The Face Rent Is a Fiction

Two tenants. Same building. Same €20/sqm agreed with the same landlord on the same day.

Three years in, one is paying the equivalent of €24.70/sqm. The other is paying €21.40/sqm.

Neither lease was unusual. Neither landlord did anything wrong. The difference came from five cost components that sit alongside, behind, or entirely outside the face rent — and how well each tenant understood them before signing.

This post breaks down each one. At the end, I'll show you how to put them together into a single number that tells you what a space will actually cost your business.

1. Indexation — and whether it has a ceiling

Most commercial leases in Europe index rent annually to HICP — the EU's Harmonised Index of Consumer Prices, published monthly by Eurostat. The mechanism is straightforward: on the anniversary of your rent commencement date, your rent increases by the published HICP figure for the prior year.

What makes it significant is that it compounds. Indexation is applied each year to the rent paid in the previous year — not to the original figure.

Here's what that looked like in practice for a tenant on €20/sqm with no cap:

2021 — 2.9% — €20.00/sqm

2022 — 9.2% — €21.84/sqm

2023 — 6.4% — €23.24/sqm

2024 — 2.6% — €23.84/sqm

Source: Eurostat EU-27 All Items HICP.

After three years, that tenant is paying €3.84/sqm more than on day one — permanently, as the new compounding base for every year that follows.

The other tenant negotiated a 3% annual cap before signing. After the same three years, their rent is €21.85/sqm. The difference: €1.99/sqm every month, for the rest of the term.

What to negotiate: A collar — a floor of 0% (rent does not increase if HICP is zero or negative) and a cap of 3–4% maximum. In high-demand locations, landlords sometimes include a minimum indexation floor, for example "HICP applies, subject to a minimum of 3%." This means even if HICP is 0.5%, your rent still rises by 3%. Read the indexation clause carefully — this term is not always obvious.

2. The rent-free period — traded well or traded poorly

Both tenants received 3 months rent-free at the start of a 60-month lease. This is a standard concession in commercial leasing and genuinely reduces total rent paid over the term.

The maths: 3 months free on a 60-month lease is a 5% reduction in total rent. On €20/sqm, that is €1/sqm/month averaged across the full term.

The important point is that landlords price their face rent knowing this concession is coming. It is not a gift — it is a structured incentive, offered in exchange for a face rent that has already been set to work for them.

One tenant accepted the rent-free period as given and moved on. The other used it as a negotiating chip — trading part of it for the indexation cap. Same concession. Completely different outcome over five years.

What to negotiate: If you have leverage — a long lease, a strong credit profile, a building that has been vacant — consider trading rent-free months for structural protections: an indexation cap, a service charge cap, or a larger landlord fit-out contribution. A smaller rent-free period with a 3% indexation cap is almost always worth more than a larger rent-free period without one.

3. Fit-out — the gap between what the landlord covers and what you actually spend

The fit-out — the works required to make the space operational for your business — is typically negotiated in the heads of terms and referenced in the lease. In many deals, the landlord offers a contribution toward fit-out costs.

The contribution is not the cost. The gap between the two is real money that sits outside the rent calculation.

In this scenario: the landlord offered a €25,000 contribution. The actual works cost €60,000. The remaining €35,000 does not appear in the face rent, it does not appear in the service charge, and it does not appear in the indexation clause. But it is part of what that space costs.

Spread over a 60-month lease, €35,000 out-of-pocket fit-out cost adds €583/month to the occupancy cost — before rent, before indexation, before service charges.

What to negotiate: The landlord contribution, the scope of what it covers, and whether it is paid directly to contractors or reimbursed to you.

4. The bank guarantee — capital tied up from day one

Before receiving the keys, a commercial tenant typically must provide a security deposit equivalent to 3–6 months of rent plus service charges plus VAT. This can take two forms:

Cash deposit: Paid directly to the landlord. No interest accrues. The capital is tied up for the full lease term and returned — subject to deductions — within 30–90 days of expiry.

Letter of Bank Guarantee: Issued by your bank to the landlord. You block the equivalent amount as collateral and pay the bank an annual issuance and renewal fee. More flexible for working capital, but carries an ongoing cost.

On a 400sqm space at €20/sqm, a 3-month guarantee is €24,000. On a larger space, or where the landlord requires 6 months, this number doubles. It is due at signing — not at handover — and it is one of the most consistently underestimated upfront costs in a commercial lease.

What to negotiate: The number of months required (3 is standard; 6 is high — push back), the form depending on your cash position, and a step-down mechanism where the deposit reduces after a period of consistent payment.

5. Service charges — estimated upfront, reconciled later

Service charges cover the cost of maintaining and managing the building and common areas. They are not included in the face rent. They are estimated at the start of each year and reconciled against actual costs at year end.

Typical inclusions: property management fee, security, common area cleaning, landscaping, building insurance, preventive maintenance of shared systems such as HVAC, fire systems and lifts.

The reconciliation works as follows: the landlord estimates costs at the start of the year and invoices monthly. At year end, actual costs are calculated. If actual costs exceeded the estimate, you pay the difference.

In a well-managed building, service charges typically run €2–4/sqm/year. In a building with deferred maintenance or an inflated management fee, they can be significantly more.

What to negotiate: A service charge cap (maximum 5% annual increase), the right to audit with full supporting documentation on request, and a clear itemised list of what is and is not included.

Putting it together: net effective rent

Net effective rent is the number that accounts for all of this.

The formula: Total rent paid over term minus value of concessions, divided by number of months.

It gives you the true average monthly cost of occupying a space — not the face rent, not the rent after rent-free, but the blended cost across everything you have committed to.

Landlords calculate this on every deal. It tells them exactly what they are walking away with after concessions.

The face rent is what you negotiate. Net effective rent is what you pay.

The gap between the two — across indexation, fit-out, the bank guarantee, and service charges — is the difference between a lease that works for your business and one that quietly erodes your margin for five years.

How to model it before you sign

The ClarePoint Lease Toolkit is an Excel-based occupancy cost model built specifically for this. It calculates your 10-year total occupancy cost across three HICP scenarios, includes a penalty simulator for early exit, and tracks every critical lease deadline automatically. Available at clarepointlease.com/shop.

If your lease is more complex — a long term, a built-to-suit deal, significant financial exposure, or a renewal where the stakes are high — a personalised review will go further. See clarepointlease.com/services.

Nicole-Olga Pulpea is a Chartered Commercial Property Surveyor (MRICS) with 10+ years in commercial real estate. ClarePoint Lease Advisory helps commercial tenants understand and negotiate their leases — before they sign. clarepointlease.com