How much rent would you be prepared to pay for premises where the first year was rent free? What if the first four years were rent free?

Landlords are offering increasingly long rent-free periods to induce tenants to commit to leases. Even before the economic downturn really began to bite research showed that 12 months rent free was typical in Glasgow and Birmingham; 18 months in places like St Albans and Watford; and in Bracknell it was pay nothing for the first 21 months.

Now, for the right property, it is possible to get 4 of the first 5 years rent free.

So why are landlords being so generous? And why not just ask for lower rents?

The generosity is a reflection of Landlords having simply too much unlet stock for the current market. The refusal to lower rents is where problems arise for existing tenants.

By offering incentives to new tenants the 'market rent' appears much higher than it truly is. If the true market rent is £80,000 per annum, the Landlord can make it look like £100,000 per annum by requiring the new tenant to sign up for the higher figure but allowing them to pay rent for just four out of the first five years of the new lease. The £100,000 per annum becomes the "Headline Rent" for those premises.

Although the Landlord is no better off than if he just accepted £80,000 per annum for the full five years, he can use the artificially inflated Headline Rent as the benchmark for any rent reviews of other properties he has already let. The tenants in those properties will expect their rent to increase to market levels at their next review. The Landlord is hoping that by propping up the Headline Rent he can make the market rent for those existing tenants £100,000 per annum rather than the 'real' market rate of £80,000.

The practice was widespread in the last recession. Landlords tried to achieve payment of headline rent on review as the only way to obtain an increase in rent when the market was flat or actually falling. Various English cases went to the Courts to resolve significant differences between landlords and tenants as to the true market rent for premises. The Courts tried to ascertain the intent of the parties where appropriate but intent cannot overturn the words used and many tenants found they had conceded Headline Rents because that's what their lease said.

Immediately thereafter, tenants' lawyers, now alert to the issue sought to agree wording in new leases that ensured that so-called Headline Rents were appropriately discounted when working out market rent levels at rent review. Memories can be short though, particularly in boom times, when propping up Headline Rents seemed to have become a thing of the past. Some tenants became more relaxed about the issue and prepared to concede wording that they never expected to see enforced.

Not so now, when – with a 4 year rent free – Headline Rents can be five times the true market level. Tenants who negotiated their leases without regard to this possibility could be facing significant – and unanticipated – levels of increases in their rental bill.

For those facing reviews in the next 18 months it would make sense to have the terms of their lease, and the rent review provisions in particular, reviewed to ascertain whether rent is increased to Headline or alternatively market levels, and start to plan accordingly.

Where there is a linkage of reviewed rent to Headline Rents all may not be lost. Valuers accept that actual rents should be discounted from market levels where the terms of the lease in question are unusually onerous. An incoming tenant knowing they will have to pay Headline Rent at the next review would discount their initial bid to reflect this. Properly argued, this could reduce and possibly even cancel out the uplift the landlord expects by reason of the headline provisions. Not all arbiters or experts will be equally receptive to the argument though so there can be no guarantee of success.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.