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In negotiating a commercial lease, the landlord may agree to provide the tenant with funds or credit known as a Tenant Allowance or Tenant Inducement, which may be compensation for all or a portion of the funds ...
In negotiating a commercial lease, the landlord may agree to
provide the tenant with funds or credit known as a Tenant
Allowance or Tenant Inducement, which may be
compensation for all or a portion of the funds required to improve
the leased premises or may simply be an inducement for the tenant
to enter into the lease.
The term "Tenant Allowance" typically refers to funds
that are recoupable by the landlord over the term of the lease and
are tied to the tenant's leasehold improvement obligations,
whereas a "Tenant Inducement" typically refers to an
non-recoupable amount paid by the landlord in order to entice the
tenant to enter into the lease and may not be tied to leasehold
improvements.
The following are some important issues which tenants and
landlords should consider in drafting and negotiating a Tenant
Allowance provision:
Issue
Tenant
Perspective
Landlord
Perspective
Turnkey or
Tenant Allowance
Does tenant want to control the improvement process, subject to
landlord oversight, or does tenant want landlord to complete the
work, subject to tenant oversight?
Tenant control comes with ability to quality control, select
materials and contractors (subject to landlord oversight), but also
attracts obligations to complete improvements in a certain manner
and timeline.
Does landlord want to control the improvement process, subject
to tenant oversight?
The allowance is typically recouped by landlord, amortized and
built into basic rent over the term of the lease.
Calculation of
Tenant Allowance
Typically tenant allowances are calculated based on a fixed
dollar amount per square foot of rentable area.
Tenant wants to ensure that HST is accounted for.
If there is a cap on GLA or Rentable Area for the purposes of
calculating rent, then landlord should ensure the same cap also
applies in calculating the allowance.
Timing of
Payment – in advance, on progress, after completion.
Tenant prefers a cash allowance be paid by landlord in advance
as opposed to having to seek reimbursement; may be paid up-front or
in instalments upon reaching progress benchmarks, on completion of
work, with balance paid when open for business.
Cash flow and financing considerations.
Landlord prefers that tenant utilize its own funds to compete
improvements and reimbursement is only provided once improvements
are completed to landlord's satisfaction, following expiry of
construction lien periods, and tenant is open for business, fully
fixtured, stocked and staffed.
Security for
Obligations
Tenant wants to provide for right of set- off in the event
landlord does not pay allowance when due or obtain letter of credit
from landlord as security for obligation to deliver allowance
funds.
Landlord wants obligation to pay allowance to be deferred as
long as possible and subject to certain conditions, so that tenant
work is complete and tenant is open for business before any portion
of the allowance is paid.
Construction
Liens
Tenant would prefer that only 10% of the allowance be held back
by the landlord until expiry of the lien period.
Landlord does not want to pay the allowance before the lien
period expires and the landlord is certain there will be no
liens.
At a minimum, landlord retains 10% construction holdback.
Landlord may or may not be "Owner" for the purposes
of the Construction Lien Act (soon to be
ConstructionAct).
Account for new amendments to the legislation.
Termination
Considerations
Tenant will attempt to avoid obligation to repay allowance on
termination.
Landlord will want tenant to repay unamortized portion of
allowance in the event that lease is terminated early by tenant or
in the event of default by tenant.
Unused Portion
of Tenant Allowance
Tenant will want any unused portion of the allowance to be
credited against future rent.
Landlord may want to limit the allowance to actual, verifiable
cost of the leasehold improvements only.
Landlord fails
to pay Tenant Allowance when Due
Tenant will want the right to set-off amount of allowance
against future rent.
If the allowance is substantial, Tenant could ask for a letter
of credit to secure the landlord's obligation.
Tenant may wish to argue lack of payment results in fundamental
breach of agreement permitting tenant to terminate the lease.
Fundamental breach is not typically or easily established, nor is
the termination of the lease realistic after the tenant has spent
all the funds to fixture the premises.
Alternatively, tenant may sue for damages.
Landlord will attempt to limit tenant's right to set-off
and contract out of Section 35(1) of the Commercial
TenanciesAct.
Mortgagees do not like tenant set-off rights.
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.
