1954 Act Consultation – treatment of rent-free periods on lease renewals

In the fifth instalment of our deep dive into the Law Commission’s second consultation on the Landlord and Tenant Act 1954 (“1954 Act”) reform, we consider the Commission’s proposals on the contentious issue of the treatment of rent-free periods on renewals.  This has been an area of uncertainty for some time, not helped by differing (non-binding) county court decisions. The Commission believes clarity is needed. 

In the open market, tenants are generally granted rent-free periods:

1. to allow for a period of fitting-out (a “rent-free fit-out period”);
2. as an inducement to take the tenancy so that, in return for the rent-free, the tenant pays a higher rent (an “inducement rent-free period”).  

Tenants argue that if the assessment of the renewal rent is based on a hypothetical letting in the open market (under the assumptions and disregards set out in Section 34 of the 1954 Act), it should take into account any rent-free period that might be offered to the hypothetical tenant. While there is no controversy around an inducement rent-free period being factored into the renewal rent calculation, landlords have been unhappy about sitting tenants receiving the benefit of rent-free fit-out periods given that their premises are already fitted out, believing this to amount to a windfall on renewal.  However, of the known county court decisions on this issue, more have favoured the tenants’ argument than the landlords.

The consultation asks whether the rent under a renewal tenancy should or should not include the equivalent of a rent-free fit-out period that would be given to the hypothetical new tenant of the premises in the open market and, in either case, how this should be achieved. 

While it would be relatively straightforward to reform the 1954 Act so tenants have the benefit of a rent-free fit-out period, it is less straightforward to assume that the premises are already fitted out such that the rent-free fit-out period should not apply. The consultation suggests six ways in which this might be achieved:

1. An assumption that, at the start of the renewal tenancy, the hypothetical tenant has already enjoyed a rent-free fit-out period, or that the premises have already been fitted out, but this may undermine the current disregard of tenant’s improvements and fixtures.
2. An assumption that the premises can be fitted out instantaneously, but this would require valuers to assume something that is unrealistic.
3. An assumption that the hypothetical tenant had access to the premises prior to the commencement of the renewal tenancy to fit out without paying rent.
4. Specifically, only in relation to any part of the renewal rent that may comprise a rent-free fit-out period, an assumption that this is a renewal, not a new tenancy, albeit a renewal tenancy that is being granted to a hypothetical tenant.
5. Amending the existing disregard of the sitting tenant’s occupation with the caveat that the disregard does not permit a rent-free fit-out period when such would not be granted to a renewing tenant in the open market.
6. Otherwise, as an alternative to a new assumption:
   1. to direct that the renewing tenant is not entitled to an equivalent rent-free fit-out period that would be enjoyed by a hypothetical tenant in the open market; or
   2. to direct that the renewal rent shall be set at the level of rent that would be paid by a hypothetical tenant after the expiry of any rent-free fit-out period that would be agreed in the open market. 

In recent years, this has been a problematic area so both landlords and tenants will welcome the Law Commission addressing it. Certainty on the point should narrow valuation ranges, reduce expert disputes and ultimately speed up settlement. 

In our next article, we will be exploring the Commission’s proposals as to whether and how the court should make decisions about the inclusion of turnover rents (and other alternative rental models) in renewal tenancies. 

Consultees are invited to respond by 16 September 2026.

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