Rent-free period in a commercial lease: mechanism, tax treatment and points to watch

The rent-free period (franchise de loyer) is now one of the most common negotiating levers when a commercial lease (bail commercial) is signed, particularly in areas where the supply of premises exceeds demand. A tenant moving into empty premises, having to finance fitting-out works or facing a gradual build-up of his business frequently obtains several months free of rent. For the landlord, this concession is not neutral: it affects the return on the investment, the accounting treatment of the rent and, more insidiously, the rental value used on renewal. This analysis explains how the rent-free period works in a commercial lease, its accounting and tax treatment, and the points landlord and tenant must master before signing.

What is a rent-free period in a commercial lease

The rent-free period is a period during which the tenant is exempt from paying rent while occupying the premises or carrying out works in them. It is a commercial incentive granted by the landlord to facilitate the conclusion of the lease or the tenant's installation.

The commercial lease regime, governed by Articles L.145-1 et seq. of the French Commercial Code, does not regulate the rent-free period. It falls within the parties' freedom of contract, on the basis of Article 1102 of the French Civil Code. Nothing therefore obliges a landlord to grant it, and nothing sets its duration: it results solely from the balance of power and the state of the local rental market. On the other financial consideration commonly negotiated when the lease is concluded, see our article on the key money (pas-de-porte) and its legal rules.

Distinguishing a rent-free period, a rent reduction and a rent deferral

Three related notions are often confused, although their legal and tax consequences differ.

• The rent-free period is a total exemption over a set period. Rent is not due for the months concerned, but the contractual reference rent remains unchanged for the rest of the lease.
• The rent reduction (or stepped rent) lowers the amount due over a given period without removing it. The rent then rises in steps until it reaches the full rent.
• The rent deferral postpones the date on which rent falls due without cancelling it: sums unpaid during the deferral period remain due and are paid later, often spread over the remaining term of the lease.

This distinction is not theoretical. A rent-free period definitively cancels the rent for the period concerned, whereas a deferral creates a debt owed to the landlord. The drafting of the clause must remove any ambiguity as to the exact nature of the benefit granted.

Pure rent-free period and rent-free period in return for works

The rent-free period in a commercial lease in fact covers two economically very different situations.

The so-called "pure" rent-free period is a straightforward commercial incentive: the landlord waives rent for a few months to attract or retain a tenant, with no consideration other than the signing of the lease. It typically corresponds to the period of installation, fitting-out works or start-up of the business.

The rent-free period granted in return for works follows a logic of exchange. The tenant carries out, at his own expense, works that durably enhance the premises (compliance upgrades, structural works, finishing works incorporated into the property), from which the landlord will benefit on expiry of the lease through the operation of accession (accession). In return, the landlord grants a rent-free period proportionate to the cost of those works. This characterisation has significant tax consequences, discussed below, because the tax authorities regard it as an exchange of reciprocal supplies.

The contractual mechanism of the rent-free period

Duration, starting point and interaction with the commencement of the lease

The rent-free period generally begins when the lease takes effect or when the keys are handed over. Its duration is expressed in months of rent, sometimes spread over several instalments to smooth the landlord's effort. It is essential to identify clearly what the exemption covers: the rent alone excluding service charges, or also the service charges, the recharged property tax (taxe foncière) and the advance payments. Where the lease relates to a building yet to be constructed, the interaction between commencement and completion is dealt with in our article on the off-plan lease (bail en l'état futur d'achèvement).

Since the Pinel Law No. 2014-626 of 18 June 2014, Article L.145-40-2 of the French Commercial Code requires a precise and exhaustive inventory of the categories of service charges, taxes and levies recharged to the tenant, annexed to the lease. The rent-free period cannot exempt the parties from this inventory: it should be expressly stated whether, during the rent-free period, the tenant remains liable for service charges and property tax. Otherwise, litigation is foreseeable.

