For tenants negotiating a commercial lease
Landlord Fit-Out Contributions: How Tenant Incentives Really Work
Sviatoslav JerdetchiiCEO & Founder of Craftex. Updated , 5 min read
The short answer
A landlord fit-out contribution is money or work a landlord provides to help a new tenant fit out commercial premises. It comes as a rent-free period, a capital contribution, or landlord's works.
- The same headline incentive can be worth very different sums to your business.
- Capital contributions are usually paid after your works, against evidence.
- HMRC usually treats a landlord paying for your fit-out as a taxable reverse premium.
- Since 6 April 2024, landlord payments for tenant works fall outside CIS.
Landlords use fit-out incentives to win tenants. The headline number is only half the story. The same incentive can be worth very different sums to your business, depending on its form.
So negotiate the form as hard as the amount. This guide explains the three forms, how contributions are paid, the tax points to raise, and what to agree before you sign. Weighing up an offer? Book a site visit and we will price the fit-out it has to cover.
Three forms of landlord fit-out contribution
A landlord fit-out contribution comes in three main forms. Each affects your cash flow, tax and risk differently.
| Rent-free period | Capital contribution | Landlord's works | |
|---|---|---|---|
| What you get | Months with no rent | Cash towards your fit-out | A finished space, built by the landlord |
| When you get it | Early in the lease | Usually after your works, against evidence | Before you move in |
| Who controls the works | You | You | The landlord |
| Your upfront cost | You fund the whole fit-out | You fund it, then get paid back | Little |
| Main tax point for you | Not a reverse premium, as no money changes hands | Usually a reverse premium, unless it reduces your capital allowances | Generally not a reverse premium where it makes the building ready to let |
| Main risk | You fund everything | Conditions, timing and clawback | The specification may not suit you |
A common deal combines them. The landlord delivers Cat A, adds a contribution towards Cat B, and gives a shorter rent-free period.
Landlord's works: Cat A, Cat A+ and plug and play
Most London office landlords offer floors at Cat A. That means raised floors, suspended ceilings, lighting, heating and cooling, and finished toilets. There are no partitions, kitchens or furniture.
Cat A+ goes further, with meeting rooms, a kitchen and sometimes furniture. A tenant can move in with little or no work.
Cat A is a sensible start when you will do your own fit-out. The catch: if your layout needs the ceilings, lighting or cooling changed, you may pay to strip out what the landlord just installed.
Ask to see the Cat A specification before agreeing the incentive. Ask whether the landlord will hold back items you do not want, in exchange for a larger contribution. Our guide to Cat A, Cat A+ and Cat B explains the differences.
How a capital contribution is usually paid
Landlords rarely hand over cash on day one. Expect these five terms.
- Conditions. The lease completed, the licence for alterations granted, and the works done to an approved specification.
- Evidence. Invoices, a practical completion statement, sometimes a surveyor's sign-off.
- Timing. Payment when the works finish, or in stages against certified progress.
- A cap. The lower of an agreed sum and the actual cost of agreed items.
- Clawback. Repayment of part of the contribution if you break early or the lease ends early.
For your budget, cash flow is the key point. Your contractor needs paying during the works. The landlord's money usually arrives after. Plan the funding gap.
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What the RICS leasing code expects in heads of terms
The RICS Code for Leasing Business Premises has applied since 1 September 2020. It is mandatory for RICS members on business leases in England and Wales.
It requires heads of terms to cover rent-free periods and incentives. They must also cover alterations, fit-out and reinstatement. If your heads of terms say nothing on these, ask why.
Three questions to settle at heads of terms, not at the final lease:
- Which works you can do without consent, and which need a licence.
- What you must reinstate at the end, and whether the landlord's works count as yours.
- Whether the contribution is tied to specific items, such as mechanical and electrical work only.
Our guides to the licence for alterations and to dilapidations cover consent and exit.
Tax, VAT and CIS: questions for your adviser
The tax treatment depends on the form of incentive and how it is documented. These are the points HMRC's guidance raises. Take advice on your own deal.
Reverse premiums for the tenant
HMRC treats a landlord paying for a tenant's fitting-out as a reverse premium. That applies whether the money goes to the tenant or straight to the contractor. A reverse premium is generally taxed as income, spread over the lease under accounting rules.
It is not a reverse premium where the works make the building ready to let. The rules also step aside where the contribution instead reduces your capital allowances. A rent-free period is not a reverse premium, because no money changes hands.
Capital allowances
A business cannot claim allowances on spending met by someone else's contribution. In some cases the landlord can claim instead. So a contribution can reduce the allowances you would claim on your mechanical, electrical and fit-out spending. Our guide to capital allowances on commercial property explains the main reliefs.
VAT
HMRC's position, after the Mirror Group case, is that most reverse premiums are outside the scope of VAT. A tenant who simply takes a lease and pays rent supplies nothing in return. VAT applies where the tenant gives the landlord a specific benefit, such as acting as an anchor tenant.
CIS
Since 6 April 2024, a landlord's payment to a tenant for the tenant's own works falls outside the Construction Industry Scheme. Payments for landlord's works carried out by the tenant are different and can still fall within it.
Who should carry out the works
Once the incentive is agreed, someone has to build it. The choice affects programme, abortive work and who answers for defects.
| Landlord's contractor | Tenant's contractor | |
|---|---|---|
| Specification | Landlord's standard | Built around your layout |
| Programme | Landlord's timetable | Yours, once the licence is granted |
| Abortive work | Risk of stripping out unwanted Cat A | None if you start from shell or Cat A with holdbacks |
| Responsibility | Split between two contractors | One team for Cat A changes and Cat B |
| Defects | Landlord's warranty | Your contractor's |
On many projects the cheapest overall answer is fewer landlord's works plus a larger contribution. Then one contractor delivers everything you need.
At Portsoken House in Aldgate, we refurbished offices on the second and eighth floors. The rest of the building was occupied, so we worked nights and weekends where needed. We then rebuilt the reception. In a multi-let building, the landlord's rules on access, noise and hours shape the fit-out as much as the design.
Tenant's checklist before you agree the incentive
That last step is where we help. We price and deliver office fit-outs and commercial fit-outs and refurbishments in leased buildings across London. We take on projects from £100,000. Book a site visit before you agree the incentive.
Before you sign heads of terms
- Compare rent-free, contribution and landlord's works on cash flow and tax, not headline value.
- Read the Cat A specification against your layout.
- Ask for holdbacks of landlord's works you would strip out.
- Fix the contribution's conditions, timing, cap and clawback in heads of terms.
- Agree reinstatement for both landlord's and tenant's works.
- Plan the funding gap between paying your contractor and receiving the contribution.
- Take tax advice on reverse premium, capital allowances, VAT and CIS.
- Get a contractor's cost and programme before you negotiate.
