A rent-free period is generally offered by a commercial landlord to a tenant to provide a limited period during which rent will either be reduced or not be payable under their lease. Bishop & Sewell’s commercial property department have facilitated numerous rent-free agreements before and during the coronavirus pandemic; this article briefly explores their implementation, and practical benefits.
The amount of rent payable by tenants can vary greatly on a case-by-case basis depending on the size or nature of their business, location of the property, and lease terms. The potential benefit of a rent-free period will always be attractive to any potential tenant.
However, if tenants are examined as a group – and consideration is given to the £6 billion unpaid rent which accrued during the coronavirus pandemic – the usefulness of rent-free periods becomes clear.
The most obvious benefit is their potential usefulness to landlords as a tool if they wish to enable leases (and relationships) to carry on, i.e., to cushion tenants’ temporarily hindered cash flow, instead of forfeiting their lease or taking other enforcement action.
For example, some landlords might prefer a documented agreement to give tenants a period to “get back on their feet”, even after the UK Governments’ Moratorium against court action ends, on 25 March 2022.
One way of documenting this might be by granting an entirely new lease which provides a rent-free period of any duration but quite typically between 6 to 12 months at the start of the term, reverting thereafter to the standard agreed rent.
Alternatively, a landlord might offer a ‘Side Letter’ or ‘Deed of Variation’ to amend the terms of an existing lease- i.e., to temporarily reduce an existing rent or alter the payment terms.
A rent-free period could be useful:
- If a landlord is marketing a new lease of commercial premises and wants to offer a rent-free period as an inducement to potential tenants, especially if tenants are worried about start-up costs, or footfall in the current economic climate.
- If a lease is coming to an end and the landlord wishes to encourage an existing tenant to remain.
- To help tenants’ cash flow during an existing lease, with a view to facilitating future landlords’ rental yields. Here, negotiation might involve a landlord agreeing a reduced rent with their tenant during an existing term in return for other amendments to the lease, such as if there is a break clause, the tenant agreeing to push back their ‘break date’ or give up their right to break – and effectivity increasing the overall length of the term (by a tenant foregoing their ability to end a lease early).
- If substantial “fit-out” work is needed to put a commercial premises into a suitable condition to allow a tenant to trade. Here, a rent-free period will enable a tenant to use the money which might otherwise be spent on rent to carry out the works and improve the condition of the premises. For example, if work is necessary to satisfy health and safety regulations for a restaurant, or if a tenant is changing the use of premises and must fundamentally alter the layout.
Bishop & Sewell have a team of expert commercial property solicitors, providing advice to many commercial landlords or tenants in different sectors. Please get in touch if you are considering offering (or agreeing) a rent-free period, or any the following questions:
- Will there be potential VAT implications if a rent-free period is offered to a tenant in return for the tenant carrying out works?
- What is the best way to document a rent-free agreement in my specific circumstances?
- What type of deals are we seeing in the marketplace relating to rent-free periods to assist in negotiations?
- Will a rent-free period have any implications for renewal lease terms determined by a court under the LTA 1954?
- Can I pursue or commence court action for unpaid rent against my tenant?
If you would like to discuss any of the points raised in this article, please do get in contact.
Christopher Simpson is a Solicitor in Bishop & Sewell’s Commercial Property team. Should you require any further advice or assistance, please contact email@example.com or call on +44 (0)20 7631 4141
The above is accurate as at 10 August 2021. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.