The premium is not the rent left on the lease. It is the difference between two futures for the same building, and the landlord's void arrives in both of them.
The landlord's break-even surrender premium is the present value of keeping the tenant to expiry and then re-letting, less the present value of accepting the surrender and re-letting now, over the same horizon. On an illustrative 1,500 m² office let at 400 per m² with four years left and an ERV of 360, the tenant has 2,400,000 of rent still to pay, but the landlord breaks even at a premium of 467,068, about 9.3 months of passing rent.
Worked in full in The Real Estate Asset Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Tenants who want to leave early usually open with an offer of a few months' rent; landlords often answer with the full rent to expiry. Both are guesses. The asset manager's job is to price the gap between the two futures for the building, and then decide how much of the surplus above break-even to negotiate for.
| Input | Value |
|---|---|
| Area, m² | 1,500 |
| Passing rent | 400 |
| ERV (market rent today, held flat) | 360 |
| Months left on the lease | 48 |
| Expected void before re-letting, months | 9 |
| Rent-free on a new ten-year lease, months | 12 |
| Empty costs while void (rates, service charge, insurance), per m² | 110 |
| Letting and legal fees, share of first year's rent | 15% |
| Discount rate | 7% |
Break-even premium = PV(keep: rent to expiry, then void, rent-free, new rent) − PV(surrender: void now, rent-free, new rent)
In Excel, build two rows of 120 monthly cash flows and take =NPV((1+7%)^(1/12)-1,keep_row)-NPV((1+7%)^(1/12)-1,surrender_row).
Step 1, the annual figures. Passing rent is 600,000 a year, 50,000 a month. The ERV is 540,000, 45,000 a month. Empty costs are 165,000 a year, 13,750 a month, and fees on a letting are 81,000.
Step 2, the "keep" future. The tenant pays 50,000 a month for 48 months. Then the space falls vacant: nine months of empty costs, fees, twelve months rent-free, and 45,000 a month to the end of year ten. Present value: 3,294,428.
Step 3, the "surrender" future. The same void, fees, rent-free and new rent, starting today. Present value: 2,827,360.
Step 4, the difference. 3,294,428 − 2,827,360 = 467,068, or 0.78 of a year's passing rent. Below that figure the landlord is worse off accepting; above it, better off.
The 2,400,000 of rent remaining, worth 2,096,734 discounted, is what the landlord would lose if the space stayed empty for four years. It will not. The premium pays for three things only:
The same logic, read the other way round, sets how much rent-free to give to keep a tenant: see how much rent-free to give for a lease regear.
A surrender is a negotiated deal with no price in the lease. It differs from a termination fee written into a break clause, which is usually a contractual formula of unamortised fit-out and commission plus a few months of rent: that calculation is in how to calculate a lease termination fee. The two-futures comparison here is the number to hold in mind when no clause sets the figure.
| ERV per m² | Premium | Months |
|---|---|---|
| 320 | 651,311 | 13.0 |
| 360 | 467,068 | 9.3 |
| 400 (passing rent equals ERV) | 282,824 | 5.7 |
| 440 (under-rented) | 98,580 | 2.0 |
| Void, months | Premium | Months | Lease left | Premium | Rent left |
|---|---|---|---|---|---|
| 3 | 391,154 | 7.8 | 12 months | 128,871 | 600,000 |
| 9 | 467,068 | 9.3 | 24 months | 249,310 | 1,200,000 |
| 12 | 504,072 | 10.1 | 48 months | 467,068 | 2,400,000 |
| 18 | 576,229 | 11.5 | 72 months | 657,265 | 3,600,000 |
The ERV dominates. On an under-rented lease the landlord gains by getting the space back, and the break-even premium falls towards zero; past that point the landlord should be willing to pay the tenant to leave. The void matters less than intuition suggests, because it is incurred in both futures: an extra nine months of void adds 109,162 to the premium, not nine months of rent.
The ten-year horizon treats the building as let at ERV in both futures at the end. The surrendered space would then carry a shorter unexpired term, which a valuer would mark down slightly, so the figures modestly understate the premium. Tax, VAT and the cost of the surrender deed are ignored. All figures are illustrative.
In negotiation the break-even is the floor, not the ask. The tenant's alternative is to keep paying 600,000 a year for four years, so its own break-even is far higher, and the settlement usually lands between the two, adjusted for the tenant's covenant strength and the landlord's view of the letting market.
Quoting the rent to expiry as the price. It assumes the space stays empty for the whole remaining term, it overstates the landlord's loss fivefold here, and it usually ends the negotiation with the tenant staying, paying rent it resents, and leaving at expiry without a dilapidations settlement anyone has prepared for. The opposite mistake is ignoring the over-rent: an asset manager who prices only the void brought forward gives away 209,673.
The accept-or-hold-out arithmetic, with every line of the holding cost, is one of the free workbooks for this book.
No. If the landlord accepts the surrender it can re-let the space, so it loses the difference between the two futures, not the whole rent. On the illustrative office, 2,400,000 of rent remains, worth 2,096,734 discounted at 7 per cent, but the landlord breaks even at 467,068 because the void, rent-free and fees it incurs now it would otherwise incur in four years.
Yes. When the passing rent of 400 is above the ERV of 360, the landlord gives up 60,000 a year of over-rent until expiry, worth 209,673 over four years. That is close to half the break-even premium of 467,068. If the ERV were 440 instead, above the passing rent, the break-even premium would fall to 98,580.
A longer expected void raises the premium, because the landlord brings that void forward by the remaining term and loses the time value. With a 3-month void the break-even premium is 391,154; with 18 months it is 576,229. The void is the input most worth testing with the letting agent before quoting a figure to the tenant.
This article is one calculation from The Real Estate Asset Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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