Why Free Rent Isn’t Free

Last week I briefly referenced the concept of free rent so today let’s talk about why it isn’t free. 

Free Rent is one clause that could impact the term of the lease. While we’re on the subject of lease clauses related to term, let’s also discuss below two other clauses you might see in a lease or want to ask for in your lease proposal or Letter of Intent (LOI), namely the renewal option clause and the termination clause.

Free Rent

Free Rent is typically provided to viable tenants to help offset the cost of the move and or construction to tailor the space to tenants’ needs.  Help offset any overlap in their expiring lease at another location.  Give tenant’s free time while they wait for permits or approvals.  In most cases free rent isn’t free because u are trading something for it like the examples above where it is an offset, or an incentive from the landlord in exchange for you signing a longer term lease, taking a smaller Tenant Improvement (also referred to as TI) allowance, or taking the space as is, rather than requiring the landlord to renovate the space.

Free rent offered, can vary greatly from one landlord, building, and property type to the next.  In fact, this lease feature isn’t always offered by the landlord or broker you speak with, but should always be requested by the tenant, with the understanding that free rent could vary from zero months to as many as six months or more on a long term lease with a credit tenant who is doing their own work and getting their own approvals.  It is important to note that just because you ask for something, doesn’t mean the landlord will give it to you; this along with the other lease terms will be examined as a whole and judged against the landlord’s estimation of the tenant’s viability and probability of living out the entire lease.

Renewal Options

Let’s talk about renewal options and why they are one of the biggest benefits that a tenant can get in a lease.  A renewal option is typically worded as a tenant’s option to extend the lease for a pre-negotiated length of time and rental rate.  The option is required to be exercised before the termination of the initial or current lease term.  This is such a great tenant boon, because it binds the landlord to these terms, but the tenant can choose to exercise the option or not.  Another reason they are beneficial to tenants is that it allows them to predict what their cost will be beyond the term of the lease, but if the space isn’t working for them for whatever reason, or they found a better deal someplace else, they can just give the keys back at the end of the lease.

One last point is that a renewal option is not the same as a renewal.  A renewal is a situation in which the tenant does not, or has not exercised their option and looks to renew the lease to stay in the location.  In some ways you can think of this as a completely new lease, as the tenant might have to negotiate the lease rate and terms again or look at this as a chance for the landlord and tenant to reset rent cost to a new amount that matches the market price for better or worse for either party.  Even if the rent changes, renewing a lease can be mutually beneficial as the tenant can save on moving and TI costs, and the landlord can save on concessions, legal fees, and other expenses.

Termination Clause

Like any contract, your lease will detail how and when the agreement can be terminated.  The Termination Clause describes the variety of scenarios where a tenant would leave the space; covering both when a lease comes to its natural end, and when either the tenant or landlord want to end the lease early.  This part of the lease also describes the condition in which the space should be given back to the landlord (normally free of any tenant possessions and broom clean).  

So what happens if a tenant needs to end the lease early?  The best thing to do is have an open and honest discussion with the landlord to see if you can work together to come up with a viable solution that lets you off the hook for the remaining lease obligations early. It is rare for the lease to state a clear penalty, but this might be covered under an Early Termination Clause or a Good Guy Guarantee—we’ll talk about this and other types of guarantees in a later article.  Sometimes the landlord will require a buyout for you to leave early to cover costs such as legal, brokerage, TI, and free rent.  Other times the landlord will be happy to just get the space back in good condition so that they can rent it to someone else.

I’m sure you’re now wondering how a landlord could end a lease early.  This can happen if the building is destroyed by fire, water, or other damage, but it can also happen if a tenant violates terms in their lease including safety violations, criminal activity, destruction of property, and of course failure to pay rent; the repercussions of each are normally clearly outlined in the lease, and would likely dictate how each infraction will be handled, the notice required by the landlord, and the cure for the issue.

Keep in mind that many of the topics discussed today are also guided by landlord-tenant laws.

Let us know what you think

Let me know what you think about this article in the comments below and don’t forget to subscribe to our newsletter. Click here to view the previous posts in this series.

Next week we’ll talk about how rent costs are presented and the difference between gross rent and net rent in 3 Things You Don’t Know About Rent.

**my awesome colleagues at CAMCO CRE contributed to this article**