Unless stated expressly in the Heads of Terms, premises have got to be returned in the same state of repair as they were in at the date of the grant. The Heads of Terms can expressly state something else, so it is the case that a lease can still be Lease Code-compliant and also require the premises to be put into a good state of repair.

I think a lot of landlords will use this as a way of granting FRI leases, which they will say are Lease Code-compliant, as the Heads of Terms will provide for an FRI lease.

It is not clear but it has been suggested by commentators, that the Lease Code would not prevent even a short three year term lease of property in a poor state of repair, being granted on FRI terms requiring the property to be put and kept in repair and returned to the landlord in a better state of repair than at grant, provided that the Heads of Terms were specific about this point and they show that the point has been considered. However, there might still be an issue with the first requirement of the Lease Code, where the repairing obligations have to be appropriate to the length of the term and the condition of the premises.

The repairing obligations have to be appropriate to the length of the term and the condition of the premises. Is this a change from current practice?

It is often the case now that landlords who are granting short term leases of properties that are in a bad state of condition are quite often likely to agree to water down repairing obligations, usually by reference to a schedule of condition, which is attached to the lease and records the items of disrepair. The difficulty with this Lease Code requirement is going to be on assignments or underlettings of existing leases.

An incoming assignee may be taking the "fag end" of the lease of premises that were in a good state of repair at time of grant but are now in disrepair. The assignee is going to be stuck with the original repairing obligations in the lease. The well advised assignee should have a reverse premium to compensate for the potential dilapidations liability.

Underlettings can be very tricky on this point, where the head lease requires the underlettings to be on the same terms as the existing lease and prohibits a reverse premium. There have been several cases recently where tenants have tried to think of innovative schemes to get round this, such as Homebase v Allied Dunbar [2002] EWCA Civ 666.

The Lease Code has tried to address the problem and, as Nick has said, it says that underlettings excluded from the 1954 Act don't have to be on the same terms as the headlease. This should make it easier for tenants to grant underleases with repairing obligations which are appropriate to the length of the term and condition of the premises, so those underleases can be Lease Code-compliant.

I think this is something that landlords, and probably even institutional landlords, are likely to accept because there is little risk for them if the underlease is contracted out, they are not going to get stuck with an undertenant trying to renew a lease with favourable repairing covenants because the undertenant does not have any rights to renew.

The Lease Code says that the property is to be given back in the same state of repair as at the date of grant. A lease that complies with the Lease Code lease will oblige the tenant to keep the property in the same state of repair as it was at the beginning of the lease, so the tenant does not have to repair anything that was out of repair on the lease grant. But what is going to happen if the disrepair causes problems and existed before the grant of the lease? There is no obligation on the tenant to repair but there may not be any obligation on the landlord either.

The 2003 case of Jacey Property Co Ltd v de Sousa, 28 February 2003 (see PLC Property, Legal update, Repairing covenants and the extent of the demised premises) made it clear that the court will not re-write a lease to fill a gap between landlord's and tenant’s repairing obligations. So unless the tenant has a covenant from the landlord that the landlord will be responsible for the disrepairs, the tenant may actually find itself forced to carry out repairs so that the building can be occupied.

The tips in the Occupiers Guide suggest a photographic schedule of condition to record the condition of the premises at the grant of the lease. This is then referred to in the lease and there is a qualification to the repairing covenant, which says that the tenant is not required to put the property in any better state of repair or condition than at the date of the lease, as evidenced by the schedule.

I am not sure that this goes quite as far as the Lease Code requirements because the qualification in the repairing covenant is linked to the condition shown on the schedule of condition and it may be that disrepair existed at the date of the grant of the lease but was missed from the schedule. Then, I suppose, the tenant is going to have a claim against the surveyor who prepared the schedule.

Of course, schedules of conditions should also pick up any disrepair in the common parts and the lease should make it clear whether the landlord has to repair these and whether the costs can be recovered from the tenant through the service charge.

I do not think it is consistent with the principle behind the Lease Code if the tenant has to pay for the landlord to repair things that are in disrepair at the grant of the lease but I expect most landlords are going to be reluctant to have a service charge provision not having a 100% recovery. It may be one thing to accept that a tenant is not going to put the property into a better state of repair, but it is a completely different animal asking a landlord to put his hand in his pocket to repair common parts without being able to recover the costs from the tenants.

The other areas of the Lease Code relating to repairs can be covered by the other speakers, but it is important to remember that the repairing covenants must be read in conjunction with other clauses and other Lease Code requirements, that is:

Where landlords are insuring the landlord's property, the insurance policy terms should be fair and reasonable and represent value for money, and be placed with reputable insurers.

