Commercial Lease Incentives: Rent-Free and Fit-Out

Incentives are how landlords and tenants bridge the gap between the headline rent and what a tenant will actually commit to. Used well, they secure good tenants; used carelessly, they give away value.

Common incentives

• Rent-free period: the tenant pays no rent for an initial period, to cover fit-out or simply to sweeten the deal.
• Fit-out contribution: the landlord contributes to the cost of fitting out the space.
• Stepped or capped rent: a lower rent at the start, rising over time.
• Break or flexibility: more flexible terms in exchange for a higher rent or stronger covenant.

Headline vs effective rent

Incentives reduce the effective rent below the headline figure. A high headline rent with a long rent-free period may be worth less than a lower headline rent with none. Because the headline rent is what shows up in comparables and at the next rent review, landlords often prefer to give incentives rather than cut the headline.

Weigh the trade-off

An incentive is worth giving if it secures a stronger covenant or a longer lease, because that is what drives value. Giving a large incentive to a weak tenant on a short lease is poor value.

Record it clearly

Set out incentives clearly in the heads of terms and document them properly, so there is no dispute later about what was agreed.

What are common commercial lease incentives?

Rent-free periods, fit-out contributions, and stepped or capped rents, used to secure a tenant.

Why give an incentive rather than cut the headline rent?

The headline rent is what appears in comparables and at the next review, so landlords often prefer to give incentives instead.