Deed vs Lease Provision
An important consideration for landlords considering offering lease incentives is how these incentives are documented. If an incentive is reflected within a lease, this becomes public record once the lease is registered on title. This could mean the Landlord is open to future Tenants requiring the same or similar incentives regardless of the surrounding circumstances.
A preferred method would be to enter into an incentive deed. The deed sits alongside the lease noting each parties’ rights and obligations however is not registered on title.
Types of Incentives
Incentives are predominantly given by way of:
- Rent free periods; and
- Fit out incentives
When offering a rent-free period, consider whether an equal abatement over the term maybe preferred over a complete rent-free period (for reasons to come).
For fit out incentives consider who has ownership of the fit out at the end of the lease term. Will you require approval not unreasonably withheld in relation to fit out plans and tradespersons? What payment terms and timeframes will you impose on the arrangement?
Repayment Obligations – When are they unenforceable?
It is important for a landlord to have protection against a situation where a tenant is given a lease incentive and then leaves or becomes insolvent.
In a situation where an incentive is given, careful drafting is required to ensure repayment of the incentive is not capable of being construed as a penalty as per GWC Property Group Pty Ltd v Higginson.
From the case of GWC Property Group Pty Ltd v Higginson a few things are clear:
- Repayment of the incentive is critical and should be acknowledged in the deed;
- Any fit out that is owned by the landlord cannot then be required to be ‘paid back’ by the tenant; and
- The rent incentive that is required to be paid back in the event of default is to be a pro rata amount based on the unexpired period of the lease remaining.
In GWC Property Group Pty Ltd v Higginson the court found the repayment clause in relation to the incentive was a penalty and therefor unenforceable. The court found this on the following basis:
- the repayment obligation was to pay back all of the ‘free’ rent not a pro rata amount; and
- the requirement to reimburse the landlord for the fit-out costs regardless of the fact that the landlord retained ownership of the fit out.
Things to Consider
- Careful drafting is required in relation to the repayment clauses, be sure to avoid drafting which could lead a court to find a penalty clause
- Make repayment of the incentive an essential term and critical
- Outline the reason and intention behind providing the incentive, for example, the tenant:
- remaining for the entire term; and
- complying with the lease and incentive deed.
- Consider whether a deed should stipulate that it ceases in operation if the tenant is in breach of the deed or lease – this can help to overcome an argument whereby the tenant claims the lease incentive was merely an inducement into signing the lease.
- Consider an equal abatement over a term rather than a period of ‘free’ rent. For example, a 3 month rent free period could translate into a 6 month period of 50% rent payable.
Although this can make it difficult for a repayment clause to be effective, it does mean that you have received rent for a period up to and including the termination of the lease and it is equal to the amount after the rent-free period you would have received in any event.
Legali can assist with leasing or commercial questions and advice. Feel free to contact the writer on 07 3188 1555 or at info@legalilaw.com.au
Writer: Shasta Turnbull of Legali