In normal circumstances, the tenant must covenant to refund the premium where the landlord insures. The Occupiers Guide suggests that the tenant must ask for a copy of the policy before entering into the lease. This is obviously a common sense approach, in that, firstly, the tenant needs to ensure that cover is in place, and secondly, the tenant needs to satisfy himself about the premium.

The Occupiers Guide recommends checking with alternative insurers to check that the landlord’s insurance policy offers value for money. It may be open to the tenant to negotiate with the landlord to seek several quotes for the premium, but it will be interesting to see whether the court's view will change following the bringing in of the Lease Code. Up until now, there have been several cases showing the courts refusing to imply a covenant that the landlord should place the insurance so as not to impose an unnecessarily heavy burden on the tenants.

In addition, it is all well and good to say that the policy will give value for money and it will be fair and reasonable, but as the PLC Standard Code Compliant lease states, the insurance effected by the landlord is subject to any exclusions, limitations, conditions or excesses. The tenant will be required to pay any excess if there is a claim. If the tenant has paid a higher premium, there may be a lower excess. I think that if you are acting for the tenant, it is advisable to try and impose some limitations on the form of the excess. You do not want your client to have to pay a huge excess at the time of any claim.

In practical terms, where there is a lease of part of the building, the insurance may already be in place and several leases may already have been completed and approved by the tenants. It may be difficult for you to try and change the insurance.

I think we need to try and address the balance between various tenants. Whether it is a lease of whole or part and what might be fair and reasonable to one tenant might not be to another.

In terms of negotiating leases, you often find that in the replies to the Commercial Property Standard Enquiries, the insurance replies are stated "to follow". The tenant's lawyers get the insurance information quite late on in the transaction, and sometimes it can quite literally be on the day of completion when we get a copy of the policy. The Occupiers Guide is advising the tenant to seek alternative quotes but if the insurance does not come through from the landlord until quite late on, it is going to be very difficult for the tenant to do that, which may delay completing leases.

The Lease Code requires the landlord's insurance to be placed with an insurer who is reputable. Given the regularisation under the Financial Services Authority, I think most insurance companies should be reputable. It is more a case if the landlord is basically trying to use a company that is not FSA-compliant, then there should be some alarm bells ringing in your heads there.

The Lease Code requires the landlord's insurance policy to be on fair and reasonable terms. The issue here is to whom should the policy terms be fair and reasonable. There will be arguments. Where you are acting for the landlord, I think it may be fair and reasonable to have terms, excesses, premiums, which might not be fair and reasonable to the tenant but given the obligations in respect of uninsured risks, you could argue it is fair and reasonable to the landlord. It is a question of striking a balance. How you want to interpret the "fair and reasonable" requirement will depend on who you are acting for.

The Lease Code provides that landlords must always disclose any commission they are receiving and must provide full insurance details on request.

The Lease Code only provides that the commission should be disclosed. It does not deal with who should be entitled to receive the commission. That is always open to negotiation and has always been a common area of dispute. A tenant will normally be expected to reimburse the landlord for the net amount of the premium but if you are acting for the landlord, you may want to argue that the commission should accrue to the landlord since it is because of the landlord’s buying power that a lower premium is available. If it is a block policy then it may be impossible to attribute the commission to a single property. Again, it will be interesting to see if the court's view will change following the Lease Code.

In the case of Williams v Southwark London Borough Council (March 23, 2000), the court held that a commission of 20% represented payment for the landlord handling claims up to a certain level on behalf of the insurer and the landlord was entitled to retain the commission.

The Lease Code says that the landlord must provide full details of the insurance to the tenant on request. It does not state how often the tenant can request that information. So again, in terms of drafting, if acting for the landlord you may want to impose a limit on the number of times during the course of the year that a tenant may actually request that information. And again if you are acting for the landlord, the safe advice would be that if you do change the policy, you keep the tenant informed of that.

If you look at the drafting notes for the PLC standard document code-compliant lease, it does say that if you put provisions in the lease which simply require the landlord to tell the tenant of "material changes" there is an argument that this could actually infringe the Lease Code.

The Lease Code provides that rent suspension should apply if the premises are damaged by an insured risk or uninsured risk, other than where caused by a deliberate act of the tenant.

I will deal with the point on uninsured risks separately, as the last two parts of clause 9 of the Lease Code deal with insured risks.

