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Rent free periods

Landlord and Tenant Act 1954

The general rule is that on a new lease a tenant can expect an initial

rent free period (often three months). Theoretically, that compensates the tenant for the time and expense incurred in fitting out the premises, although it is rare indeed for there to be any such calculation or correlation between fitting out costs and the negotiated rent free period. But what is the impact of that rent free period on future rent levels?

Suppose there is a five-year lease, with a three-month rent-free period – that is a 5% discount over the term. So, if local rent comparables are being used should the headline rent from those comparables be used, or should those comparables be reduced by the (e.g.) 5%? As far as rent review clauses are concerned, most leases contain an express assumption that any rent free period has expired (and thus the review will be on the assumption that any rent free period is ignored).

But, how is the rent free period treated when deciding the “market rent” on a lease renewal under Section 34 of the Landlord and Tenant Act 1954? The answer is that there is no clear authority on the point, there seems to have been three unreported county court decisions (one saying rent free period should be ignored when looking at comparables, and the other two saying that they should be taken into account). But there is clear uncertainty on the point. So while no clear guidance can be given, landlords and tenants should be at least aware of this potential issue.

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