Lease incentives Perth landlords offer are the difference between the rent written in the lease and the rent the tenant effectively pays. They are normal, they are negotiable, and they are the part of a deal most often misunderstood by owners who have not leased a property for a few years. The face rent is what goes in the lease and into a valuation. The incentive is what it actually cost to get there.
What an incentive looks like in practice
There are only a handful of forms, and they behave very differently.
Rent free. The tenant occupies and pays nothing for an agreed period, usually at the start. Simple to document and the easiest for a tenant to value.
A fitout contribution. The landlord pays some or all of the cost of fitting out the premises, either directly or by reimbursement against invoices. The money stays in the building.
Rent abatement. A reduction in the rent across part or all of the term rather than a period of nothing, which spreads the benefit and keeps cash moving from day one.
A cap or exclusion on outgoings for a period. Less common, and worth watching, because it can quietly cost more than it looks.
Early access before the term starts, for fitout. Not always thought of as an incentive, and often the most valuable thing a tenant can be given.
Face rent, effective rent, and why owners care
The face rent is the figure in the lease. The effective rent is the face rent less the amortised value of the incentive across the term.
A landlord will usually prefer to hold the face rent up and give a larger incentive, because the face rent is what the next valuation, the next rent review and any future sale are measured against. A tenant will usually prefer the lowest possible face rent, because it is what every review and every percentage increase is calculated on for the rest of the term.
Both positions are rational. Which one you should take depends on whether you are holding the asset or selling it, and on how long the term is.
Why a fitout contribution often beats rent free
For a landlord, money spent on fitout stays in the building. A well fitted tenancy re lets faster and better at the end of the term, and the improvement is there whether this tenant stays or goes.
Money given as rent free is gone. The tenant occupied, the owner received nothing, and at the end of the term the premises are in the same condition they would have been anyway.
For a tenant, the calculation is the reverse only if they have the capital to fit out themselves. Many do not, which is why fitout contributions are so often what actually closes a deal.
What incentives are running at right now
That depends on the sector, the building and the tenant, and it moves. Incentive levels in a well located office floor behave nothing like those in a small warehouse or a suburban shop, and a number quoted in an article is out of date by the time it is read.
The useful question is not what the market average is. It is what has actually been agreed recently on comparable space in the same precinct, which is evidence rather than opinion.
What a landlord should be asking for in return
An incentive is a payment. It should buy something.
Term. A longer commitment, or a longer first term before an option.
Covenant. A stronger tenant, a personal or parent company guarantee, or a larger bank guarantee.
Structure. A clean fixed increase rather than a review mechanism that will be argued about, or a market review removed.
And clawback. If the tenant defaults or ends the lease early, the unamortised portion of the incentive should be repayable. An incentive without a clawback clause is a gift.
Two things that go wrong
Incentives agreed in a heads of agreement and never properly documented, so the mechanism, the timing and the clawback are all vague when they matter.
And fitout contributions paid before the work is done. The money should follow the invoices, with evidence, and the tenant should be responsible for anything that overruns.
The short version
Incentives are normal. The form matters more than the headline. Fitout keeps value in the building where rent free does not. Whatever is given should buy term, covenant or structure, and should be clawed back if the tenant leaves early.
If you are about to negotiate a lease and are not sure what a reasonable package looks like for your building, that is worth checking against real recent evidence rather than a rule of thumb. Our commercial property leasing team assesses incentives against what is actually being agreed on comparable space, and sets the heads of agreement out properly before the lease is drawn.
This article is general information and not advice.