The repayment clause in the event of early departure

Unless otherwise agreed, as is permitted for long-term leases, the tenant has the right to give notice at the end of each three-year period pursuant to Article L.145-4 of the French Commercial Code. A tenant who benefits from a substantial rent-free period and then leaves at the first three-year break would cause the landlord a pure loss.

Landlords therefore frequently insert a pro rata temporis repayment clause: in the event of early termination at the tenant's initiative, the tenant repays all or part of the rent-free period, calculated in proportion to the unexpired term of the lease. The validity of such a clause requires careful drafting. If it is characterised as a penalty clause (clause pénale), the court may reduce the amount under Article 1231-5 of the French Civil Code where it is manifestly excessive. It is better to draft it as a mere condition of the benefit granted, backed by a firm term commitment, rather than as a sanction. The conditions of validity of this type of provision and the limits of the court's power to reduce it are detailed in our article on the penalty clause in a commercial lease.

Rent-free period and contractual reference rent

The most delicate point concerns the relationship between the rent-free period and the rent stated in the lease. The rent-free period does not reduce the contractual rent: it suspends its payment for a period. The base rent remains the reference for annual indexation, review and renewal. Confusion on this point may lead a tenant to believe, wrongly, that the "real" rent is the rent reduced by the rent-free period spread over the whole term of the lease.

Accounting treatment of the rent-free period

The principle of spreading over the firm term of the lease

For accounting purposes, the rent-free period is not allocated solely to the financial years in which it is used. Accounting doctrine, derived from the work of the French Accounting Standards Authority (Autorité des normes comptables) and reflected in the French General Chart of Accounts (ANC Regulation No. 2014-03), adopts a spreading approach.

The economic benefit represented by the rent-free period must be spread on a straight-line basis over the firm commitment term of the lease, that is to say the first three-year period or any longer firm term agreed. The rent recognised each year then corresponds to the average of the rents actually due over that firm term, after deduction of the rent-free period.

In practice, a tenant who obtains six months rent-free on a three-year firm commitment does not recognise a nil rent expense for the first six months and a full expense thereafter: he recognises a rent expense smoothed over the thirty-six months, the difference being recorded in an accruals account. Symmetrically, the landlord spreads his rental income over the same period. This treatment avoids distorting the results of the first financial years and reflects the economic reality of the consideration.

Rent-free period in return for works: a fixed asset for the landlord

Where the rent-free period remunerates works that will revert to the landlord, the treatment becomes more complex. Works carried out by the tenant and intended to remain in the premises on expiry of the lease constitute, for the landlord, a benefit which may need to be capitalised and depreciated. The rent-free period then becomes the consideration for a deferred acquisition of value, and not a mere commercial expense. Coordination between the chartered accountant and the legal adviser is required from the negotiation stage, because the accounting characterisation determines the tax treatment.

Taxation of the rent-free period

Treatment for income and corporate tax purposes

For a landlord taxed under property income (revenus fonciers), that is an individual landlord holding the building directly, the taxable rent is the rent actually received. During a pure rent-free period, as no rent is received, no property income is taxed for the rent-free period. The costs of ownership (loan interest, property tax, deductible works) nevertheless remain deductible under the ordinary rules, which may generate a property loss (déficit foncier) that can be offset under the applicable rules.

For a landlord subject to corporation tax or taxed under industrial and commercial profits (bénéfices industriels et commerciaux), the accounting spreading approach prevails: rental income is allocated to financial years according to the accruals principle, smoothed over the firm term where accounting doctrine so requires. The rent-free period therefore reduces taxable income on a spread basis, not a concentrated one.

For the tenant, the rent expense is deductible from taxable profit as it is allocated in the accounts, that is to say according to the same spreading. The tenant cannot deduct rent that he does not bear economically during a pure rent-free period.

The central question of VAT

The letting of bare premises for professional use is in principle exempt from VAT, but most commercial leases are subject to an option for VAT provided for by the French General Tax Code, or to VAT as of right for fitted-out premises.

For a pure rent-free period, the absence of rent means there is no taxable amount for VAT over the period: no VAT is due on rent that does not exist.

