What Is a Rent-Free Period?
Fit-out period: 3-6 months at lease start; allows tenant to install fit-out before trading. Headline incentive: additional rent-free as market inducement, 3-24 months in a tenant's market. During rent-free: service charges, insurance rent, and business rates typically still payable, only rent (and sometimes insurance rent) is waived. SDLT: rent-free period excluded from NPV calculation, reduces NPV and SDLT liability. Must be clearly documented in the lease or a separate rent concession agreement.
HMRC Spreading Treatment
ITTOIA 2005 / CTA 2009: landlord must spread total rental income evenly over full lease term, the rent-free period does not create a nil-income period for tax purposes. Effective annual rent = total rent payable over term, number of years in lease. Example: 5-year lease at £100,000/year with 6-month rent-free ? total rent £450,000 over 4.5 paying years; HMRC deems annual rent £90,000 (£450,000, 5 years). Capital contributions (landlord pays cash contribution instead of rent-free) receive same spreading treatment. GAAP/IFRS 16: lease incentives spread over lease term from tenant's perspective.
Rent Review Interaction
Headline rent vs effective rent: headline = face rent before rent-free; effective = economic return after deducting rent-free benefit. Rent review clause typically assumes hypothetical letting on open market, whether that hypothetical letting includes or excludes a market rent-free depends on the assumptions and disregards. If rent review disregards the rent-free, reviewed rent = full open market headline rent. RICS guidance: express rent review evidence in both headline and effective rent terms; adjust comparables to compare like with like.
Service Charges and Outgoings
Service charges: typically payable during rent-free period, check lease carefully; some leases waive service charges during fit-out period. Insurance rent: payable throughout. Business rates: payable by occupier from date of occupation, empty property relief may apply during fit-out (100% relief for 3 months for most commercial property; 100% for industrial/listed; 50% thereafter). VAT: if opted to tax, VAT applies to rent; during rent-free period no rent is payable so no VAT arises on rent.
Scotland and Best Practice
Scotland: rent-free periods common in Scottish commercial leases; same HMRC spreading treatment; LBTT NPV calculation excludes rent-free period. Negotiate in heads of terms: agree full incentive package (duration, which outgoings are waived, any capital contribution) before instructing solicitors. Total effective rent: model total effective rent (rent + outgoings - rent-free benefit) over full lease term, not just headline rent. Complex arrangements: split periods; staged rent-free; conditional on performance targets, document with specialist commercial property legal advice.