Lease incentive agreements

In leasing transactions, it is common for a landlord to agree on a commercial rent but document a higher rent in the lease, with a separate agreement providing for a rebate or discount. This is typically referred to as a lease incentive agreement and may apply for part or all of the lease term.

These arrangements are often justified as offering a concession to the tenant or as being conditional on matters such as payment of rent on time.

However, lease incentive agreements can create legal and commercial risk for both landlords and tenants. They may also raise issues where the structure of the arrangement does not accurately reflect the true agreement between the parties.

Risks associated with lease incentive agreements

While some lease incentive arrangements are appropriate, issues arise where the lease and the incentive agreement are inconsistent. For example, a lease may state a rent of $100,000 per annum, while a separate agreement provides for a 20% rebate for the term, resulting in an effective rent of $80,000 per annum. The lease may be registered and publicly searchable, while the incentive agreement remains confidential.

This can give rise to a range of risks, including:

• Misleading other tenants about the rent being achieved at the property
• Misrepresenting income to financiers, which may affect borrowing capacity
• Misleading prospective purchasers about the true income generated by the property
• A purchaser of the property not being bound by the incentive agreement, leaving the tenant exposed to the higher rent
• A liquidator, mortgagee or receiver not recognising the incentive agreement
• The tenant being drawn into disputes involving allegations of misleading or deceptive conduct

For these reasons, lease incentive agreements should be carefully reviewed to ensure the arrangement reflects the true commercial position and does not expose either party to unnecessary risk.

The treatment of lease incentive agreements has been considered by the courts. In GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264 and Finetea Pty Ltd v Block Arcade Melbourne Pty Ltd (Building and Property) [2019] VCAT 1529, the courts considered attempts by landlords to recover incentives following tenant breach. In those cases, recovery of the incentive would have resulted in the landlord receiving more than originally agreed, which was found to be inconsistent with the commercial bargain and may amount to a penalty.

For advice on leasing and lease incentive agreements, please contact Peter Muller at peterm@qbmlaw.com.au or Megan Hanneman at meganh@qbmlaw.com.au