If you have found a premise to lease, the next step is to agree on the rent. Typically, the landlord’s agent may include a lease rental or fit-out incentive, such as:
- rent-free periods;
- monthly rental reductions for a fixed period; or
- cash contribution to the tenant’s fit-out cost.
We’ve included some handy tips to help you negotiate the best deal for your lease incentive.
Why Offer Lease Incentives?
Landlords negotiate a lease incentive to entice a tenant and secure a long-term lease commitment but also to get the right tenant for the building. It’s important to speak with your accountant to work out any tax implications the type of incentive may have on your business. For example, a fit-out incentive may mean you can’t access the benefit of the depreciation of the assets during the term of the lease.
Timing of the Incentive
The timing of a lease incentive is important as it could affect your business’ cash flow. For example, landlords usually provide tenants with rent-free periods to enable them to carry out its fit-out works. Rent becomes payable as soon as the rent-free period is over, meaning you have a narrow window to complete the fit-out. Otherwise, you may be stuck paying rent when you haven’t started trading.
If the landlord offers to pay for your fit-out works, ask what preconditions you must satisfy before you are entitled to the incentive payment.
Will the landlord make payment on a reimbursement basis where you first pay for the costs? Or, do you need to submit invoices to the landlord directly for payment? It’s sensible to discuss these issues with the landlord before signing the lease.
What Happens if you Exit the Lease Early?
During the term of the lease, the need may arise where you want to sell your business and transfer the lease, or in a commercial lease, give the premises back. What will happen to the incentive? Can you transfer the incentive, or will there be consequences for exiting the lease?
The incentive provision may have a condition requiring you to pay back the incentive amount for a breach or assignment of the lease. Recent case law suggests this type of clawback provision is unlikely enforceable. In GWC Property Group Pty Ltd v Higginson and others  QSC 264, the parties entered into a long-term lease for seven years. The landlord gave the tenant a lease incentive in the form of a fit out contribution and a rent and signage fee reduction over the first three years of the initial term. During the term, the tenant company entered liquidation, and the landlord tried to recover the incentive amount by relying on the clawback provision.
Here, the Court decided that a landlord could recover normal damages for breach of the lease, such as the loss of rent when a landlord must look to re-let the premises.
If the landlord could recover the incentive amount, it would be placed in a better position than it would have been had the tenant not breached the lease. This is because, under the lease, the landlord had no right to ask for the tenant to repay the incentive had the tenant continued with its lease until the expiry date. On that basis, the clawback provision was a penalty and consequently, unenforceable. Although there is no recent case law covering the scenario of an assignment of lease, presumably clawback provisions would be unenforceable if it had the effect of being a penalty provision.
Before entering into a lease and accepting a lease incentive, you should carefully consider the different types a landlord can offer a tenant and decide which works best for your circumstance – both from an accounting and a legal perspective. The timing of when the landlord provides the incentive is also critical. Ensure that it fits in with your lease commencement date so you can avoid carrying out any fit-out works when you are not trading. Finally, it’s worth understanding what a landlord expects if you can’t continue with the lease down the track.
If you have any questions or need assistance reviewing your lease documents, get in touch with our leasing team on 1300 544 755.
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