When businesses plan an office fit out, they typically focus on what the project will cost them. What fewer businesses realise is that part of that cost can often be funded by the landlord, if you know how to ask.
Landlord fit out contributions, also known as tenant incentives, fit out allowances or capital contributions, are a well-established feature of commercial leasing. In a competitive property market, landlords have a strong incentive to attract and retain quality tenants, and contributing to the cost of a fit out is one of the most direct ways they can do so.
This guide explains how fit out contributions work, when they are available, what to ask for, and how to negotiate effectively, so you can enter your next lease negotiation better prepared.
What Is a Landlord Fit Out Contribution?
A landlord fit out contribution is a financial incentive offered by a landlord to a prospective or existing tenant, designed to offset some of the cost of fitting out a new space. It is typically offered as either a direct cash payment or a rent-free period – the latter being an indirect way of freeing up cash that the tenant can use to fund the fit out.
In some cases, landlords will also offer a combination of both: a shorter rent-free period alongside a direct capital contribution. The structure of the incentive package will depend on the landlord, the building, the length of the lease and the strength of the tenant’s covenant.
Why Do Landlords Offer Fit Out Contributions?
Understanding the landlord’s perspective is key to negotiating effectively. Landlords want their buildings occupied by good tenants on long leases. Void periods are costly, and not just in terms of lost rent: but in terms of rates, service charge and the reputational impact of an empty floor.
A well-fitted space also makes a building more attractive to future tenants. If a landlord contributes to a quality fit out and the tenant vacates at lease end leaving the space in good condition, that is a better outcome for the landlord than a vanilla Cat A space that a future tenant will need to fit out from scratch.
From the landlord’s perspective, a fit out contribution is often a rational investment in the quality and longevity of their tenancy. Understanding this dynamic shifts the negotiation from a favour being asked to a commercial conversation between two parties whose interests are broadly aligned.
When Are Fit Out Contributions Available?
Fit out contributions are most commonly available in the following circumstances:
- Taking a new lease on a Cat A or shell-and-core space. This is where landlords have the clearest incentive to help you get the space into a usable condition.
- Renewing or extending an existing lease. A landlord who wants to retain you as a tenant may offer a contribution towards refurbishing an ageing fit out as part of the renewal terms.
- Moving into a building that has been vacant for some time. The longer a space has sat empty, the more flexible the landlord will typically be on incentives.
- Taking a significant amount of space. Larger lettings give you greater leverage as a tenant, and the landlord has more to gain from securing your commitment.
Contributions are less common on short leases – typically under three years – as the landlord’s payback period is too short to justify the investment. The longer the lease you are willing to commit to, the stronger your negotiating position.
What to Ask For
The most common forms of landlord incentive are a rent-free period, a capital contribution and a combination of both. Each has different implications for your cash flow and your fit out budget.
A rent-free period gives you time at the start of your lease during which no rent is payable. This is effectively the landlord lending you the equivalent of that rent to fund your fit out. For a business occupying 5,000 square feet at £30 per square foot per annum, a six-month rent-free period is worth £75,000, a significant contribution to a Cat B budget.
A capital contribution is a direct cash payment from the landlord, typically paid on completion of the fit out works against an invoice or cost schedule. This is preferable from a cash flow perspective, as it does not require you to fund the works entirely yourself before receiving the benefit.
In addition to financial incentives, it is worth negotiating on landlord approvals. Ask for the Licence for Alterations process to be expedited, and for the landlord’s preferred contractor list (if any) to be waived or broadened to allow competitive tendering.
How to Approach the Negotiation
The most important principle in negotiating a fit out contribution is to do so before you sign the lease, not after. Once you have committed to a space, your leverage disappears. The negotiation happens during the heads of terms stage, before solicitors are instructed and before you have any legal obligation to proceed.
Come to the negotiation prepared. Have a realistic cost plan for your proposed fit out ready to share – ideally prepared with the support of your fit out partner. This demonstrates that you are a serious, well-organised tenant and gives the landlord a basis on which to calculate what level of contribution is reasonable.
Be clear about what you are asking for and why. A landlord is more likely to respond positively to a specific, well-reasoned request than to a general ask for a better deal. If you can show that a contribution will enable you to create a high-quality, long-term fit out that adds value to the building, you are making the landlord’s case for them.
Work through a commercial property agent or solicitor who has experience in office leasing. Agents who know the local market will have a clear sense of what incentive packages are being offered in comparable buildings and can advise you on whether you are negotiating from a position of strength or need to adjust your expectations.
What Landlords Will Want in Return
A fit out contribution does not come without conditions. Landlords will typically require a minimum lease length – often five to ten years – in exchange for a meaningful contribution. They may also require the right to approve your fit out design and specification before works begin, and in some cases will have preferred contractor lists or specific material requirements that must be followed.
At lease end, dilapidations obligations may apply – meaning you could be required to strip out the fit out and return the space to its original condition. It is important to understand these obligations before you sign, as they can represent a significant cost at the end of the lease term.
The Role of Your Fit Out Partner in the Negotiation
Get Support with Your Fit Out Negotiation
The strongest negotiating position is a well-prepared one. If you are approaching a lease negotiation, a renewal or a move to a new space, speak to us before you agree terms. We will help you build a realistic cost plan, understand what incentives are achievable in your market and structure your ask in a way that gives the landlord confidence to say yes.
