Code for Leasing Business Premises in England and Wales 2007

A practice note summarising the recommendations of the Code for Leasing Business Premises in England and Wales 2007, which was published on 28 March 2007.

Contents

Before the Lease Code 2007: 1995 and 2002

1995

In 1995, the first edition of the Code of Practice for Commercial Leases in England and Wales (1995 Code) was published as a voluntary agreement between professional and industry bodies. The 1995 Code was supported by the government as an initiative by the property industry to:

  • Regulate itself.

  • Address concerns over a perceived inflexibility in commercial lease terms.

  • Avoid a legislative solution as proposed by the government.

The 1995 Code had no apparent impact on market practice, and the government continued to threaten legislation.

2002

A second edition of the Code of Practice for Commercial Leases in England and Wales was published in April 2002 (2002 Code). For details, see Practice note, Code of Practice for Commercial Leases (www.practicallaw.com/9-107-4707).

The government requested a review by Reading University of the effect of the 2002 Code on market practice. The report concluded that:

  • The 2002 Code had made a greater impact than the 1995 Code in that it had been more widely disseminated.

  • Even where it was known about, however, the 2002 Code was having little direct impact on individual lease negotiations.

For more information, see Legal update, Reading report on Code of Practice for Commercial Leases (www.practicallaw.com/8-200-3998).

It is against this background that a third edition of the Code was prepared, which was called the Code for Leasing Business Premises in England and Wales 2007 (Lease Code 2007).

 

Lease Code 2007

The Lease Code 2007 was formally launched on 28 March 2007 to achieve:

  • A fairer balance between the landlord and tenant.

  • Greater flexibility in commercial lease terms.

The official website for the Lease Code 2007 is www.leasingbusinesspremises.co.uk.

Lease Code 2007 comprises primary and supporting documents

The Lease Code 2007 comprises a primary document and two supporting documents, which contain recommendations that come into play at different stages in the relationship between the landlord and tenant.

Primary document: Landlord code

The primary document in the Lease Code 2007 is the Landlord Code: Leasing Business Premises: Landlord Code (www.practicallaw.com/5-242-0959).

Supporting documents

The two supporting documents in the Lease Code 2007 are:

  • The Occupier's Guide: Leasing Business Premises: Occupier Guide (www.practicallaw.com/7-242-0958).

    The Occupier's Guide goes further than the Landlord Code in places. If a lease were to comply with both the Landlord Code and the Occupier's Guide, it would favour the tenant to a greater degree than if the lease were to comply only with the Landlord Code. This may be entirely appropriate in some circumstances, but may not be acceptable to all landlords or lenders. If a landlord markets premises as being available on a "code-compliant" lease, it is not clear whether the lease must comply with only the Landlord Code, or both the Landlord Code and the Occupier's Guide.

  • Model Heads of Terms: Leasing Business Premises: Model Heads of Terms (www.practicallaw.com/9-242-0957).

    The Model Heads of Terms are, as the title suggests, a precedent set of heads of terms. They provide a checklist of issues to be determined and information needed before the lease can be agreed.

Lease Code 2007 provides recommendations for each stage of the lease transaction

The recommendations in the Lease Code 2007 break down into three categories, according to the stage of the transaction:

Understanding the limitations of the Lease Code 2007 and future development

There is much in the Lease Code 2007 to be welcomed but it is important for anyone working with it, including lenders and guarantors, to understand that strict adherence is not possible because:

  • There are a number of significant issues that may need to be addressed to make the Lease Code 2007 workable in practice.

  • The Lease Code 2007 has not been written in precise "legal" or "legislative" language, which leaves many of its provisions open to interpretation.

The working group responsible for the Lease Code 2007 publishes supplementary information (briefing notes) on issues relating to commercial leases that are particularly complex. The briefing notes do not form part of the Lease Code 2007 itself.

Amendments made in April 2008

The working group published briefing notes on the issues for landlords and tenants resulting from:

  • The requirement to provide energy performance certificates to prospective buyers and tenants.

  • Changes to empty property rates relief.

The notes contain suggestions as to how landlords and tenants could approach these issues. For more information, see Legal update, Guidance on EPCs and empty rates relief (www.practicallaw.com/0-381-2464).

