BIM41052 - Receipts: reverse premiums: the commercial background

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.

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.

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.