APC: Hot topics for summer

There are four hot topics – other than Covid-19 – that RICS APC and AssocRICS candidates should ensure they are aware of in their summer reading. These are:

1. Changes to the RICS minimum professional indemnity insurance (PII) policy requirements
2. The RICS professional statement Code for leasing business premises 2020
3. The 5th Anti-Money Laundering Directive
4. Red Book Global 2020

PII policy requirements

Rule 9 of the RICS Rules of Conduct for Firms states: “A firm shall ensure that all previous and current professional work is covered by adequate and appropriate indemnity cover which meets standards approved by the Standards and Regulation Board.” Firms need to hold PII for three main reasons:

• The firm is protected from financial loss if it faces a claim that cannot be met from its own financial resources;
• The firm’s clients are protected from financial loss that a firm cannot meet; and
• The firm or insured member is protected against the consequences of its liability to pay damages to third parties for breaches of professional duty that it commits through its professional activities.

RICS’s minimum PII policy wording was updated on 1 May 2020. The changes were made to ensure that PII cover remains appropriate in “unprecedented market conditions”, ie it continues to be available and affordable to the property industry. The key changes are as follows:

• RICS launched the external wall fire review process (EWS1 form) in December 2019 in response to the Grenfell Tower fire and valuation of high-rise properties that use actual or potential combustible materials in external wall systems and balconies. Given the potential liability associated with this process, RICS has inserted a temporary ability for insurers to apply their own fire safety exclusions into policies. Previously, RICS included prescribed fire safety exclusions wording in the minimum policy requirements.
• The excess applicable in respect of defence costs has been adjusted to allow insurance providers more flexibility when proposing renewal term.
• Unlimited aggregate round-the-clock limit of liability, with the aim to provide increased availability of PII to firms.

Earlier changes effective from 1 April 2019 relating to run-off cover have been incorporated into the professional guidance by RICS. These changes seek to ensure that all firms have access to run-off cover, providing better protection to consumers.

In simple terms, run-off cover is required when a firm or member ceases to trade. This must be on a claims-made basis and fully retroactive, so it covers all historic work carried out by the firm.

The new requirements still require firms to have “adequate and appropriate” cover for six years in relation to commercial claims.

However, for consumer claims, firms must obtain cover for a minimum of six years with an aggregate limit of £1m. This should be automatically included in the insurer’s minimum wording without any premium paid to trigger it.

Firms should obtain longer periods or higher levels of cover if it is adequate and appropriate to do.

Code for leasing business premises 2020

This new professional statement is effective from 1 September 2020. It replaces the 2007 Code, which was originally produced by a coalition of industry bodies (including RICS). In contrast, the new 2020 Code has been published directly by RICS, but is supported by a number of other organisations.

University of Reading research in 2009 showed a lack of awareness and usage of the 2007 Code. This has been addressed by the new Code having professional statement status – meaning that it is of mandatory application to RICS members and firms.

The aim is to improve transparency and fairness in commercial lease negotiation, including initial negotiation of lease terms and mandatory provision of comprehensive heads of terms to facilitate the legal drafting process. This applies to both new leases and lease renewals. Other key aims include:

• Providing assurance and clarity to occupiers;
• Promoting a less adversarial relationship between occupiers, owners and their advisers;
• Encouraging surveyors and lawyers to work collaboratively; and
• Encouraging occupiers to take professional advice.

“Commercial” is defined to include “tenants who will carry on trade, professional or other business activities in them, but it does not apply to agricultural lettings, to premises that will only be used for housing plant and equipment (such as electricity transformers or telecoms) or advertising media (such as hoardings), to premises that are intended to be wholly sublet by the tenant, or to premises being let for a period of not more than six months”.

There are a number of mandatory requirements within the new Code.

First, negotiations and heads of terms must be approached in a constructive and collaborative manner. This should produce letting terms that “achieve a fair balance between the parties, having regard to their respective commercial interests”.

Parties who are not represented by a RICS member or property professional must be advised about the existence of the Code and to obtain professional representation.