It is unlikely that any loss of rent insurance would cover damage by an uninsured risk and the Lease Code appears to require the landlord to operate the rent suspension and bear the loss of rent itself, which is obviously moving away from what our standard institutional leases are at the moment. The argument is that the tenant would still have an obligation to repair, as it is damage caused by an uninsured risk and, therefore, will not be excluded from the repair obligation. There is also an argument that the rent suspension is compensation for the tenant having to repair in the event of damage by an uninsured risk.

The PLC Standard Lease Code compliant lease does contain a definition of deliberate damage and you will see this in the drafting notes. If acting for the landlord, I would want to ensure that the wider definition suggested is used, so it includes those acting under the authority of the tenant, those invited to the premises by the tenant, and also additional optional words so the rent suspension does not automatically “kick in” if the tenant has caused the insurance policy to be vitiated or the payment of the insurance monies withheld.

If acting for the tenant, the Occupiers Guide recommends disclosing details of the tenants use, any alterations, whether you have certain explosive substances stored at the property, because you do not want to end up with a situation where the policy is rejected on the grounds of change of risk.

If the rent suspension is limited to the period for which loss of rent is insured, leases should allow landlords or tenants to terminate their leases if reinstatement is not completed within that period.

I think that this is a reasonable provision where damage is caused by an insured risk, and in the majority of cases again I would say that this is what is happening. In practice it is usual for the right to break to coincide with the expiry of the loss of rent insurance.

You want to strike a balance, whether acting for a landlord or tenant, to ensure that those two periods actually end at the same time.

You do sometimes see leases drafted so that a tenant can break once a loss of rent insurance cover has expired but then there is a three month notice period, so obviously the tenant has to pay for three months for which he has no ability to occupy the property.

I will deal with these two points together. In terms of drafting, I think the way we will go is that everyone will look at uninsured risk and terrorism together.

In the past, who is responsible for an uninsured risk has been dependent upon the market, and the respective bargaining positions of the parties. In practice, the requirement under the Lease Code will make landlords want to insure against the widest risks, and so undoubtedly that will mean that the premium will increase.

I would go back to the question about fair and reasonable to who? It would be reasonable for the landlord to argue that an increased premium to cover a wider definition of insured risk is actually reasonable to the landlord.

There are also problems with certain risks, historically the risk of damage to premises by an uninsured risk rests with the tenant. Repair and rent suspension in standard leases are obviously linked to damage by an insured risk so if acting for a landlord there is a risk that the landlord cannot guarantee throughout the term of the lease that he can insure against all of the defined risks, so think about putting protections in there.

Cover will depend upon the insurance market and the particular building at any given time. If one of the insured risks cannot be insured against, then the landlord's covenant to reinstate or rebuild will not apply and the tenant will not receive a rent abatement.

In addition, the tenant's repair covenant may be sufficiently wide so the tenant must make good the damage caused by an uninsured risk and continue to pay rents. So obviously the elements of the Lease Code are there to try and share the risks between the landlord and tenant.

The obvious uninsured risk is terrorism. If you look at the PLC Property Drafting notes, there are many different ways in which terrorism is defined, but the threat of terrorism and other uninsured risks, (flooding and subsidence) will depend on the insurance market and the location and type of the building.

My major concern with terrorism cover and the guidance in the Lease Code, is the word "practicable". It will be interesting to see how that is interpreted. The model heads of terms talk about agreeing whether terrorism will be covered.

A point to watch is that Pool Re will only insure the whole portfolio owned by one insured. You cannot pick and choose which of your properties you will insure against terrorism.

If it is a Government tenant that self-insures, you may have to look at trying to split up the insurance. If you are acting for a landlord with only block policies, that could cause some difficulties.

Where the risk of damage by an uninsured risk is shared, it is obviously usual to include provisions in the lease which will enable the landlord to elect whether to reinstate at its own cost where the damage is by an uninsured risk. The Lease Code follows this. However it does not state any period of time within which landlords agree to rebuild.

My main problem with the elements of the Lease Code in respect of uninsured risk and reinstatement is that the benefits of the rent abatement of an uninsured risk lie now with the tenants.

As the tenant does not have to pay rents, there is an argument that the tenant still has its repair obligation, and so that is seen as compensation. The tenant is given the ability to terminate the lease, but the landlord may insist that the lease continues, which may help the landlord to negotiate if, for example, someone is to fund the rebuilding of the property.

I think the PLC Standard Code Compliant lease is sensible in the way in which the landlord is given a period of time to reinstate at its own cost. This is a sensible compromise, which goes beyond the Lease Code but which gives both parties certainty.

Damage by uninsured risks is quite controversial. It is something which should be negotiated at Heads of Terms phase, and these things need to be talked about before the lease is actually drafted.