In the context of real property, a premium is a sum a tenant
pays a landlord for the grant of a lease of land. It may also be
the sum a new tenant pays an existing tenant for the assignment of
an existing lease.
A reverse premium is consideration that passes in the
opposite direction, which is from landlord to tenant. It is an
incentive for the latter to take a lease. The payer will often be a
developer, though it may be a landlord who holds the property as an
investment. The term may also denote a sum paid by an existing
tenant to induce a new tenant to take over a lease that has become
onerous or surplus to requirements.
Developers have long been prepared to offer inducements to
so-called
anchor tenants. The presence of a major department
store in a shopping mall will attract shoppers and permit smaller
concerns to enjoy their custom. This will enable the owner to
charge higher rents. The recession in the property market in the
late 1980s and early 1990s heightened the effect. A buyers' market
gave prospective tenants of commercial property enhanced bargaining
power over landlords and developers.
Inducements to potential tenants may take various forms. The
most obvious is to offer the tenant a reduced rent, or a rent-free
period of occupation. More and more often, however, tenants have
come to receive lump sum payments, either to spend as they choose
or as a contribution to specified expenditure. Another possibility
is that sums are paid to a third party in satisfaction of some
liability of the tenant. In the late 1990s the value of inducements
given was substantial and payments in excess of £10 million
were far from rare.
The commercial benefit of actual payments from the payer's
perspective is that, unlike the reduced rent or rent-free period,
they leave the rental flow unimpaired. This is particularly
important for a developer. Normally, the developer will be seeking
to sell the property to a prospective landlord, typically a
financial institution such as a life assurance company. The rental
flow from the property will determine the sale price. Even for a
landlord with no immediate intention of selling, the maintenance of
a rental flow is vital for, say, borrowing capacity.