Amendments made in September 2009

The working group published two briefing notes on:

  • Environmental Good Practice, containing guidance on the use of a memorandum of understanding.

  • Environmental Management of Building Agreement.

For more information, see Legal update, Guidance on environmental good practice (www.practicallaw.com/0-500-1829).

Monitoring the Lease Code 2007

In January 2009, the government commissioned the first part of a two-part research project to assess the dissemination, awareness and use of the Lease Code 2007 since its launch.

On 3 July 2009, the Department for Communities and Local Government (DCLG) published a report on the findings of the first stage of the research, Monitoring the 2007 Code for Leasing Business Premises (www.practicallaw.com/0-386-3689).

The report considered the:

  • Awareness of the Lease Code 2007 among landlords and tenants.

  • Extent to which the Lease Code 2007 is being used in negotiations.

  • Sources of advice for tenants on the Lease Code 2007.

  • Perceptions of landlords, tenants and their advisors on the impact of the Lease Code 2007 on leasing.

The report concluded that awareness and advice on the Lease Code 2007 was limited and that it played only a minor role (if at all) in negotiations. The general opinion among those involved in negotiating leases was that leases were now "flexible and fair" and that the Lease Code 2007 was unnecessary.

For further information, see Legal update, Report on the impact of the 2007 Code for Leasing Business Premises published (www.practicallaw.com/3-386-5804).

The second phase of the research has not occurred but was expected to take place in 2010-11 and look at more substantive issues, namely, the impact of the Lease Code 2007 on leasing patterns, against the background of trends in the property market.

For more information, see Press release: CLG Monitoring of Code for Leasing Business Premises - First Phase (www.practicallaw.com/7-386-5213).

Support for the Lease Code 2007

On 13 December 2011, the Department for Business, Innovation and Skills published a report setting out recommendations for improving the state of high streets and town centres following an independent review by Mary Portas. The report urged landlords to sign up to the Lease Code 2007 and for more to be done to raise awareness of it. For more information on the Portas Review, see Legal update, Portas Review recommendations published (www.practicallaw.com/2-517-0067).

On 13 March 2012, the government published a response to the recommendations in the Portas Review. In its response, the government confirmed that it had written to:

  • Local authorities encouraging them to adopt the Lease Code 2007.

  • Key industry players encouraging them to promote the Lease Code 2007.

For more information, see Legal update, Government response to the Portas Review published (www.practicallaw.com/7-518-7744).

 

Practical Law Property code compliant lease

Standard document, Lease of floor(s) of an office block with guarantee and prescribed clauses (complies with Lease Code 2007) (www.practicallaw.com/9-218-6006) is drafted to reflect, as far as possible, the recommendations of the Lease Code 2007.

In 2007, Practical Law Property hosted a seminar on the Lease Code 2007. See Business Lease Code - the impact so far? Seminar notes, November 2007 (www.practicallaw.com/5-379-8333).

 

Heads of terms and the conduct of negotiations

The Model Heads of Terms (www.practicallaw.com/9-242-0957) indicate the level of detail envisaged by the Lease Code 2007. In addition to the Model Heads of Terms, the information that should be made available at the negotiation stage is contained in both the Landlord Code (see Landlord Code: the heads of terms and negotiation stage) and the Occupier's Guide (see Occupier's Guide: the heads of terms and negotiation stage).

Landlord Code: the heads of terms and negotiation stage

The landlord's offer should be made in writing and contain the following information:

  • Rent.

  • Length of term.

  • Break rights.

  • Security of tenure. If security of tenure is to be excluded, the landlord should encourage the tenant to get advice on the implications at an early stage.

  • Rent review arrangements.

  • Rights to assign, sublet and share occupation of the premises.

  • Repairing obligations. The Landlord Code states that unless the heads of terms expressly state otherwise, the lease should only require the tenant to hand back the premises in the same condition as when the lease was granted.

  • VAT status of the premises.

  • Any rent deposit proposals, including the amount, duration, arrangements for payment of interest and conditions for release. The rent deposit arrangements should protect the tenant against the landlord's insolvency or default.

  • Conditions for the release of any guarantee.

  • Best estimates of service charges, insurance payments and any other outgoings that the tenant will incur under the lease. The Landlord Code does not restrict this requirement to providing information only on costs payable to the landlord.

