Lease Incentives

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The lease incentives being offered to prospective retail tenants are on the rise according to a recent article in the Financial Review. The article confirms the trend I am currently seeing in the commercial and retail leasing sector. As the financial climate continues in its current period of uncertainty, landlords are becoming more and more imaginative in the ways they can entice potential tenants to their commercial or retail premises.

What is a Lease Incentive?

A lease incentive is effectively a bonus or discount offered to a tenant in consideration for their entry into a lease with a particular landlord. Lease incentives can come in many forms, but the most common are contributions to fit out expenses, and rent free or discounted rent periods.

What are the Implications of a Lease Incentive?

Whilst a significant rent free period or free fit out can seem particularly appealing to a tenant, there are traps associated with incentives that both landlords and tenants need to be aware of:

  1. Tax – A cash incentive will generally be considered taxable income of the tenant. Case law suggests the Commissioner of Taxation will only consider the incentive to be capital if it is received during the commencement of an entirely new business.
  2. Repayment – The less obvious subclauses of incentives will often provide that a portion of the incentive will be repayable by the tenant in the event the lease is terminated, surrendered or assigned prior to the expiry of the term. This is a key consideration that many tenants overlook.
  3. Commencement of Rent Free Period – Landlords may rely on rent free periods as an inducement for tenants to sign a lease before getting professional advice. Irrespective of the commencement date of a rent free period, you should conduct a thorough due diligence of the lease and the premises, before signing a lease.
  4. Disclosure of Incentive – Many landlords prefer to grant the tenant an incentive pursuant to a deed which is independent of the lease. This serves the purpose of, amongst other things, keeping the incentive confidential between the parties. This does not however absolve the landlord of its obligation to disclose the concession to relevant third parties, such as their financier for example.
  5. Ownership of Fit Out – Where an incentive relates to the provision of or contribution towards a fit out, tenants need to carefully review the clause relating to who retains title in the fit out at the expiry or the lease. This could affect the tenant’s make good obligations at the expiry, assignment or termination of the lease, as well as tax implications with regards to who is entitled to claim depreciation on the fit out.

The legal and taxation position regarding lease incentives is particularly complex. You should obtain specialist legal and accounting advice prior to entering into a lease in any form.

Please contact me if you have any questions regarding this post.

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