With a rise in Perth CBD office vacancy rates, landlords have become increasingly willing to grant more attractive incentives to tenants to maintain a competitive presence in the market. But how do landlords make sure their incentives don't become a burden?

While there are many types of incentive, the traditional, and still most common ones are rent-free or rent-reduction periods, and contributions to fit out or plant.

There is a real risk, however, that landlords who offer generous incentives may not be properly protecting their interests. The best way to do this is to ensure that the incentives (or part of them) are recoverable in the event that the lease is breached or terminated before the expiry of the initial term.

One way in which landlords can ensure they are adequately protected is to include a claw back provision in the lease agreement. What this means is that all or part of the incentive (as a proportion to the time remaining in the initial term) is repaid to the landlord in the event that the lease is terminated due to tenant default.

An alternative protection is to draft incentive provisions so that they occur during the whole of the term rather than at the commencement of the term. For example, rather than providing a 6 month rent free period at the beginning of the lease, landlords can instead offer a 2 month rent free period at the commencement and one month rent free periods for the first month after each anniversary of the lease (for a five year lease). By structuring the incentive this way, the landlord's interests are better protected, and it is a real incentive for the tenant to remain in the lease for the whole term to get the benefit of the incentive.

In the case of the landlord contributing to the fit out or plant, the landlord may offer to provide a portion of that contribution on each anniversary of the commencement date. In this scenario if the lease is terminated part way through the term, the landlord has not sacrificed the whole of the incentive to the defaulting tenant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.