What are Lease Incentives in the UK?

When you choose a commercial premises for your business, you will often negotiate with the landlord before committing to the lease. The rental amount, for example, will likely be the subject of negotiation. However, you may need more to ensure that the commercial premises suit your circumstances. Indeed, as a commercial tenant, you may wish for a better overall financial package. This is where lease incentives help. Landlords or lessors may offer a variety of incentives to tempt you, as a potential tenant or lessee, into signing a commercial lease agreement with them. Lease incentives also help landlords to preserve their market rent figure. You should gain as many lease incentives as possible when you take on a new lease agreement as a commercial tenant. This article will outline typical lease incentives of commercial leases.

Gaining Lease Incentives

As a commercial tenant, it is helpful to note that when you negotiate lease incentives, you should consider what affects a commercial landlord’s offers and decisions. The incentives they offer will depend on, for example:

• the location of the property;
• what the demand is for commercial space;
• other market forces; 
• any relevant conditions; and 
• the degree to which the landlord wants you in their property.

For example, suppose a shopping centre is going through a quiet period. Accordingly, landlords may offer commercial tenants retail space without rent if they pay other rates.

As a tenant and business owner, you should understand that if you receive incentives, these can have tax obligations for which you should seek professional advice. 

Rent Incentives

Landlords sometimes use rent incentives to encourage a potential business tenant to lease the commercial premises. We explore rent incentives below.

1. Rent-Free Period  

A typical way a landlord may incentivise you to take a lease agreement is to offer a rent-free period. Accordingly, this means there will be no rental charge for part of your lease, usually at the beginning. This can help you as you can:

• compensate for the payments you make to relocate your office space;
• make use of this time to fit out your commercial premises; and
• take the pressure off your cash flow. 

Rent-free periods can be very generous. For example, if you take on a 10-year lease in London, you may receive a rent-free period of 25-29 months.

2. One-Off Premium

Commercial landlords may offer a one-off premium to incentivise you to use their property for your business premises. This means they will provide you with payment back on your lease for a specific reason.  

3. Gradual Rent Increase

If the rental amounts seem too high for you (as a potential tenant), a landlord may agree to decrease it and then gradually increase it to the level they want. Alternatively, they may keep the rent low and schedule a rent review later.

4. Rental Payment Basis

A difficulty for you as a commercial tenant may be the time your rent payment is due. This is often upfront and more than one month in advance, which can be a considerable burden for a business. Therefore, commercial landlords may be willing to delay payments or agree to smaller payment periods to help your cash flow.

Fit Out Contribution

It is a costly process to reallocate your commercial premises, and landlords recognise this. Therefore, one of the incentives landlords may offer is a capital contribution towards the cost of alternatives and fit-out of your commercial space.

Reimbursement or Assumption

A commercial landlord may offer to reimburse or assume the costs of an expense you will incur due to taking up a lease agreement with them. For example, they may provide this for:

• relocation costs; or
• expenses relating to a commitment with your current lease. 

Key Takeaways

If you are in the process of looking for a commercial premises for your business or changing your current business location, you may negotiate with potential landlords. In addition to arranging obvious points such as the rent rate, you should gain as many lease incentives as possible. These are additional benefits a commercial landlord may offer to entice you to choose their property over another. For example, you may receive a rent-free period or be able to gain help with setting up your business space with a fit-out contribution.  

If you need help understanding lease incentives in the UK, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

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