A rent inducement is any “perk” that a landlord uses to entice a renter to sign a lease agreement. One of the most common types of inducement is “free rent” or a tenant improvement allowance.
Free-rent terms, for example, literally give the tenant or prospective tenant the ability to operate in the premises for a certain period of time rent-free. These periods can be a few weeks or a few months. Either way, they can be very valuable for tenants, particularly those practices that are just getting started, and because they often compel tenants to become long-term leaseholders, they can be beneficial for landlords as well.
While these free rental periods can be beneficial, tenants should be on the lookout for “inducement recapture” provisions. These terms are very landlord-friendly, so tenants need to be aware of what these terms mean and how they can affect you and your practice.
Inducement recapture is a term in a commercial lease that provides that the tenant has to pay for any free rent or other inducements that the landlord provided if there is a default in the lease terms.
In general, an inducement recapture provision is only triggered when a landlord provides notice to the tenant that it intends to invoke that clause. The tenant is usually provided with some opportunity to cure the breach or default, and if it is not cured, then the inducement recapture provision will go into effect. That being said, not all leases provide for a cure period so it is important to have a medical or dental lawyer review the lease.
Inducement recapture provisions can be extremely expensive. If, for example, you have an inducement of three months’ rent at the outset of your rental relationship, the full value of those months may be due immediately if the inducement recapture clause is triggered. In fact, many landlords will use a technical default to force the tenant to repay the inducement perks.
Not all that long ago, inducement recapture was not nearly as relevant as it is today. During the height of the COVID-19 pandemic, businesses had to shut their doors, sometimes in response to state-wide closures. In those cases, tenants were often unable to meet their monthly rental obligations. Those defaults ultimately resulted in not only a default of the lease in general but also even more monetary obligations because of terms like inducement recapture.
Unfortunately, many tenants glossed over default terms like inducement recapture because they assumed that a default would never occur. These tenants were hit hard by these clauses, sometimes because they did not fully understand what they meant or that they even existed.
There is a difference between inducement recapture and a recapture provision. A recapture clause comes into play when you are ready to sell your practice or business. In essence, this term allows the landlord to automatically cancel the lease instead of assigning it to the new doctor or buyer who purchases your practice. A recapture clause gives a landlord a huge amount of power when you try to sell your practice, and it can put a damper on the sale as a whole.
While inducement recapture provisions are not as cumbersome as recapture provisions, they are still very unfavorable to tenants. In many situations, the attorneys at Dental and Medical Counsel will recommend that you avoid lease agreements that include recapture provisions. If at all possible, Dental and Medical Counsel will often recommend avoiding inducement recapture clauses as well.
As a tenant, you need to keep a close eye on provisions like these that can profoundly impact your rights not only as a tenant but also as a practice owner. Learn more about commercial lease provisions and get tailored advice for your situation by contacting our team. Call 925-999-8200 for more information or submit a contact us form to schedule a complimentary consultation with attorney Ali Oromchian.
Stay updated with industry news!