Written heads of terms must be provided by the landlord or their letting agent on a subject to contract basis.

These must include the following terms as a minimum:

• Identity and extent of the premises, with the landlord providing a Land Registry compliant plan if the lease is registerable (ie term over seven years)
• Special rights to be granted, eg parking or telecom/data access
• Term length and security of tenure
• Break or renewal rights
• Any guarantor and/or rent deposit
• Rent and frequency of payment
• Payment of business rates and VAT
• Incentives, eg rent-free period
• Rent reviews, frequency and basis
• Service charge
• Insurance
• Alienation rights
• Repairing obligation
• Permitted use and changes of use
• Alterations and reinstatement
• Initial alterations or fit-out
• Conditions, eg subject to survey, board approval or planning consent.

The above also apply at lease renewal or extension, however, terms stated may follow the existing lease subject to reasonable modernisation.

To ensure that the minimum requirements are met, the parties should refer to the template heads of terms and checklist in Appendix A of the 2020 Code. The checklist, in particular, can be used when a landlord prefers to use their own heads of term document to ensure that the mandatory minimum requirements are met.

There are also various best practice requirements, although the list below is not exhaustive:

• Break options should be conditional only on the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers.
• Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry.
• Leases should require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect.
• Repayment of service charges may be deferred until the service charge accounts are finalised.
• For rent deposits, the following must be confirmed: amount held (including/excluding VAT); time it will be held; whether it will be held as security for rent only or for all other lease obligations; and when it will be returned to the tenant with any accrued interest.
• For rent reviews, both parties should be able to initiate the process and there should be no time limits imposed to prevent a review or set a new rent through inaction by either party.
• In relation to alienation, tenants should be permitted to assign whole with landlord’s consent, not to be unreasonably withheld or delayed. Reasonable and appropriate circumstances where consent can be refused may be stated, eg rental arrears, or where the assignee has insufficient financial strength. When assigning a lease, the landlord may reasonably require the tenant to provide an authorised guarantee agreement (AGA).
• In terms of change of use, clauses should be no more restrictive than is necessary to protect the value of the premises and any adjoining or neighbouring premises owned by the landlord.

There is also a guide for landlords and tenants (Appendix B), which provides supplementary guidance and is not of mandatory application. It aims to assist both landlords and tenants in understanding commercial lease negotiations and the aims of the new professional statement.

It is essential for surveyors to read and a helpful point of reference for clients to ensure that they understand the process of agreeing or renewing a commercial lease.

5th Anti-Money Laundering Directive

This took effect from 10 January 2020. It introduced a new legal requirement for residential and commercial letting agents to carry out customer due diligence (CDD) checks when a property is let. This applies to lettings which are for:

• A term of a month or more; and
• At a rent, which, during at least part of the term is, or is equivalent to, a monthly rent of over €10,000.

CDD must be undertaken on both the lessor and the lessee, ie both parties to the transaction.

The existing requirements of the 4th Anti Money Laundering Directive already cover work undertaken by residential and commercial sales agents.

RICS has not yet published any guidance on compliance with the new Directive. This is currently being put together in collaboration with HMRC, although no publication date has been announced.

RICS members, regulated firms and APC candidates, should be aware of the requirements and seek to put appropriate CDD measures in place with immediate effect.

Red Book Global 2020

A new edition of the Red Book Global (now known as such, rather than as just the Red Book) has been published to coincide with the publication of the latest version of the International Valuation Standards (IVS). The changes take effect from 31 January 2020.

The key changes reflect amendments to the latest version of IVS, as well as feedback stemming from extensive consultation carried out by RICS during 2019.

IVS are now revised on a rolling basis, rather than being updated in separate new editions. This means that valuers need to ensure that the latest versions of both, in addition to any relevant national guidance, are used for new instructions.

Jen Lemen BSc (Hons) FRICS is a co-founder of Property Elite, a chartered surveyor, a registered valuer and an APC assessor