling claims up to a certain level on behalf of the insurer. The landlord was held entitled to retain this.)

Rent suspension should apply if the premises are damaged by an insured or an uninsured risk, other than where caused by a deliberate act of the tenant.

To date, who takes on responsibility for uninsured risks has usually depended upon both the market and the respective bargaining strength of the parties. Generally, this requirement will encourage the landlord even more to insure against the widest range of risks available, at the cost of the tenant, but there will always be problems with particular risks.

At least six months before the termination date landlords should provide a schedule of dilapidations.

The Property Litigation Association Dilapidations Protocol (September 2006) states as follows:

3.3) The schedule shall be served within a reasonable time. 'Reasonable time' will vary from case to case but generally will be not more than 56 days after the end of the lease.

3.4 ) The landlord may serve a schedule before the end of the lease. However, if it does so it should confirm at the end of the lease that the situation remains as in its earlier schedule or serve a further schedule within a reasonable time.

Many landlords will prefer to adhere to the first limb of this.

Landlords should make decisions on consents for alterations within 15 working days of receiving full information.

The Landlord and Tenant Act 1988 does not apply to covenants against alterations, and so there is no statutory duty upon a landlord to respond to an application for consent to alter within a reasonable time, as there is in the case of fully qualified covenants against alienation.

Occasionally, however, landlords will be prepared to give a covenant to do so.

This requirement would necessitate an express covenant by landlords, but many would probably be unhappy with a fixed time of 15 days particularly where the consent of a superior landlord was also required.

Final summary

Some of these specific requirements represent a marked departure from current leasing practice, and may not easily be taken on board by landlords. The particular concern will be the impact, otherwise, on an investment sale to a purchaser who does not subscribe in total to the Landlord Code.