The Code of Practice for Commercial Leases was introduced in April 2002, but has only recently attracted the publicity it deserves.
The code has been produced by representatives of the property industry in an attempt to address the Government's concerns over the inequality of bargaining power between landlords and tenants. An issue of particular concern to the Government is the upwards-only rent review. The Government has made clear its intention to legislate if it is not satisfied that the industry has, after two years of the code being in operation, made sufficient changes in the terms of commercial leases – and the most obvious target for legislation is the upwards-only rent review. The response of the property industry to the code will be monitored by Reading University on behalf of the Government. An interim report on the first year's operation is due by December 2003; the final report on progress after two years is due by December 2004.
The prospect of further regulation of the property industry is clearly very unwelcome to landlords and investors, so there is a real need to demonstrate that the code is being put into practice if the industry is to ward off the threat of legislation. Much of the code simply sets out what is clearly good business practice in terms of a fair and open relationship between landlord and tenant, as well as the need for good communication, both at the negotiation stage and during the term of the lease. Here, compliance with the code is really an issue of communication rather than one of change of practice, but some of the recommendations in the code advocate radical departures from terms currently thought essential in an 'institutional lease'. These include:
• upwards and downwards rent reviews.
• removing 'preconditions' to assignment and returning to a reliance on landlords' consent (not to be unreasonably withheld).
• requiring an authorised guarantee agreement only where the assignee is of lesser financial standing than the current tenant, and not automatically on every assignment.
• alternative pricing depending on the options on offer to the tenant.
• where property is damaged or destroyed by an uninsured risk, allowing the tenant the right to bring the lease to an end unless the landlord agrees to reinstate at its own expense.
These are the areas that may require a change of practice for landlords, which are certainly causing them to take stock of what their priorities are on lettings so they can calculate how best to comply with the code.
Quite apart from the contents of the code, the industry needs to tackle the Government's thinking behind the need for it. The code is founded on the Government's basic premise that the balance of power lies disproportionately with landlords and that the code (or legislation) is the tool for redressing that balance. While the balance is sharply in the landlord's favour in some cases, it is fair to say that in most cases heads of terms and leases are keenly negotiated, and the deal eventually struck represents a reasonable balance of the landlord's and the tenant's interests. As that is the case, it is essential to communicate this to the Government and show that the basic premise is not always applicable.
So what role should property lawyers play in all of this? Should they merely accept clients' instructions via heads of terms on leases and look to put these in place on the best terms possible for clients? Or should they be looking to play a more active role in shaping the way that the property industry evolves to cope with the challenges of the code?
There is no doubt that still more regulation from the Government will not be beneficial to the property industry. Property lawyers should be trying to make sure that clients communicate with the Government in order to avoid regulation. The British Property Federation (BPF) has led the way by setting up a register for showing support of the code and including a lease monitoring form on its website. This is an essential first step to show that the industry is taking the code seriously, but more needs to be done. Where landlord clients are offering alternatives, property lawyers need to make absolutely sure that their clients are communicating their efforts to the Government, either through the BPF monitoring form or directly to the Government.
The property industry has been notoriously poor at its own publicity. Property lawyers need to try to help the industry change, and the legislation provides an urgent need to get an accurate message across to the Government. They must show the Government that the balance of power is not always slanted in favour of the landlord and that in many areas adherence to the code is current practice. It is generally acknowledged that it would be very difficult to show that the code is being followed in each and every case, but the property industry should be able to show a body of compliance. The thornier, 'institutionally unacceptable' elements of the code will remain to be dealt with, but even there lawyers should be able to show that the process of negotiation embraces many of these and that they are resolved by compromise on both sides. The normal practice of just getting on with transactions is not going to be good enough here.
There is no doubt that further legislation will be to the detriment of the industry. Of particular concern is the harm that is likely to be caused to the investment activity where the UK investment lease has always been differentiated from other European jurisdictions. It is time for lawyers to play a very active role in making sure that the news of the code is spread to all of their clients and that they react to it.
Property lawyers are are in a unique position, with access to lease negotiations and transactions that are really happening. They need to use their position to the benefit of the industry.
Jon Vivian is a commercial property partner at SJ Berwin