Building Better Leases Series – Inducement Recapture, Late Charges, Interest, Breach by Lessor

Building Better Leases

Inducement Recapture

Inducement Provisions refers to the inducements, or influences, the Lessee agreed to when they entered the Lease. This can include free rent, abated rent, payment to the Lessee of bonuses, cash or other monies, and similar concessions. A Breach may void these Inducement Provisions, thus making the Lessee responsible for paying for all free or abated rent or money initially received by the Lessor.

Sometimes Lessors will either give Early Possession or rent-free occupancy after the Commencement Date of the Lease. Early Possession is not always seen as an inducement and therefore may not be subject to 13.3. Rent-free occupancy, however, is seen as abating the rent and therefore there should be no argument that the Lessor is allowed to recapture the cost of the free rent.

Late Charges

Late Charges are commonly associated with Rent, however can also include processing and account charges and late payment penalties related to tardy loan payments. If any Rent is not paid within 5 days from when it’s due, then the Lessee is responsible for paying a one-time late charge (10%) of the amount overdue or a flat fee ($100), whichever is greater. In the event a late charge occurs for 3 consecutive installments of Base Rent, then the Lessor can request that all future Base Rent is paid a quarter in advance.

If monthly Base Rent is high, then the amount of the late charge is often negotiated. For example, a large warehouse could have a monthly Base Rent that is tens of thousands of dollars, so a late charge of 10% would be disproportionate to the flat fee. In addition, many larger companies have accounting departments that handle expenses like Rent, so a delay in payment is less likely due to insufficient funds and more likely due to logistics or the bureaucracy of a large company. Therefore, larger companies may ask to modify this section in advance. It’s important for tenants to realize that Rent is late the day after it is due and places the Lessee in Default of the Lease.


Interest occurs on payments due under the Lease that are not made within 30 days of their due date. Interest is applied at 10% per annum or the maximum rate allowed by law, whichever is less. Interest is paid in addition to potential late charges.

Every state will vary in terms of interest, so the 10% specified above pertains to California. Similar to late charges, the interest rate is negotiable. With that being said, the Lessee has amble opportunity to pay any outstanding amounts due under the Lease within the 30 + days (which is also negotiable). Lessee’s should be careful in arguing about the interest rate on late charges as it may lead the Lessor to ask, “do you expect to be late a lot?”

Breach by Lessor

Notice of breach

The Lessor is not deemed in Breach until they have been notified, in writing, by the Lessee regarding the Lessor’s failure to perform its obligations under the Lease within a reasonable time period. A reasonable time period is considered at least 30 days. If it takes the Lessor more than 30 days to perform their obligations, then they are deemed in Breach of the Lease. Note that the time period the Lessor has to cure and Default does not begin until the Lessee provides a written notice, so it does not depend on when the actual Default occurred.

Performance by Lessee and Behalf of Lessor

If the Lessor does not resolve the Breach, then the Lessee may take responsibility. If the Lessee cures the Breach, however, it will be at the Lessee’s expense, but the Lessee is allowed to deduct the costs from Rent as long as the amount does not exceed one month’s Base Rent or the amount of the Security Deposit, whichever is greater. In the event that it costs more than one month’s Base Rent or the Security Deposit, then the Lessor can request reimbursement from the Lessor. The Lessee is accountable for providing all documentation if they want any costs reimbursed.