An Alternative to a Rack Rent Lease

A shop or office is available on a new development. Do you take a short Lease at a Rack Rent or do you purchase a long Lease at a low Rent?

A Rack Rent represents the full open market annual rental value of the premises and is often simply called a Market Rent.

For those wishing to purchase a long leasehold interest of commercial premises at a low Rent and particularly on a new mixed commercial and residential development the problem has been to obtain Mortgage finance to complete the purchase.

Recently, however, various developers have offered as an alternative to the purchase of a long leasehold interest an arrangement whereby a Lease typically for a term of ten years is granted at a Rack Rent coupled with an Option exercisable typically within two years to purchase a long leasehold interest at an agreed price or a price calculated in accordance with an agreed formula at a low Rent.

The advantage of the Option is that this gives the Lessee the opportunity to establish a trading record and to determine whether the site is viable. Further it will provide useful information to a proposed Lender enabling it to make a decision as to whether to provide finance to purchase the long Lease.

Indeed having spoken to two Banks in particular such an arrangement was received with a positive response.

For further information please contact Michael Elliott on 0121 236 7388 or email michael.elliott@peason-rowe.co.uk.

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