  • Details of any irregular events that would have a significant impact on the amount of future service charges.

    The Landlord Code reminds landlords to have regard to the RICS 2006 Code of Practice: Service Charges in Commercial Property (www.practicallaw.com/3-203-1847). This has since been replaced by subsequent editions. For information on the current edition of the RICS Code of Practice (Service Charge Code), see Practice note, Third edition of RICS Code of practice for service charges in commercial property (www.practicallaw.com/4-557-5825).

The tenant should be informed of any proposed provisions that do not comply with the Lease Code 2007 and be given reasons for the departure. The landlord should state whether alternative lease terms are available and, if requested by the tenant, propose different rents for the alternative lease terms.

Occupier's Guide: the heads of terms and negotiation stage

In addition to the information set out in the Landlord Code, the Occupier's Guide suggests that the tenant should ask the landlord to provide the following information at the negotiation stage:

  • Written confirmation that the proposed lease complies with the Lease Code 2007.

  • A checklist of costs, covering:

    • rent;
    • VAT;
    • rates;
    • service charges;
    • insurance;
    • utilities;
    • repairs and dilapidations; and
    • fitting-out and alterations.

    In relation to each of the costs, the checklist should provide the following information:

    • who pays;
    • the amount and frequency of the cost;
    • the tenant's proportion of the cost; and
    • if the cost is not fixed, then on what it is dependent.
  • A plan showing the extent of the property, with boundaries clearly marked.

  • The floor area of the property.

  • The means of access to the property, including any access shared with other occupiers.

  • Any limitations on hours of use.

  • Any restrictions on the type of use.

  • Any legal or planning obligations that come with the property.

  • Details of the identity of the landlord and any superior landlord.

In relation to rent deposits, the Occupier's Guide advises tenants to:

  • Remember that the deposit is the tenant's money.

  • Ask the landlord to hold the rent deposit in an escrow or stakeholder account, in case the landlord becomes insolvent.

  • Demand that interest is accrued at a fair rate.

  • Obtain statements from the landlord, throughout the term of the lease, to confirm that the money is still in the account and that all interest earned has been credited to the tenant.

  • Check that the deposit will be transferred to a new landlord if the original landlord sells its interest.

 

Terms to be considered for inclusion in a lease

Length of the term and break clauses

The Landlord Code states that the length of the term of the lease should be clear, but does not give any further details on how this recommendation could be met. Where possible, parties may want to use wording that expressly refers to the start and end dates.

If the lease contains a tenant's break right, the only pre-conditions to the tenant exercising the break right should be that:

  • The basic rent is paid up to date.

  • The tenant gives up occupation of the property.

  • There are no continuing subleases.

The Landlord Code states that disputes about the state of the premises, or what has been removed or left behind, should be settled after the break right has been exercised. The rationale is that a breach of covenant by the tenant should not prevent the break clause being exercised, as either party will still be able to claim damages from the other in respect of any antecedent breach of covenant (Blore v Giulini [1903] 1 KB 356).

A lease that requires the tenant to give vacant possession of the property as a pre-condition to exercising the break is not compliant with the Lease Code 2007. The meaning of vacant possession goes beyond the tenant giving up occupation of the property and ensuring that there are no continuing subleases. For example, if the tenant leaves furniture at the property, the tenant will not have given vacant possession. For more information on the meaning of vacant possession, see Practice note, Selling with vacant possession (www.practicallaw.com/5-101-5748).

At first glance, the pre-condition that there are no continuing subleases appears to be unnecessary. If the tenant exercises the break right and determines the lease, then (as a matter of contract) any sublease will also end (Barrett v Morgan [2000] 2 AC 264). However, if the term of the sublease lasts beyond the break date in the lease, and the subtenant has security of tenure, then, although the sublease will end as a matter of contract, the subtenant would have the right to apply for a renewal lease from the head landlord (as its competent landlord) (see Practice note, Break clauses in leases (www.practicallaw.com/3-107-4395)).

The Occupier's Guide advises tenants to ensure that any sublease granted by the tenant (or any agreement to share possession of the property) satisfies both of the following:

  • It expires before the break date in the tenant's lease.

