October 24, 2018

The term “free rent” is not an oxymoron.  Free rent is often negotiated between a commercial tenant and landlord before signing the lease agreement.  For those who are new to the commercial real estate industry or a business leasing commercial space for the first time, here are a few pointers on free rent:

What is free rent?

Free rent is a bit of a misnomer.  In its simplest form free rent means just that – a period of time after the lease commences when the tenant is not obligated to pay rent.  However, in buildings where the tenant is responsible for paying utilities and additional rent such as common area maintenance (“CAM”), free rent may apply to the “base” rent (sometimes referred to as “fixed” rent) and the tenant will nevertheless be obligated to pay its additional rent, including utilities and CAM, etc.  To complicate matters further, the scope of the free rent period may change over time.  For example, the tenant may be obligated to pay only additional rent for the first month, then additional rent and one-half of the base rent for the following month, and full rent thereafter.

Why would a commercial landlord agree to free rent?

A commercial landlord may agree to a free rent period (sometimes referred to as a rent concession period) on a long term lease as an incentive for the tenant to take the space and to give the incoming tenant a reprieve while the parties complete the work necessary for the tenant to open for business.

What are some of the terms and conditions negotiated as part of free rent?

As noted above, the duration and scope of the free rent period are often negotiated between the parties.   Free rent may also be subject to certain terms and conditions.  For example, free rent may be conditioned on tenant not being in default of its obligations under the lease.

Can the landlord recover the free rent if the lease is terminated prior to the expiration date?

Depending on the language in the lease agreement, the landlord may be entitled to recover the free rent from the tenant and any guarantors if the tenant breaches the lease and fails to cure the breach within a specified time frame.  The attorneys may negotiate the mechanics and triggers for such a contingency in the lease agreement and guaranty.

Conclusion

Free rent often plays an important role in commercial lease negotiations.  It is important that the parties understand how the free rent is structured and the terms and conditions upon which free rent is extended, as well as the circumstances under which the landlord can claw back the free rent, e.g. in the event of a tenant default.

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The Law Offices of Keith R. Betensky, Esq.
The Empire Building
26 Village Green, Suite 4
P.O. Box 22
Bedford, New York 10506-0022
(914) 338-8050
keith@betenskylaw.com

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