Nice incentive – but what’s the catch?!
When entering into a leasing transaction, a landlord will usually offer the tenant an incentive to enter into it, that on the face of it is quite inviting to the tenant. These can come in the form of either a rent-free period, rent reductions or a fit-out contribution. But at what costs do these “incentives” come at and what should a prospective tenant know about these incentives?
An incentive deed is a document that will sit alongside the lease agreement. The deed sets out the agreement for the incentive, which could be a:
- Rent-free period;
- Rent reduction; or
- Fit-out contribution.
Normally, landlords offer these types of incentives on the basis that:
- The tenant will stay in the lease for the entire term; and
- The tenant will not sell their business, thereby transferring the premises to another tenant.
So, what does each incentive include?
1. rent free period
Rent-free periods, also known as a rent abatement, is the suspension of the rent that you would otherwise pay at the start of the lease. The time frame for these rent-free periods vary but typically range from between 3 months to 12 months [depending on the premises, the rental value of the premises and prevailing market factors].
2. rent reduction
A rent reduction will either be provided by equal reductions in monthly rent installments over the term of the lease or larger reductions at the beginning of the term with smaller reductions for the balance of the term.
3. fit-out contribution
Sometimes rather than giving a rent abatement or reduction the landlord will provide the tenant with a contribution towards their fit-out works, where the tenants provide the landlord with receipts showing the fit-out costs, and the landlord will pay this cost on a reimbursement basis.
It is a standard requirement that the landlord will pay the contribution once the tenant has:
- executed the lease;
- provided the security required under the lease [i.e bank guarantee or security deposit];
- taken out the necessary insurance policies; and
- submitted the plans and specifications of the fit-out works.
The landlord may also require you to obtain several quotes for the works and may only decide to pay the cheapest quote. At the end of the lease, the landlord will own the fit-out works but you might still be required to make good the works [depending on the terms of the lease].
things to be aware of
1. assignment of lease
Incentive deeds will only be available to the tenant while the original tenant remains the tenant in occupation of the premises. If the tenant wishes to assign the lease at any time during the incentive, the tenant may be in breach of the incentive deed and may have to repay some or all of the incentive already received by the tenant.
2. sale of premises
The tenant should ensure that the incentive deed contains a provision that if the leased premises are sold, the landlord must ensure that the purchaser enters into a deed with the landlord and the tenant providing that all rights and obligations of the landlord under the incentive deed pass to the purchaser from completion of the sale.
3. default provisions
If at any point the tenant is in default under the lease, the landlord can terminate the lease and either suspend or terminate the incentive arrangements, and the tenant may have to refund part or all of the incentive received by it from the landlord. This could end up being quite costly.
When entering into a leasing transaction it is likely you will be asked to sign a number of different documents. It’s important to understand each document and how they interact and what impact they may have on you. If you are a tenant and are looking at entering into a lease contact a businessDEPOT commercial lawyer to arrange a no-obligation consultation to discuss how we can help.