Fitout Incentives and Clawbacks

Among the many technical issues to consider when finalizing a lease, the issue of fitout incentive and what it means long term does not get a big enough spot-light by many. In simple parlance a cash incentive usually referred to as a fitout incentive has been part of the mechanics of leasing within shopping centres since their business model was born. Cash rich or resource able Shopping centre landlords were able to lure retailers from traditional shopping strips by providing, better amenities, controlled environments, higher traffic customer traffic flow AND payment toward a retailer’s shop fit, that has always been inexorably linked to a premium rent.

Like anything in life, nothing is for free so this incentive is not free money, it is budgeted for with the single purpose of achieving the rent required by the centre. When negotiating there is a play off between the two numbers always, leasing executives will provide more fitout incentive for more rent. The amounts vary depending on the particular centre, who the retailer is and how badly they want them.

The purpose of this article is to address a bug-bear of mine which is the infamous ‘claw-back’ provision within a lease. In simple parlance if a retailer fails or surrenders its lease term then the landlord requires the fitout incentive to be paid back on a pro-rata basis on the balance of term remaining. The same applies if a Retailer assigns, or transfers a lease to another party or its company has a change of majority shareholding. In simple speak if a sale of a retailer occurs, they also want their money back.

Oh no! the rent stays the same when you sell and transfer a business so why do they want it back? I must say it has never been explained to me other than ‘we are investing in your client when commencing the lease therefore they should be penalised when they leave or sell’……………. really, that is the best and only explanation I have ever heard when trying to justify it.

Similarly if a business fails, a landlord has the right to claim damages, which includes duration of vacancy, any shortfall of income for the replacement rent, reasonable advertising or leasing fees, therefore again if the rent is paid why claim again for the original incentive paid, its a double up or penalty is it not?

LeaseWise is steadfast with its advice to clients on these matters and take heart in a smattering of recent court decisions which assist with equitable adjudication of the questions being asked. Feel free to contact us for clarity of these are issues within your portfolio.