Lease incentives are benefits offered by landlords to tenants to encourage them to sign or renew a lease.
As landlords want to reduce their vacancy rates, lease incentives are commonly found in commercial, retail and industrial leases. They will be incorporated in the terms of the lease or an Incentive Deed.
Lease incentives can take various forms, the most common of which include a:
- rent free period;
- period of reduced rent; and
- contribution to the tenants fit out.
Often the first incentive offered by a landlord is not the best incentive the landlord is prepared to offer. If you’re an existing or new tenant of a premises, you should always:
- ask your landlord about lease incentives; and
- engage a lawyer to help you negotiate a lease incentive.
In this article, we consider the most common forms of lease incentives a landlord can offer you.
What are common lease incentives provided to tenants?
Rent Free Period
The most common type of lease incentive is a ‘rent free period’. A rent free period is a period of time during which the tenant does not have to pay rent.
The length of a rent free period will depend on:
- the size of the premises;
- the length of the term; and
- the annual rent charged by the landlord.
Based on the above considerations, a rent free period could be anywhere between 1 to 12 months.
As a tenant, you will want the rent free period to commence at the beginning of the lease. This will help you maintain cash flow and attend to any fit-out works to the premises.
Rent Reduction (Abatement)
Instead of providing a rent free period, a landlord may also provide rent reduction. Rent reduction is an incentive whereby the tenant pays a reduced rent over a period of time.
Landlords are more inclined to offer a rent reduction instead of a rent free period. This is so the landlord can maintain cashflow over the period of the lease incentive.
Fit Out Contribution
If you propose to fit-out a leased premises, a landlord may offer you a fit-out contribution. A fit-out contribution is:
- a cash contribution paid by a landlord to the tenant;
- to apply to fit-out works to the leased premises.
A landlord will often impose conditions that must be satisfied before a fit-out contribution is paid. For instance, a landlord may require you to transfer ownership of the fit-out to them. As such, it is important that you carefully consider any conditions to the fit-out contribution.
Can a landlord provide more than one lease incentive?
It is not uncommon for landlords to provide more than one lease incentive to a tenant. For instance, you could receive both a rent free period and a fit-out contribution.
If your landlord has not offered you a lease incentive, you should speak to them about the incentives available.
What is an Incentive Deed?
It is not uncommon for landlords to incorporate the terms of a lease incentive in an incentive deed. Incentive deeds are separate agreements which:
- document the incentive provided by the landlord to the tenant;
- set out the terms and conditions on which the landlord provides the incentive.
Landlords generally avoid documenting incentives in a lease agreement as:
- lease agreements are usually registered (as they are sometimes required by law);
- anyone is able to access a registered lease and see the incentives offered to tenants.
Where this occurs, a landlord is placed in a difficult position as prospective tenants can see which incentives have been provided in the past and demand the same incentives for their lease.
Can a landlord clawback a lease incentive?
A landlord will usually include a clawback provision in a lease agreement or incentive deed. Clawback provisions will require a tenant to repay the incentive amount in certain circumstances. For instance, a tenant can be required to repay an incentive where they default on the lease or terminate the lease before the end of the term.
The rationale for clawback provisions is that landlords provide incentives in exchange for tenants:
- staying in the premises until expiry of the term; and
- complying with the terms of the lease during the lease term.
As the lease agreement and incentive deed will be prepared by the landlords solicitor, clawback provisions will usually be drafted in favour of the landlord. For this reason, it is important for tenants to engage a lawyer with leasing expertise to advise them on, and help them negotiate, incentive deeds and in particular clawback provisions.
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