Recent decision highlights lease incentive risks for landlords

Risks associated with leasing incentives The provision of leasing incentives, be they fitout contributions, rent free or rent abatement, have become a permanent part of the commercial and retail leasing landscape in Australia, and are now widely taken into account by valuers in assessing market rents.

But the provision of leasing incentives comes with some risks for a landlord – if the incentives are "front- loaded" and the lease is terminated early for default or insolvency on the part of the tenant, the landlord's investment in providing incentives to secure the tenancy can be substantially lost.

It is common for landlords to require tenants, in these circumstances, to repay the incentive, or at least a part of it. These are commonly referred to as clawback provisions. Prudent landlords will also ensure that any personal guarantees or security given by tenants, such as a cash bond or bank guarantee, also cover the tenant's liability to repay this amount.