As competition for reliable tenants in commercial space intensifies landlords more and more, are turning to incentives to try to cajole or encourage prospective tenants into entering into a long term arrangement.
Tenants should always complete their long term calculations as to the total amount of rent that they will pay before going ahead with any contractual arrangement.
Commercial Lease Incentives are generally provided in the form of:
(i) an extended rent free period;
(ii) rental discounts at the start of the period;
(iii) prepayment of fit out expenses.
Tenants should always seek accounting advice in relation to how the Australian Taxation Office will treat the receipt by the tenant of the particular incentive. A capital payment up front may be protected and may be treated as a capital payment, however some incentives are treated as earnings and tax will be paid on the amount “received”.
Whatever payment is offered by the landlord will always be paid by the tenant in some way – normally in the form of increased rent/lease payments during the balance of the lease term.
Furthermore, if any option or any renegotiation of an extension or renewal of the lease is then to be effected, then the amount of rent being paid in the final period will be the base upon which a percentage or a marginal increase will be applied, even though that is an inflated figure to repay cash incentives at the beginning of the lease.
It is hard to imagine a lease incentive that is not of benefit to the landlord, and it is most unlikely that they will be giving away something that they didn’t intend to recover.
Some lease incentives or fit out repayments are also linked to the fit out being carried out by the landlord’s agents or contractors and again the landlord would then be just creating work for its own subcontractors.
Tenants should also be weary of clauses in leases which require the repayment of the cash incentive in the event that the lease term is terminated before its due date.
Finally tenants should also review exactly who will own the fit out that is being carried out and who will have the benefit of being able to depreciate the cost of that fit out.
Landlords always get a benefit from having a higher rental figure nominated in the lease (even if a discount is referred to as well) because the nominal lease amount will be the base for future adjustments moving forward and sets the benchmark for the market rate applicable for the premises.
If you need assistance with Commercial Lease Incentives contact one of our expert property lawyers for some advice.
Foulsham and Geddes notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Foulsham and Geddes are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Keyword: Commercial Lease Incentives