Cathy Hughes and Neil Crosby Policy making without legislating: the self-regulation of commercial property leasing Cathy Hughes and Neil Crosby 21 November 2018

Regulation of the UK leasing market Little regulation in the commercial sector Policy interest: Enterprise and productivity Do leasing practices provide barriers to efficiency and flexibility? This question has been asked continually since 1990! Self-regulation has been the ‘solution’ since 1995 Code of Practice for Commercial Leases v1 (1995) Code of Practice for Commercial Leases v2 (2002) Code of Practice for Commercial Leases v3 (2007)

Has self-regulation worked? University of Reading research has found market-led changes to leasing practices but also…… Little awareness of codes and little direct influence of them on lease negotiation and management. Government is not happy. “Except for some well-advised major tenants, the code is not a primary tool for the negotiation of new leases. If parties do not know about the code and do not use it, it will have no impact. The property industry has asked us not to legislate in this area, and we have held back to give the 2007 Code a chance to work. But if the more substantive research shows that the market has not responded, legislation is bound to come back on to the agenda.” The Parliamentary Under-Secretary of State for Communities and Local Government (July 2009)

Can self-regulation of commercial leasing ever work? The aim of the paper is to begin to answer this by: Reviewing the wider literature on self-regulation in other industries From the review, generating key criteria to explain when self-regulation is effective Assessing UK commercial lease codes against these criteria

Self-regulation literature Self-regulation is “a regulatory process whereby an industry-level, as opposed to a governmental- or firm-level, organization (such as a trade association or professional society) sets and enforces rules and standards relating to the conduct of firms in the industry” (Gupta and Lad, 1983: 417) Positive: Industry organisations can ‘moralise’ industrial and commercial life by creating a normative framework (Durkheim 1933). Industry members are committed (and not hostile) to industry-imposed rules on behaviour (Boddewyn ,1985) Negative: Critics see self-regulation as being a way to keep government from regulating, serving the industry rather than the public and being an attempt to deceive the public that an industry is behaving responsibly (Braithwaite, 1993 and Gunningham and Rees, 1997)

Key themes emerging An industry morality is central A normative framework must be developed (by the industry body) There must be practical ways to ensure compliance The system must be inclusive, reflective and honest Regulation and self-regulation are on a continuum; the position on this should be determined by the industry structure

Evaluation: key issues and performance indicators Due process Inclusivity of development Fairness of implementation Fairness of procedures for monitoring Fairness of procedures for enforcement Suitability of consequences Relevance Whether it addresses a fundamental problem Success Extent to which it achieves objectives Existence of organisation to administer Nature of monitoring mechanisms Extent to which sanctions are in place and used Coverage Alternative approaches Adequacy of sanctions Credibility Requirement for external input Adequacy of resources Source: Industry Canada 2002

Evaluating the Lease Code Due process Inclusive development Fragmented implementation arising from the lack of single industry body No procedures for monitoring or enforcement No direct incentives or negative consequences Relevance Involvement of range of parties and development over three editions suggests addresses relevant problems Success Problems with process make this difficult to establish Coverage is poor Alternative approaches An independent monitoring body, mandatory use by professional bodies or legislation may be considered necessary

Conclusions Despite the efforts of wide range of stakeholders, the Lease Code is not measurably successful There is no clear sense of an industrial morality There is no normative framework to ensure that it works; the structures are not in place to ensure implementation, monitor compliance and record views of affected stakeholders One suggested reason for the apparent lack of the framework is the fragmentation of ‘the industry’ and the lack of a single industry body The industry may not have the capacity to self-regulate , the institutional structures may necessitate greater state intervention Further research is needed on self-regulation in property markets in different countries alongside further study of the literature on other industries with particular focus on institutional structures.