  • It does not give the subtenant or occupier any rights to stay in the property beyond the end of the tenant's agreement with the subtenant or occupier.

For more information on term and break clauses, see Practice notes:

Rent review

To comply with the Landlord Code, rent reviews should be clear and should not contain provisions that aim to achieve a headline rent, which is the rent that would be payable after any rent-free period, concessionary rent period or other inducement has expired (Headline rent (www.practicallaw.com/4-107-6681)).

The Landlord Code does not require rent review clauses to be upwards or downwards (rather than upwards only). Wherever possible, however, the landlord should offer alternatives, priced on a risk-adjusted basis. Suggested alternatives are:

  • Annual indexation

  • Upwards/downwards reviews to market rent with a minimum of the initial rent.

The landlord should give reasons if it is unable to offer alternatives.

Either the landlord or the tenant should be able to start the rent review process.

The Occupier's Guide gives tenants some additional suggestions when negotiating the rent review provisions:

  • The rent review should be to the market rent, unless an alternative basis is clearly stated.

  • If the rent increase is by reference to an index, the index should be a published, independent, authoritative source.

  • Where the review is by reference to an open market rental value, the value of the tenant's business and any improvements made by the tenant (except those carried out under an explicit obligation) should be disregarded.

  • Any disagreements should be referred to an independent expert or arbitrator.

  • If the landlord will not agree to an upwards/downwards review, the tenant should consider requesting a break option.

  • Interest on any back rent should be no higher than base rate.

  • The tenant should try to negotiate a provision whereby the landlord forfeits any interest on the back rent if the landlord does not initiate the rent review procedure before the review date.

    This suggestion appears to be at odds with the recommendation in the Landlord Code that either party should be able to initiate the rent review. If the tenant can instigate the rent review prior to the review date, the argument that the landlord should not receive interest on any back rent is weakened.

  • Strict time limits should be avoided in the rent review clause (except in relation to the landlord forfeiting interest if it fails to instigate the review before the review date).

For more information on rent and rent review clauses, see Practice notes:

Assignment and subletting

The Landlord Code prescribes that the only restriction on an assignment of the whole of the premises should be obtaining the landlord's consent, which should not be unreasonably withheld or delayed.

For details of statutory controls on landlord's consent, see Practice note, Landlord's consent for dealings with a lease and the Landlord and Tenant Act 1988 (www.practicallaw.com/5-107-3899).

Section 19(1A) of the Landlord and Tenant Act 1927 (LTA 1927) allows the landlord to specify in the lease circumstances which must exist before the landlord will give consent to an assignment. If the landlord withholds consent to the assignment on the basis that the circumstances have not been met, the landlord will not have acted unreasonably. The Landlord Code states that the landlord should not specify any such circumstances. However, it goes on to say that a lease will still comply with the Lease Code 2007 if it requires that any group company taking an assignment must be of at least equivalent financial standing to the assignor.

The Landlord Code recommends that authorised guarantee agreements (AGAs) should not be required as a condition of an assignment, unless the assignee is of lower financial standing than the assignor, or if the assignee is resident or registered overseas. Landlords should consider accepting rent deposits from smaller tenants, in place of AGAs.

The terms "financial standing" and "smaller tenants" do not easily translate into legal drafting in a lease and the Landlord Code does not contain any further guidance on what the terms mean. The meaning of these terms is considered in more detail in Standard document, Lease of floor(s) of an office block with guarantee and prescribed clauses (complies with Lease Code 2007): drafting note, Circumstances justifying refusal and conditions on assignment (www.practicallaw.com/9-218-6006).

If subletting is permitted, the Landlord Code states that:

The Occupier's Guide suggests some additional points for tenants when negotiating the alienation provisions in the lease:

  • The tenant should request flexibility to allow sharing of the premises with a service provider or supplier. The example of sharing given in the Occupier's Guide is providing an external cleaning company with a cupboard to store equipment in the premises.

  • Where consent is required, the tenant should ensure that the landlord (and any superior landlord) is required to give its consent within a defined (and short) period of time.

    This suggestion may be difficult for a landlord to comply with, as it is often outside the landlord's control to ensure that a superior landlord gives its consent within a defined, short, period of time.

