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] Find out more
[edit] Related articles on Designing Buildings Wiki
Featured articles and news
Read the story behind the world's most iconic festival stage, Glastonbury's Pyramid Stage.
First ever BREEAM Communities innovation credit is claimed by Temple Farm Development.
Read the story of Ronan Point, another disastrous event which had profound consequences for the construction industry.
CIOB to help conservation specialists gain recognition for their expertise with launch of new Certification Scheme.
BIM and the future of construction
A brief introduction to Building Information Modelling - is it the future of construction?
Have a look at Francis Kéré's 2017 pavilion, based on the concept of the tree as a place of shelter.
CIOB announce new commission to assess what more it and the industry can do to tackle build quality issues.
As the UK enjoys a heat wave, read all about the daylight factor.
Not only is this building shaped like a teapot, it can rotate 360-degrees.
What is ACM cladding, what is it used for, and is it banned?
Read about the largest transport project in Norway getting underway.
Read our review of a new guide aimed at helping architects avoid and resolve disputes.
Find out about specifying insulation for inverted roofs.
Have a look at the new project being trialled in Modena that 'eats' the equivalent air pollution of 275 urban trees.