Lessors to commercial and retail leases may offer a lessee short term advantages to entice a lessee to enter into the lease. These advantages are known as lease incentives.
While lease incentives do intend to provide lessees with an easier transition into leasing premises, they also can have hidden traps that lessees should be aware of. Lessees should understand the obligations imposed on them prior to entering into a lease.
What is a Lease Incentive?
Lease incentives are a bonus or discount offered to lessees to greater influence them to enter into a lease with the landlord. While lease incentives can come in many forms, they are typically offered as short term rent-free or discounted rental periods in the lease.
Types of Lease Incentives
The most common methods that lease incentives are offered include:
- Rent Abatement – a rent-free period where rent is suspended for a period of time so the lessee does not have to pay rent until a date specified in the lease or Incentive Deed.
- Rent Reduction – the lessor reduces the amount of rent that the lessee pays for a specified period of time or until the lessee uses up the total rent reduction amount.
- Lessor’s Fit Out Contribution – the lessor offers to pay a contribution to the fit-out works by reimbursing the lessee or the lessor arranges and pays for the fit-out works to be undertaken.
Lease Incentives – Hidden Considerations
Each of the above incentives provides its own hidden concerns that lessees should take into account before agreeing to be bound by these incentives and lease terms. Lessors may impose requirements for a lessee to meet before they are obligated to contribute to pay the fit-out costs.
For example, a lessee may be required to:
- provide security under the lease by way of a bank guarantee or security deposit;
- take out the relevant insurances over the property; and
- submit specifications of the fit-out works for the lessor to approve before the fit-out works are undertaken.
Lessees should not be influenced to enter into a lease immediately after being offered an incentive by the lessor. Parties should always obtain legal advice on the lease terms (and Agreement for Lease) before signing and being bound by them. A lawyer can explain to you any continuing obligations you may have under a lease.
Lessors and Lessees should also be mindful of how the incentives are recorded on the lease. It is quite common for the lease not to make mention of the incentives and instead for them to be recorded under a separate document often called an Incentive Deed.
Incentive Deeds are used for the primary purpose of keeping the terms of the incentives confidential between the lessor and lessee. Lessees should ensure that if the lease does not contain the incentive provisions, then an incentive deed is entered into simultaneously. Lessors should remember they may still be required to disclose the incentives to relevant third parties.
It is important for lessees to negotiate incentives to assist them with the costs of a lease.
Does a Lessee Need to Pay Back a Lease Incentive?
The whole purpose of a lease incentive is for the lessee to receive a financial benefit. However, it is possible that the lease will require the lessee to repay back lease incentives in certain circumstances (this is commonly referred to as a clawback provision). The document that records your lease incentives (whether that is your lease or Incentive Deed) should contain a provision if a lessee is required to pay back the lessor. If a clawback provision is included, it typically comes into effect if a lessee breaches a term of the lease or terminates the lease early.
The courts have ruled some clawback provisions invalid. Lessees should be mindful that if they are offered incentives by the lessor in order to enter into a lease, they should carefully read the lease terms to identify whether there is a possibility that they may have to pay back the incentive.
A clawback provision being applicable to your lease may force the lessee to serve out the full term of the lease and failure to do so will likely result in some sort of financial penalty.
If you have any questions or require assistance with drafting, renewing or entering into a commercial or retail lease in Queensland, please contact the property team at NB Lawyers for more information.
Kayleigh Swift, Associate
Chloe Skubis, Graduate Law Clerk
About the authors
Kayleigh Swift is an associate in our Commercial and Property team who assists with Employment Law matters. With a high level of experience in commercial and retail leasing, voluntary and involuntary purchase and sale acquisitions, property development and employee relations, Kayleigh provides practical advice to ensure smooth business transactions.
Chloe Skubis is a Graduate Law Clerk in our Property team who assists with various conveyancing transactions. Chloe is very experienced in residential conveyancing and is a problem solver. She always provides efficient service to all her clients.