  • If the landlord requires an AGA, tenants are advised to request provisions which allow the tenant to cancel the AGA, either if defined conditions are met or after an agreed period of time.

For more information, see the following Practice notes:

Service charges

The Lease Code 2007 contains detailed recommendations for the service charge information that should be given to tenants at the negotiation stage (see Heads of terms and the conduct of negotiations).

In particular, the Landlord Code reminds landlords to have regard to the RICS 2006 Code of Practice: Service Charges in Commercial Property (www.practicallaw.com/3-203-1847). This has since been replaced by subsequent editions. For information on the current edition of the Service Charge Code, see Practice note, Third edition of RICS Code of practice for service charges in commercial property (www.practicallaw.com/4-557-5825).

In addition, the Occupier's Guide advises tenants to:

  • Ask the landlord whether the landlord complies with the Service Charge Code.

  • Request a written estimate of the likely service charge costs for each year of the lease term.

  • Check that the building does not need any major repairs at the beginning of the term, which the tenant would be liable for under the service charge.

  • Check that the lease requires the landlord to bear the service charge costs for any unlet units at the building.

Repairs

The Landlord Code states that tenants' repairing obligations should be appropriate to the length of the term and the condition of the premises at the start of the lease.

Unless the heads of terms expressly state otherwise, the lease should only require the tenant to hand back the premises in the same condition as when the lease was granted. A covenant to keep the property in repair includes an obligation to put the property into repair if it is in a state of disrepair at the start of the lease (Proudfoot v Hart (1890) 25 QBD 42). A covenant to keep the premises in repair may therefore fall foul of the Lease Code 2007, if the premises are actually in disrepair when the lease is granted.

The Occupier's Guide recommends instructing surveyors to prepare a formal photographic schedule of condition to record the state of the premises at the beginning of the lease. The Occupier's Guide does not state which party should bear the cost of preparing a schedule of condition.

If the tenant's repairing obligation is to be limited by reference to a schedule of condition, the covenant in the lease should expressly state that this is the case. Difficulties may arise later if a schedule of condition was prepared when the lease was granted, but was not referred to in the lease.

For more information, see Practice notes:

Alterations and changes of use

The Landlord Code recommends that the landlord's control over alterations and changes of use should not be more restrictive than is necessary to protect the value of the property and any adjoining or neighbouring property of the landlord.

Landlord's consent should not be required for internal non-structural alterations, unless the alterations could affect the services or systems in the building. Where consent is not required, the tenant should notify the landlord of any internal non-structural alterations it has carried out.

Reinstatement at the end of the term should only be required where reasonable. The landlord should notify the tenant of its requirements for reinstatement at least six months before the end of the term.

The Occupier's Guide suggests some additional points for the tenant to consider when negotiating the alterations and changes of use provisions:

  • The tenant should ensure that the landlord provides it with all relevant planning information.

  • The Occupier's Guide advises tenants that the lease will usually make the tenant responsible for checking that the proposed use complies with the planning consent for the property. However, the Occupier's Guide goes on to suggest that, if possible, the tenant should obtain the landlord's confirmation that the proposed use complies with the planning consent for the property.

  • The tenant should ensure that the lease requires the landlord to give consent to alterations within a reasonable time period. The Occupier's Guide suggests that 21 days would be a reasonable period.

For more information, see Practice notes:

Insurance

The Landlord Code states that where the landlord is responsible for insuring the property:

  • The policy terms should be fair, reasonable and give value for money.

  • The policy should be placed with reputable insurers.

  • Any commission received by the landlord should be disclosed to the tenant.

    A landlord may find it difficult to comply with this requirement if the property is insured as part of a block policy, as any commission may not be allocated to individual properties.

  • The landlord must provide full insurance details on request. This recommendation is not limited to providing the insurance details a specified number of times in each year.

  • The landlord should provide appropriate terrorism cover, if practicable.

If the premises are damaged by an insured risk or an uninsured risk then rent suspension should apply, unless the damage was caused by a deliberate act of the tenant. It is unlikely that any loss of rent insurance would cover damage by an uninsured risk. In these circumstances, the Landlord Code appears to require the landlord to operate the rent suspension and bear the loss of rent itself.

If the rent suspension is limited to the period of loss of rent insurance cover, either party should be able to terminate the lease if reinstatement is not completed within that period.

