Looking at leases

Research being conducted is expected to reveal that the current voluntary code of practice for commercial leases has failed. By Michelle Perrett.

The government is poised to introduce new legislation that could force pub landlords to offer more flexible lease deals and outlaw upward-only rent reviews.

A report by Reading University, about to be released by the Office of the Deputy Prime Minister, is expected to show that the current voluntary code of practice for commercial leases, which was set up to promote more flexible leases and encourage the end of upward-only rent reviews, is not working.

Ministers are understood to be keen to launch a consultation paper on potential legislation that will ensure adherence to the code.

In the recent Budget document Flexibility in the Economy, the government confirmed that it expects to initiate "a consultation on possible measures to promote flexibility in the commercial property lease market."

The code, which was launched in April 2002, covers all property companies and provides an outline of good practice for all new landlord and tenant lease negotiations.

It was prepared by a working group representing all sides of the property industry and urges landlords to offer alternatives to upward-only rent reviews. It says they should be providing tenants with various lengths of leases with a range of appropriate rents.

However, no pub companies have signed up to the code and the industry could face legislation because these voluntary measures are considered a failure.

At the end of last year Barry Gillham, chairman of property agent Fleurets, said he thought the industry could be facing legislation as early as 2004/2005 if it fails to act and take on board the major elements of the voluntary code. He said: "The property industry is being given the opportunity to put its own house in order. But it has been slow to respond. If anything pub landlords have been slower still and there is now a real prospect of legislation."

There has been some concern about the credibility of the code and fears have been raised that companies could be claiming they are compliant without being officially monitored. The code is unpoliced, which could mean that landlords are putting the code's logo on their documents without meeting its requirements.

At the beginning of last year Unique Pub Company wrote to ask for permission to use the logo on its lease agreements. It sent a copy of its lease and code of practice but was told that compliance is not monitored. Unique decided not to sign up as it felt there was no official confirmation.

Chris Proctor-Smith, property director at Union Pub Company, said: "I would be concerned if the government looked at legislation. The message of the code of practice is that people need to be flexible and offer a variety of agreements. I believe pub companies are already doing that. We believe we are already compliant with the basic message of the code - we offer a three-year agreement as well as the Open House 21-year agreement."

However, Tony Payne, chief executive of the Federation of Licensed Victuallers' Associations, said: "The upward-only rent review clause in most leases is unfair for licensees. We support government intervention as a code of practice is worthless because everyone can ignore it.

"Rents will only be reduced if they are unfairly high - so pub companies have nothing to worry about."

Advice for landlords on how to comply with the code:​

• inform your staff of your support for the code, and train them
• appoint a member of staff to be in charge of compliance with the code
• mention your support for the code in letting particulars and get your surveyors and legal advisers to inform clients that you support the code
• use the logo in your advertising
• establish a link from your website to the code website
• amend your standard lease clauses to comply with the code
• develop a system for providing alternative quotations which are priced on a risk-adjusted basis
• sign up as supporter of the code on the British Property Federation's (BPF) website
• collect evidence of your compliance using the BPF's online form.

For details of the code go to www.commercialleasecodeew.co.uk​For the BPF go to www.bpf.co.uk.​

Advice for licensees under the code:​

• Term:​ If you agree a fixed term you may have to meet all the obligations (including payment of rent and carrying out repairs) until the lease ends.

Guarantee:​ You may be required to personally guarantee the obligations for the terms of the lease and if your business fails, you may have to pay rent and for repairs from your personal assets.

Rent:​ Rent is payable at the agreed figure regardless of your trading circumstances. Failure to pay the rent at the agreed time will usually result in action by the landlord to recover the debt.

Rent Review:​ There will be periodic rent reviews unless the lease is short. If your lease imposes the "upward-only" method, your rent cannot fall regardless of the current market rental value.

Repairs:​ The ordinary obligation to repair the property can require you to carry out all necessary repairs.

Ending occupation early:​ This is only possible if allowed by the lease. It may be by sub-letting or by assignment to a tenant acceptable to the landlord.

Managing the risks:​ If you are concerned about the obligations of the lease, you could ask the landlord for alternatives. You could ask for a shorter term, limitation of the repairing liability or an alternative method of rent review.