Lease incentives are benefits that a landlord may offer to encourage a tenant to sign or renew their lease. They are predominantly considered during lease negotiations, with the value of the incentives varying depending on the current commercial market. The most common incentives include a rent-free period and prepayment of fit-out expenses.
Fit Out Contribution
There are two main methods in which a landlord may wish to provide the fit- out contribution. The fit- out works may be completed as per prior agreements concerning the value of the incentive amount. Alternatively, a landlord may evaluate the premises to determine arrangements that must be completed in order for the tenant to carry on the permitted use. This can include installing fittings and alterations to which a contribution will then be made accordingly. Receipts are often provided by the tenant showing the fit-out costs.
Are there any tax implications ?
Landlords and tenants may seek accounting advice when determining whether to offer or accept a particular incentive. Tenants should be aware of whether they would be entitled to depreciation deductions subject to the Fit Out Contribution Deed.
Rent Free Period
A rent-free period allows the rent to be waived for a specific period of time that would otherwise be paid at the beginning of the lease. That is until the value of the incentive has been extinguished. This is negotiated between the landlord and tenant and will differ depending on the size of the premises.
What if there is a Clawback Provision ?
Tenants must be aware of any clawback provisions that a landlord might seek to include in the lease or incentive deed. If this provision is present,, the landlord reserves the right to have the tenant repay the incentive in certain circumstances. For instance, if there is an early termination of the lease due to a breach or default by the tenant.
With the current commercial market at a peak, it is common to find landlords offering lease incentives to their tenants. However, it is recommended that you seek legal advice when reviewing these incentives, particularly if there are any clawback provisions.