The position is radically different for a rent-free period granted in return for works. The tax authorities and the case law, following the Court of Justice of the European Union, analyse this transaction as an exchange of reciprocal supplies for consideration. The landlord provides the use of the premises and waives the rent; the tenant carries out works that enhance the property. Each of these supplies may then be subject to VAT, on a taxable amount corresponding to the value of the works and not to a financial flow. This recharacterisation frequently surprises parties who thought they had agreed a mere commercial gesture. It requires the nature of the rent-free period to be precisely documented and, if an exchange is established, VAT and its deductibility to be anticipated.

Registration duties and land registration

A commercial lease for a term of more than twelve years is subject to land registration (publicité foncière) and to duties. The rent-free period, by reducing the sums received over the period, does not exempt the parties from these obligations, which are calculated on the terms of the lease. The applicable basis should be checked with the notary where the lease is executed as an authentic instrument or registered.

Points to watch for the landlord

Preserving the reference rental value

The main risk for the landlord arises on renewal. The rent under the renewed lease is in principle capped under Article L.145-34 of the French Commercial Code, but it may be set at the rental value in cases of uncapping (déplafonnement), the rental value being defined by Article L.145-33. Incentive measures, including the rent-free period, are a factor in assessing that value.

A substantial rent-free period may be interpreted as a sign that the contractual rent stated is higher than the real economic rent. A well-advised tenant will use it to challenge the rental value and push the rent down. It is therefore in the landlord's interest to distinguish clearly, in the lease documentation, what is a one-off incentive to move in (with no lasting effect) from what would reflect a structural overvaluation of the rent.

Securing the commitment term

A generous rent-free period without a firm term commitment exposes the landlord to the tenant's early departure. Two protections usefully combine: a firm commitment by the tenant for a term longer than the three-year period (permitted to reinforce stability), and a pro rata temporis clause for repayment of the rent-free period in the event of early departure. The drafting must avoid characterisation as a reducible penalty clause and favour the logic of conditional consideration.

Coordinating the rent-free period, the security deposit and guarantees

The rent-free period must not weaken the landlord's security. The security deposit remains payable as soon as the lease takes effect, irrespective of the rent-free first months. Likewise, a surety or an independent guarantee must cover all of the tenant's obligations, including any obligation to repay the rent-free period. Combining a long rent-free period with the absence of effective security would amount to accumulating risks.

Points to watch for the tenant

Checking the exact nature of the benefit

The tenant must ensure that the clause does provide for a rent-free period (definitive exemption) and not a deferral (postponement of a debt). The difference concerns sums which, in one case, will never be due and, in the other, will remain payable. A careful reading of the clause, of the treatment of service charges during the period and of the arrangements for resuming payment is decisive.

Measuring the impact of a repayment clause

A tenant who accepts a clause for repayment of the rent-free period in the event of early departure must include this contingent charge in his financing plan. Leaving at the first three-year break may then cost several months of repaid rent. This constraint reduces the flexibility offered by the three-year termination right under Article L.145-4 and should be negotiated with full knowledge of the facts.

Anticipating the actual accounting and tax treatment

A tenant who reasons in terms of "average" rent (rent smoothed after the rent-free period) must bear in mind that the full contractual rent will apply as soon as the rent-free period ends, with indexation on that basis. The jump in costs at the end of the rent-free period must be anticipated in cash-flow forecasts. Furthermore, if the rent-free period remunerates works, the tenant must check the VAT consequences and the fate of the fittings at the end of the lease, in particular the operation of accession in the landlord's favour.

