Rent-free periods were originally introduced to give time for T to fit out newly acquired premises. These days, the length of a rent-free period is likely to be far longer than the time needed to genuinely fit out.

A long rent-free period has the advantage to T of lowering the SDLT payable, by virtue of a smaller amount of rent (and less VAT) being payable during the first five years of the lease term.

From T’s point of view, it is important that any rent-review provision does not disregard the rent-free period. It is not unreasonable to disregard the rent-free period if it genuinely reflects the time for fitting-out works. Case law shows that a rent-review clause that seeks to achieve a headline rent will be viewed in a dim light by the courts if it makes an artificial assumption and is not a reflection of reality (‘the clause which deems the market rent to be the headline rent obtainable after a rent-free period, granted simply to disguise the fall in rental value of the property, is not in accordance with the basic purpose of a rent review clause... In the absence of unambiguous language, a court could not... construe a rent-review clause as having this effect’, Broadgate [1995]).

There are also VAT implications. A rent-free period that amounts to a simple inducement will not give rise to VAT. But, if the rent-free period is for a consideration for something other than T’s agreement to enter into the lease, then it might amount to an independent supply of consideration by the T and thus may result in VAT being payable. Accordingly, it is important to ensure that a T entering into a lease which includes a rent-free period should not be construed as providing a service to L.

Likewise, with capital contributions (ie reverse premiums). If T does nothing more than undertake to become a T, and to pay the rent due under the lease, that will not amount to a supply by the T to L for VAT purposes and thus will be outside the scope of VAT. However, is not inconceivable that there may be circumstances in which T is making a supply to L for which the L will be deemed to be paying consideration (eg if T is to be the anchor T of a new development and is, therefore, effectively providing advertising). In that case, T will have to account for VAT on the capital contribution received. See [2009] 223 PLJ 11.