The UK Code of Practice for Commercial Leases

Citation

French, N. (2006), "The UK Code of Practice for Commercial Leases", Journal of Property Investment & Finance, Vol. 24 No. 3. https://doi.org/10.1108/jpif.2006.11224caa.001

The UK Code of Practice for Commercial Leases

A flexible market for commercial leases will help businesses and benefit owners and occupiers. The property market is important for delivering economic prosperity, and we want it to work better (Yvette Cooper, Parliamentary Under-Secretary of State, ODPM).

Introduction

All corporate occupiers understand that property is a factor of production. It is space from which the business operates and, as with all factors of production, it should be used efficiently and effectively. A good property strategy should ensure a mix of short term, medium tern and long term occupation to match the strategic requirements of the business. In simple terms, core space tends to be for large amounts of space on a long lease (or indeed freehold) at a cost per square unit lower than that paid for smaller spaces on shorter leases. Effectively, the occupier pays more on a pro-rata basis to buy “flexibility”.

The trick is to get the right property in the right location for the right duration at the right price. This is not always easy, partly because of internal decision making structures but partly because the UK property market has historically been slow to offer flexible lease terms.

In the UK, the dominance of the investment market from the late 1960s through to the early 1990s meant that the majority of leases were “institutional” and tended to be of 20-25 years with five-year upward only rent reviews. This meant that while firms were able to match their long term property requirements, it was very difficult to obtain shorter more flexible leases. As a result many firms found that they were tied into long leases that became onerous as the operational requirement for that building declined or ceased.

At a micro-level, this hindered the individual company from operating an efficient property strategy but, in a broader sense, the Government became concerned that UK businesses as a whole were not operating on an “even playing field” when compared to their international competitors, all of whom benefited from much shorter lease patterns.

The Code of Practice for Commercial Leases

As a result, the Government committed itself to improving flexibility and choice in the commercial property market and in April 2002, in response to the Government’s concerns, the property profession published a voluntary guide; The Code of Practice for Commercial Leases in England and Wales. This made recommendations for best practice for negotiating and administering commercial leases. With regard to encouraging flexibility, there were two principal recommendations:

1. 1.

   Recommendation 4 – Duration of lease. Landlords should consider offering tenants a choice of length of term, including break clauses where appropriate and with or without the protection of the Landlord and Tenant Act 1954.

2. 2.

   Recommendation 5 – Rent. Where alternative lease terms are offered, different rents should be appropriately priced for each set of terms.

These recommendations should have led to more and more tenants asking for bespoke packages for lettings from landlords at an “appropriate” price.

Monitoring the Code of Practice

On publication, the Government announced that it would monitor the impact of the new Code of Practice over a two-year period, and commissioned The University of Reading to report on its impact. The principal aims for monitoring the impact of the code were threefold:

1. 1.

   Provide Government with evidence to help inform policy concerning the commercial property landlord and tenant relationship.

2. 2.

   Evaluate changes in commercial property market conditions over the period April 2002-2004.

3. 3.

   Measure flexibility in the commercial property leasing market.

The final monitoring report, published in March 2005, found that most landlords were not offering an explicit set of appropriately priced lease terms at the commencement of negotiations. One constraint to this approach was the (perceived) difficulty of pricing the different options but there was also an inertia in the market with occupiers still being offered very standard lease terms (albeit the length of lease is now between five and ten years).

The principal recommendations of the report that the Government has fully endorsed are:

• •

  Concerns about inflexible assignment and subletting provisions.

• •

  The awareness of the Code to small businesses.

• •

  Continued monitoring of the Upwards Only Rent Review provisions in leases – the government has retained the option to legislate against them in the future.

We are therefore in another period of assessment. The property profession is in transition. Landlords know that to encourage occupation, they need to offer space on the right terms for the right duration. Occupiers are aware that they need to match their property requirements to their business strategies much more closely than previously. The code is just there to oil the wheels.

Web pages

The Office of the Deputy Prime Minister (download the Monitoring Report)

www.odpm.gov.uk

Code of Practice for Commercial Leases (download the Code of Practice)

www.commercialleasecodeew.co.uk

British property Federation (download Commercial Leases Code of Practice Resource)

www.bpf.propertymall.com/publications/comleases/

Department of Real Estate & Planning. The University of Reading Business School

www.reading.ac.uk/REP

Nick French