Encyclopedia
Tenant inducement
A benefit given to get a tenant to sign, such as free rent or a tenant improvement (TI) allowance.
For example: A tenant compares inducements. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you are moving your accounting firm and two landlords compete for you. One offers six months of free rent; the other offers three months free plus a larger allowance toward your fit-out. When we spread both packages over the five-year term and add your own build costs, the second offer costs less and gives you a better office.
What I’d tell a friend
Compare inducements on their total value over the term, and read what happens to them if your plans change.
Why it matters to you
Free rent or allowances can make a lease look cheaper than it is. Compare deals on total cost over the term, and check whether you have to pay inducements back if you leave early.
How to use it in your deal
Tenants should ask for inducements in writing and understand conditions: when allowances are paid (often after work is complete and invoices are submitted), whether they must be repaid if you default or leave early, and whether free rent includes additional rent. Get tax advice, since inducements can be taxable.
Landlords should tie inducements to lease commitments and keep repayment clauses. Buyers should check outstanding inducements owed to tenants, since they may become your obligation. Lenders treat unpaid inducements as costs. Compare offers on net effective rent: take total rent over the term, subtract the value of free rent and allowances, and divide by the term.
Two offers with the same face rent can be very different once inducements are counted. Ask whether an allowance can be spent on furniture, cabling or moving, or only on fixed improvements; landlords often prefer fixed improvements that stay with the building. Watch for clauses requiring you to spend the allowance by a deadline or lose it.
Mistakes I see
Not reading payment conditions. Forgetting tax effects. Buyers missing unpaid allowances. Comparing face rent instead of net effective rent. Losing an allowance by missing the spending deadline.
In BC and Vancouver
The lease controls. Canada Revenue Agency (CRA) has guidance on the tax treatment of inducements.
Official sources: CanLII (court decisions) · Income Tax Act (Justice Laws)
Common inducements and how to compare them
Landlords use inducements to attract tenants without lowering the face rent. The usual ones are free rent, an allowance for improvements, help with moving costs and sometimes cash.
The value of a package depends on the term, so compare offers on net effective rent and total cost. A generous package on a longer term may not beat a smaller one on a shorter term.
What to watch
Some leases say you must repay part of an inducement if you default or leave early, often on a declining scale. Read that clause before you sign.
Inducements can have tax effects for your business, so ask your accountant how to treat them.
Questions to ask before you sign
- What's included?
- When is it paid?
- Must it be repaid?
- How is it taxed?
Keep reading
Related terms: Effective rent, Tenant improvements (TI)
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.