Something for Nothing: How Rent-Free Periods Can Work for Landlords
8th August 2017
We’ve all heard the expression “you don’t get something for nothing”, but, in the world of commercial property that’s not strictly true.
One way a landlord can lure in a tenant is to offer them rent-free periods – a tactic most commonly used to crystallise a deal.
Traditionally, the rule of thumb used to be one month rent-free for each year the tenant commits to. So, for example, if the tenant signs a 5-year lease, then a landlord can grant five months rent-free in order to get the deal over the line.
The rent-free period is governed by the following factors:
- Term certain (i.e. length of lease before break clauses);
- Tenants covenant strength (i.e. the financial standing of the tenant signing the lease);
- The aggression of the landlord (i.e. how badly the landlord wants the deal?);
- The market and competition for the deal; and
- Condition of the property
The latter is a key factor within the retail sector when tenants’ fit-outs are of a higher value and are heavily linked to their brand. Therefore, it’s more commonplace for retailers to expect high levels of rent-free periods or inducements in order to spend higher amounts of money on a landlord’s retail property.
However, why are we not seeing this in the office market and industrial sectors – both areas where rent-free periods are hardening and now often limited to weeks instead of months?
The answer is to be found in the fact that the market is now more competitive and landlords are not being as aggressive as they once were. When coming out of the last recession, for example, a lot of commercial space was still empty.
So how do we mitigate a rent-free period?
NG always advises clients to present their properties in the best possible light. If rent-free is offered then this should be linked to what a tenant is going to do in return; they may agree to install new lighting or new windows – but this should be contractual and fixed in the contract that it must be done in, for example, the first year of the lease.
Landlords, working with agents, can also think of clever ways to extend the lease. How about you grant five month rent free on a 5-year lease, then negotiate a 5 year and five month lease.
If breaks are in the lease then you can split the rent free. So a 10-year lease with six months rent free but a break at the end of year 5, then grant three months at the commencement of the lease and a further three in the event the tenant doesn’t break.
That way landlord isn’t giving as much from day one and tenant has an incentive not to break.
However, at the end of the day, it should be remembered that a potential occupier often makes his or her mind up on whether to pursue a letting within the first few minutes of viewing a property – why would they sign a lease if a building is scruffy and unloved? And what does it say about the way a landlord feels about his building? Keeping your property portfolio up to spec will leave you with the room you need to negotiate a healthier deal and ultimately mitigate your exposure to the amount of rent free needed in order to get the deal.