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In today’s market, lessors want to retain lessees whose leases have expired or find new lessees to fill vacant premises. Lease incentives are being offered by lessors to current lessees to keep them in the premises they have been operating from or are trying to attract new lessees to enter leases for vacant commercial premises.

On the flip side, it would not be an unusual scenario for a prospective lessee to request of the lessor a lease incentive during negotiations to enter into a new lease.

A lease incentive is similar to a discount offered to current or prospective lessees in consideration for them entering into a lease. Lease incentives can take on different forms, for example, contributions to fit out expenses, rent free periods, rent discounted periods, upfront cash payments or non-cash items such as a motor vehicle or a holiday.

While a rent free period or contributions to fit out expenses or another type of lease incentive might sound appealing to a lessee, there are things to be aware of for both lessor and lessee:

  1. Who owns the Fit Out? – where the incentive is a contribution towards a fit out, the question arises as to who will actually own the fit out at the expiry or termination of a lease –  lessor or lessee? It is important to review the relevant clauses carefully.
  2. Documenting the Lease Incentive – most lessors would have a special condition inserted in the lease outlining the parameters of the lease incentive or alternatively have a separate deed prepared to ensure confidentiality of such an incentive between the parties.
  3. Offer of Rent Free Period –  regardless of any offer from the lessor of a rent free period, the prospective lessee should always conduct due diligence of the premises first and seek legal advice on the documents before signing a lease. A lessee should not feel pressured by the lessor to sign a lease just because the lessor is offering a rent free period.
  4. Cash Incentive – a cash incentive will typically be seen as taxable income of the lessee and would be assessed as such.

It is important to make sure that whatever lease incentives a lessor is proposing to a current or prospective lessee, the lessee obtains proper legal advice before signing a lease and not feel concerned that they will “lose out” on the lease incentive.

Finally, a lessee needs to be able to feel comfortable that they have made an informed decision before signing any legal document.

For advice on lease matters please contact Mirella Angelino, BDO & Senior Associate Lawyer, on 8410 9294 or send an email via this form.