If the property is so damaged by an uninsured risk as to prevent occupation, the tenant should be allowed to terminate the lease unless the landlord agrees to rebuild at its own cost.

The Occupier's Guide suggests that the tenant should:

  • Request a copy of the landlord's insurance policy before entering into the lease.

  • Check with alternative insurers that the landlord's insurance policy gives value for money and that the policy is with a reputable insurance company.

  • Ask the landlord to confirm that it does not intend to change the scope of the insurance cover and that the landlord will consult with the tenant over any changes to the policy.

  • Ensure that the lease requires the landlord to use the insurance money to repair or rebuild the property unless the insurance is invalidated by the tenant.

  • Inform the landlord of any proposed alterations to the premises and check that the alterations would be covered by the insurance policy.

  • Let the landlord know if the tenant intends to store hazardous chemicals at the property.

  • Let the landlord know if the tenant intends to leave the property vacant at any time.

For more information on insurance provisions in leases, see:

 

Conduct of the parties during the term of the lease

Tenant's default

The Landlord Code recommends that:

  • Landlords should handle defaults promptly and deal with tenants and any guarantors in an open and constructive way.

  • Terminal schedules of dilapidations should be served at least six months before the end of the term. Any dilapidations which occur in the last six months of the term should be notified to the tenant as soon as practicable.

The Occupier's Guide advises tenants to check that the lease:

  • Requires the landlord to notify the tenant if the tenant is in breach.

  • Allows the tenant an opportunity to remedy any breach before the landlord can take action against the tenant.

    It is common for forfeiture clauses to allow the tenant a period of grace to pay the rent before allowing the landlord to re-enter the property. However, it is unusual for the forfeiture provisions to allow the tenant time to remedy a breach of any other tenant's covenant. In practice, a landlord is unlikely to exercise the right of re-entry without allowing the tenant an opportunity to remedy the breach, but tenants may want a period of grace to be expressed in the lease.

  • Contains clear forfeiture provisions, which allow the tenant enough time to pay and provide for the tenant's business to be restructured without the lease being vulnerable to forfeiture.

The Occupier's Guide highlights the potential cost of the tenant being required to comply with statutes and other legislation. It suggests that the tenant obtains written confirmation from the landlord that the property complies with existing legislation before taking the lease.

For more information, see Practice notes:

Applications for consent

The Landlord Code requires landlords to:

  • Give the tenant, where practicable, an estimate of the costs involved when the tenant applies for consent.

  • Request any necessary additional information from the tenant within five working days of receiving the application.

  • Consider at an early stage what other consents may be required (for example, from a superior landlord or mortgagee) and apply for these.

  • Make decisions on consents for alterations within 15 working days of receiving full information from the tenant.

The Occupier's Guide advises tenants to:

  • Provide the landlord with all necessary information at the outset.

  • Ask the landlord to confirm that obtaining any other consents will not cause delay to the approval process.

For more information, see Practice notes:

 

Commercial Landlords Accreditation Scheme

The Commercial Landlords Accreditation Scheme (CLAS) is a government-backed accreditation scheme, launched by the BPF. Any commercial landlord in England and Wales may apply to become a member of this self-regulatory scheme.

CLAS builds on the Lease Code 2007 by offering applicants the opportunity to display the CLAS logo on their stationery and marketing materials, showing that they are committed to the Lease Code 2007. A list of scheme members is kept on the CLAS website (www.practicallaw.com/3-375-1138) and prospective tenants can also check with the scheme operator whether or not a landlord is a member. The BPF hopes this will give CLAS members a commercial advantage in the market place and provide reassurance to tenants.

To achieve accreditation, landlords must commit to do all of the following:

If a CLAS member breaks the CLAS rules, there is a three-step complaints process:

  • The landlord's internal complaints procedure.

  • Review by a CLAS case worker.

  • In serious cases and on appeals, a referral to the independent CLAS Standards Board. The board will comprise equal numbers of landlord, occupier and independent representatives.

Sanctions may include private reprimands, public reprimands, suspension or removal from CLAS.

A scheme manual contains the full terms and conditions and prospective applicants should read this before applying. Application forms are available on the CLAS website (www.practicallaw.com/3-375-1138).

 
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