Rent free period
A rent free period is often offered by landlords under the terms of a commercial lease in the UK with a view to encouraging a prospective tenant to sign a new lease, or to encourage an existing tenant to remain in occupancy of premises. In existing leases, rent free periods are often linked to the non-exercise of a break clause. i.e by not exercising a break clause a tenant is rewarded with a rent free period.
Rent free periods are particularly common in times of economic difficulty when incentives become necessary to encourage tenants to sign leases.
It is interesting to consider why, instead of offering rent free periods, a landlord does not reduce the level of rent so that over the period of the lease the income to the landlord is broadly the same. The answer lies in the fact that the 'headline rent' being paid is used as a valuation metric to value the property producing the rent. This is, in turn, based upon the rental yield and for this purpose the presence of a rent free period is ignored.
To take an example:
If the headline rent is £40 per square foot and the estimated yield for the property in question is 5% then the capital value is £800 per square foot.
The fact that a rent free period may reduce the 'effective rent' earned over the period of the lease to, say £37 per square foot does not affect the capital valuation of the property although, at first sight, it would suggest a reduction in capital value to £740 per square foot. i.e a reduction of 7.5%.
This fact is of vital importance to institutional investors and funders whose interests could be adversely affected by a consequent reduction in capital values if the lower effective rent was to be used.
So whilst the offer of a rent free period is attractive to a tenant and costly to a landlord it does not impact on the capital valuation of the leased property.
The relationship is cyclical
[edit] Related articles on Designing Buildings
Featured articles and news
Noise in the built environment
BSRIA guide TG 20/2021.
17,000 people suffer conditions as a result of exposure to excessive noise at work.
Turning down the noise: Auditory health
A pervasive risk with far-reaching consequences.
UK Construction Week, London is here !
Debuting major international pavilions and much more.
Getting the most out of heat pumps and heating
How heat pumps work and how they work best.
Plumbing and heating for successful retrofit and renovation
Low temperature underfloor systems and heat pumps.
Cost-of-living crisis and home improvement plans
Starting on the right footing and top tips for projects.
Delays on construction projects
Types, mitigation and the acceleration of works.
From Chaucer to Fawlty Towers.
Electrotechnical excellence, now open for entries.
Net zero electricity grids BSRIA guide NZG 5/2024
Outlining the changes needed to transition to net zero.
CIOB Global Student Challenge 2024
Universitas Indonesia wins for second year running.
New project and cultural district described in detail.
ECA 2024 Apprentice of the Year Award
Entries open for submission until May 31.
UK gov apprenticeship funding from April 2024
Brief summary the policy paper updated in March.