Tenants love free rent. But they would hate to pay it back.
Under the AIR lease, if Lessee commits a Breach, it is required to immediately pay Lessor the value of any free rent or other inducement (TI allowance, etc.) it received (Paragraph 13.3). This type of provision is included in many custom leases as well.
This repayment obligation is triggered only after Lessee receives written notice from Lessor of its failure to perform a Lease obligation and fails to cure within the applicable cure period (assuming the failure can be cured).
Importantly, Lessee may be required to pay the entire value of the free rent or other inducement even if Lessee commits the Breach at the very end of the Lease term. For example, assume a 60-month lease at $10,000 Base Rent per month, in which the parties agree that Base Rent is abated in months 2-4. If Lessee commits a Breach in month 58, it is immediately required to pay Lessor $30,000, even though Lessor received the benefit of a tenant that complied with all Lease terms, including the payment of rent, for nearly the entire term.
Lessee may feel that this provision is unfair in this type of situation. When representing tenants, I often modify the Inducement Recapture provision so that the repayment obligation is reduced/prorated as the Lease term progresses. Therefore, if the Breach occurs when there are only 3 months remaining on the 60-month term, Lessee would pay only 3/60ths of the value of the Inducement Provisions. If you are representing a tenant, you may wish to prorate this repayment obligation.
If you have a suggested topic for this blog, please click here to send Usman a message.