By Anthony Herro -
Snapshot
- Provisions requiring the repayment of a lease incentive will generally be unenforceable.
- Where the tenant also has a right of termination, a Court or Tribunal may determine the repayment provisions to be enforceable.
- One way to ‘work around’ this problem is to record the incentive by way of a rent abatement throughout the term of the lease.
It is common in retail and commercial lease transactions for a landlord to offer a financial incentive to entice a tenant to enter into a lease.
Standard leasing practice: Incentives
These incentives can be in the form of rent-free periods, rent abatements, landlord works – or, as is commonly the case, in the form of a monetary contribution towards the tenant’s fit-out costs.
Tenants generally consider fit-out contributions attractive as they alleviate them having to finance all of their fit-out costs up front.
A landlord will factor in the incentive in determining the rent – the rent is notionally higher to take into account the incentive.
Landlords do not wish the incentive to be recorded within the registered lease. Rather, the incentive is recorded in a side document, typically referred to as an incentive deed, which is not registered to avoid the incentive being in the public domain.
It further assists a commercial landlord (not retail) as market reviews under commercial leases generally ignore incentives and side deeds, and are determined on the face value of the rent in the lease.
