The Model Commercial Lease is now five years old, and an updated version has recently been published. Dion Panambalana reflects on why the MCL was created, what has happened since its launch, and why the rise of machine reading makes it all the more important.
The Model Commercial Lease (MCL) is a free-to-use, institutionally acceptable lease that represents a fair starting point for most negotiations and, in many cases, a fair end point. There are many versions of the MCL, adapted for different classes of property, together with all the supplemental deeds that you’d expect to use on typical leasing transactions.
The “MCL committee” comprises representatives from Hogan Lovells, Eversheds Sutherland, Shoosmiths, Bryan Cave Leighton Paisner, CMS, Brecher, Ashurst, Macfarlanes, Maples Teesdale and Landsec, representing both landlords and tenants, but most, if not all, of the major real estate law firms have been involved in some way in its inception, development and progress.
While the new RICS Lease Code is intended to drive behaviour and practice, the MCL is designed to reflect the market. The MCL has therefore become a useful “referee” in disputes between lawyers where they want to resolve a point but their particular styles or positions are slightly, or even more than slightly, apart. (Just as an aside, the MCL layout and wording isn’t of itself any better than any other leases. The advantage lies in everyone agreeing to have the clauses in the same place and saying the same thing.)
This is probably because (and say it quietly) most, if not all, lawyers realise that for routine leasing – which actually is most UK leasing – there is little value in having the clauses in different places depending on preference and house style, or (more importantly) clauses saying the same thing in many different ways. An industry-wide, institutionally acceptable lease removes these issues.
What has happened since the launch of the MCL?
Since the MCL launched in July 2014, the MCL committee has invited feedback by any means: you can register it on the MCL website or just send an email. We’ve been keen to find out how we can improve on the product, including the drafting – we’re not precious about it. As a result, there were updated versions in 2016 and 2017. The latest version was published on 24 April 2019 and again represents a document that takes into account feedback, changes in the law and various other “tidy-ups”.
The key changes are highlighted in the box to the right. There is one substantive change, and this is the only point that is at odds with the Lease Code. General feedback has been that many investors prefer having, as their starting point, absolute discretion to require reinstatement at the end of the lease. That doesn’t mean that’s where you’ll end up on all transactions, as the deal will drive the terms, but that’s their preferred starting point. The feedback has also indicated that, if the MCL can be changed to reflect this, they will adopt it as their standard form of lease.
Machine reading
The original philosophy behind the MCL was to speed up transactions, make them less antagonistic (by removing the need to argue over different types of drafting that generally said the same thing) and remove clauses that are nice to have but pretty much never used. However, over the past few years, another key reason for the industry to standardise has emerged, and that is the march of the machines.
Machine reading has been with us for a few years now. It’s most definitely not a perfect tool, yet. But it definitely will be. This is not artificial intelligence. A machine reader is a search-and-locate tool. Tell it what to do, and it will do it. But you must interpret the information it finds. This interpretation piece is what lawyers have done for decades when presented with security reviews for banks or portfolio transactions with dozens or even hundreds of leases and other documents to analyse.
Take out the cost and time (as well as the boredom factor) for lawyers of having to trawl documents to find particular clauses and painstakingly compare whether they are the same, and you’ve instantly optimised this part of the transaction. You’ve removed the cost for bidders or buyers in undertaking that element of the due diligence. You’ve also potentially sped up the bid process and made the bid prices more robust if the seller does this and presents it as warranted information.
So how does the MCL help that? Part of the issue with machine reading is that the machine must read clauses that generally say the same thing but are written in dozens of different ways. For example, are the premises described as the “premises”, the “demised premises”, the “property”, the “unit”, or by another defined term?
If clauses say that you must pay your rent or that the property is in good and substantial repair and condition, in the same way and in the same place, then you’ve instantly made the job of the person writing the program for the machine easier, and the lawyer’s value-added advice on the implications of that wording can start, almost, immediately.