Drafting the clause: the essential provisions

A robust rent-free clause specifies, leaving no grey area, several cumulative elements:

• the exact nature of the benefit (rent-free period, not deferral or reduction), and its definitive character
• the duration of the rent-free period, expressed in months, and its starting point (commencement of the lease or handover of keys)
• the scope of the exemption: rent alone, or rent and service charges, property tax, advance payments
• the express maintenance of the obligations not covered (security deposit, any service charges, insurance)
• any consideration (works to be borne by the tenant) and its characterisation, with the tax consequences accepted
• the repayment clause in the event of early departure, its method of calculation and its triggering event
• confirmation that the contractual reference rent, for indexation and renewal, remains the full rent

Conclusion

The rent-free period in a commercial lease is not a harmless commercial gesture: it is a clause with a double effect, whose consequences extend over the whole life of the lease, up to renewal. A landlord who grants it without framing the commitment term or documenting its one-off incentive nature weakens his position on rental value and exposes himself to an uncompensated early departure. A tenant who negotiates it without reading the repayment clause or anticipating the jump in costs at the end of the rent-free period discovers constraints he had not budgeted for. The most sensitive dividing line remains the distinction between a pure rent-free period and one granted in return for works, as the latter may fall within the scope of VAT as an exchange of supplies.

Before signing, it is recommended to have the rent-free period precisely characterised by a legal adviser and to validate its treatment with a chartered accountant, particularly where it remunerates works. A clear clause on the nature, duration, scope and fate of the rent-free period in the event of early departure is better than a generous but imprecise negotiation.

Frequently asked questions

Does a rent-free period reduce the rent under the renewed lease?

No, not directly. The contractual reference rent remains the full rent, which serves as the basis for indexation, review and the calculation of the cap under Article L.145-34 of the French Commercial Code. However, a substantial rent-free period may be relied on as an indication that the stated rent exceeds the real rental value defined in Article L.145-33, and weigh on the setting of the rent in the event of uncapping. It is therefore in the landlord's interest to document the purely incentive nature of the rent-free period.

Is the rent-free period subject to VAT?

A pure rent-free period, with no consideration other than the signing of the lease, generates no VAT over the period, as no rent is received. On the other hand, a rent-free period granted in return for works carried out by the tenant and benefiting the landlord may be analysed as an exchange of reciprocal supplies for consideration, potentially subject to VAT on the value of the works, in line with the analysis adopted by the Court of Justice of the European Union. The exact characterisation of the rent-free period is therefore decisive.

How should a tenant account for a rent-free period?

According to the French General Chart of Accounts (ANC Regulation No. 2014-03), the benefit resulting from the rent-free period should in principle be spread on a straight-line basis over the firm commitment term of the lease, generally the first three-year period. The tenant thus recognises a rent expense smoothed over that term, and not a nil expense during the rent-free period followed by a full expense. The difference is recorded in an accruals account. Validation by the chartered accountant is recommended according to the firm term actually agreed.

Must the tenant repay the rent-free period if he leaves at the first three-year break?

Only if the lease contains a pro rata temporis repayment clause. In the absence of such a clause, the rent-free period remains definitively acquired, even in the event of three-year termination under Article L.145-4 of the French Commercial Code. Where the clause exists, its drafting must avoid characterisation as a penalty clause, which the court may reduce under Article 1231-5 of the French Civil Code if it is manifestly excessive.

Must service charges be paid during the rent-free period?

That depends exclusively on the drafting of the lease. By default the rent-free period covers the rent excluding service charges, but the parties may extend it to service charges, recharged property tax and advance payments. The inventory of charges required by Article L.145-40-2 of the French Commercial Code since the 2014 Pinel Law must be annexed to the lease, and the rent-free clause must expressly state whether the tenant remains liable for service charges during the rent-free period.

What is the difference between a rent-free period, a rent reduction and a rent deferral?

A rent-free period is a definitive exemption: the rent for the months concerned is never due. A reduction lowers the rent without removing it, often in progressive steps. A deferral postpones the date on which rent falls due without cancelling it: sums unpaid during the period remain due and are paid later. These three mechanisms have distinct accounting and tax consequences, which makes precise drafting essential.

Is an individual landlord taxed on rent not received during the rent-free period?

No. For a landlord taxed under property income, only rent actually received is taxable under the rules of the French General Tax Code. During a pure rent-free period, as no rent is received, no property income is taxed for that period. The deductible costs of ownership nevertheless remain deductible, which may give rise to a property loss subject to the offsetting rules in force.