Seen as the final chance for the property industry to avoid government legislation on commercial leases, the code will effectively be a kite mark for good practice with participating landlords who fail to comply, expelled from the scheme.

The revisions were drawn up by a working group comprising key figures from organisations such as the RICS, Law Society, Confederation of British Industry, Department of Communities and Local Government, British Property Federation and the British Retail Consortium.

The revised code describes itself as a ‘checklist for lease negotiations’ with its ultimate aim to be ‘clear, concise and authoritative’. Containing ten recommendations, it has been welcomed with open arms by the industry as a comprehensive checklist for landlords and tenants.

A key principle of the code is the call for the scrapping of conditional break clauses. This area has seen much litigation over the past few years and the code proposes that the only pre-conditions to a tenant exercising its break clause should be that the tenant is up to date with the basic rent, that it gives up occupation and that it leaves behind no continuing sub-leases.

Another central tenet of the code is that landlords will be expected to offer genuine alternatives to upwards-only rent reviews, priced on a risk-adjusted basis, if tenants request them.

Ian Pitt, head of client services at Bruton Knowles, comments: “This is an important point and is particularly pertinent to both landlords and tenants if rental values fall. Time will tell if the code will have an impact in this area as it is likely that overall lease costs to a tenant will be just redistributed by landlords.

“The tenancy market is relatively weak at the moment as small and medium sized businesses demonstrate a strong preference for buying properties in the face of low interest rates and the tax efficient advantages of buying and leasing their property. With tenant demand dropping, potential new tenants are in a strong position to negotiate on their commercial leases. Moreover, the trend for shorter and shorter leases is giving tenants the opportunity to renew and renegotiate their terms and conditions on a more regular basis.”

The rather contentious issue of assignment and subletting is also covered in the revised code of practice which attempts to regulate the use of authorised guarantee agreements (AGAs) so that an AGA could only be used when a tenant wants to assign to another tenant of lower financial standing. The AGA ensures the original tenant will still be liable to the landlord if its subtenant defaults on the rent.

Ian Pitt explains: “The use of AGAs are relatively widespread throughout the industry, even in cases where the assignee has a comparable financial standing to the tenant. From a landlord’s perspective, the AGA covers their back and protects their position if a tenant goes bust.”

It is vitally important that landlords and tenants fully understand exactly what they are entering into at the outset of a lease agreement. Bruton Knowles’ professional team can add value by advising on the latest developments and relevant issues in the marketplace and helping secure favourable lease terms for both landlord and tenant which maximise returns and reduce liability.

Ian Pitt concludes: “The biggest test for the commercial lease code will come after its launch. It will be interesting to see what degree landlords sign up to the scheme and if the Government decides the issues that it seeks to address require legislative enforcement. Time will tell if the Government deems that the property industry has done enough to safeguard the interests of tenants, typically smaller players, from the potential pitfalls associated with entering into commercial lease arrangements.”