This is just one part of the process. But it’s an important one. If you can make it quicker, cheaper and easier, that’s a big win for everybody. Add in the ability to use the data to plug into property management systems and the benefits really start to tot up.
Main image © Shutterstock
The industry view on the MCL
Emma Mackenzie, director at NewRiver REIT:
“At NewRiver we see the landlord and tenant relationship very much as a partnership, and in line with the changing retail landscape, lease lengths have become shorter and turnover provisions ever more common. Adopting the MCL has been part of our strategy to develop strong retailer relationships, improve efficiency for both parties and retain an institutionally acceptable contract. Adopting the MCL as an industry can only be a positive step.”
John Duxbury, head of UK retail and leisure, M&G Real Estate:
“As the UK’s leasing market adapts from longer lease contracts to shorter, more flexible agreements, we need a quicker and more cost-effective approach to documenting agreements, and this is where the MCL stands to help us most. Our experience using the MCL for 18 months is that it’s making a positive difference, with far less challenge and negotiation of the standard provisions. Our sense is that the more forward-thinking investors and occupiers are keen to support streamlining of the leasing process, recognising that contract modernisation and moving the property sector towards a more digital model will make work faster and more efficient, and deliver better outcomes for everyone.”
Tim Cooper, legal director, Landsec:
“Landsec has been using the MCL for several years now, particularly within our leisure and retail portfolios, where the benefits of standardisation are compounded. This is across not only our own portfolio but also those of our customers who have multiple sites, both with us and with our peers. Having a balanced and standardised agreement allows us to have more meaningful conversations over what is really important to us and our customers.”
The main changes made to the MCL in April 2019
Services and service charges
Reference now made to the new RICS professional statement Service Charges in Commercial Property (1st Edition, Sept 2018).
The services have been separated into mandatory and discretionary services, which can be amended to suit the requirements of the landlord and the property (but all the services can be mandatory without making significant changes to the service charge provisions).
Reinstatement at the end of the term
The reinstatement provisions in earlier versions of the MCL included the right for the tenant to serve notice on the landlord at the end of the term asking which alterations and additions the tenant should reinstate. If the tenant served notice, it would only be obliged to reinstate the items specified by the landlord. In light of landlords’ feedback, the default position is now that the tenant must reinstate all alterations and additions that it has made.
Wayleaves and supply runs
For leases of part of a building or in a shopping centre, the MCL now includes a new landlord’s obligation to enter into a wayleave with a telecommunications operator where the tenant reasonably requests that the landlord does so, and at the tenant’s cost.
The language has been updated in the MCL around conducting media, recognising that some buildings have lateral runs for conducting media and not just vertical risers. Reference is now made to “supply runs” rather than just “service risers”.
CRC Energy Efficiency Scheme
As the CRC Energy Efficiency Scheme has now been abolished, all references to it have been removed.
Tenant’s works
An obligation on the tenant not to use “prohibited materials” when carrying out works to the premises has been added. “Prohibited materials” has been defined generically, and not by reference to a long list of materials that must not be used.
“Avonridge” clause
“Avonridge” wording has been added, stating that the landlord will not be liable for any breach of the landlord’s obligations in the lease after the landlord has disposed of its interest in the premises, building, estate or centre.
Interpretation provisions
The interpretation provisions in the MCL are an important part of its terms. They have grown piecemeal, both before and after the original version of the MCL was published in 2014. The opportunity has now been taken to consolidate the interpretation provisions so that they form a more coherent part of the MCL.
The changes are mainly just to the order in which the provisions are set out, although response has been made to some of the amendments that tenants’ lawyers have typically been making – for instance, by including a landlord version of the clause stating that the tenant will be liable for breaches committed by people acting under its control or with its express or implied authority.
Find the updated Model Commercial Lease at: https://modelcommerciallease.co.uk
Dion Panambalana is a member of the MCL working group, on behalf of which this article is written, and a real estate partner at Hogan Lovells
