Rent free periods - considerations for landlords

Here we consider when rent free periods are used and their wider implications for the lease.

Purpose of rent frees

Most commercial landlords will be familiar with rent free periods. Most common, and now market standard, are rent free periods as an inducement to tenants, for instance if prospective tenants are worried about start-up costs or if fit-out works are to be carried out by the tenants.

As well as being offered as an inducement to enter into the lease, we are increasingly seeing rent free periods during the term of a lease. The most common is on tenants' break options - if the tenants do not exercise their break, they get the benefit of a rent free. That's offered to incentivise tenants to remain.

Certainly more relevant in recent years in retail, rent free periods have been used to enable leases to continue during periods of temporary interruptions to the use of the premises. Such interruption can lead to cash flow concerns for tenants (e.g. during government enforced lockdowns during covid).

In such cases it is important to identify the rent free triggers to ensure that it operates only when needed; and is not a money-saving tool for tenants when use of the premises and therefore trade, in practice, is not interrupted (and keep an eye out for our upcoming blog on whether covid clauses generally are still relevant).

It is also important to be clear - particularly the case in the context of pandemic provisions - if the arrangement is:

a pure rent free (i.e. no rent is payable or demanded); or
a rent abatement and deferral (with the rent then being repaid over a set period once the premises are reopened); or
a reduced rent (with, perhaps, the balancing rent then being repaid over a set period); or
some or all of the above.

The key consideration is whether the rent free is linked to either (a) the tenants being unable to use the premises for the permitted use under the lease (which is the more usual position, as the principle behind a lease is that the landlords grant the tenants the right to use the premises for a specific use), or (b) interruption to the tenants' business or loss of trade from the premises (less common given that underlying principle: landlords are not guaranteeing that a tenants' business will be successful at the premises).

Considerations for landlords

While the principle is not new, from a landlord perspective it is important to consider the implications of rent free periods. The rise in pandemic clauses has arguably prompted tenants to be more cautious about other situations which could result in their being unable to use their premises for the use permitted resulting in a loss of trade and income.

We are starting to see tenants looking for a rent abatement if landlords require entry to the premises for a prolonged period rendering parts or all of the premises unusable e.g. if complex repair works to the common parts building require access into the premises and take the landlords several months to complete. While this may appear a reasonable principle, if they're minded to agree landlords should ensure they are clear as to when it applies, and for how long. There is also the proportionality consideration: is it whole or part of the premises that are affected, and should the rent free reflect that?

We've seen occasions where tenants look to go beyond the 'usual' rent abatement mentioned above. For example, the ability to withhold rent where 'emergencies' restrict access to the premises. This could be triggered by all manner things e.g. street closures, protests, nearby security / safety incidents. Such wide ranging clauses need to be carefully considered, given the landlords are just letting the premises for the permitted use. That is not usually contingent on factors out with the landlords' control.

Consideration should be given where rent free periods or rent concessions should be balanced against the tenant paying the landlord additional rent. For example a tenant pays additional rent spread over a specific period in exchange for the landlord providing an additional service (e.g. furniture or carrying out tenant fit out). Landlords are likely to expect such expenditure to be rentalised and that needs to be considered in any rent free.

Impact on the other lease provisions

As no clause in a lease stands on its own, one should assess the impact of a rent free period on other lease clauses. The key clauses are rent review and assignation, but the impact on all of the lease provision should be considered.

The impact of a rent free at an open market rent review should be analysed. If it could result in a negative impact on the rental value, should it be disregarded at rent review?

Landlords need to consider if a rent free is personal to the current tenants. If so, one needs to ensure that is set out clearly in the lease so the assignee tenant does not benefit from it. Alternatively, the landlords may prohibit assignation with a set period at the start of the lease so that the tenants cannot assign the lease before the rent free period starts to be rentalised. That latter option has, in turn, implications for rent review so again must be carefully considered.