Legal Definitions - no-bonus clause

A no-bonus clause is a specific provision often included in a lease agreement between a landlord and a tenant. This clause becomes particularly important if the government decides to acquire the leased property for public use through a process known as condemnation (also referred to as eminent domain).

The primary purpose of a no-bonus clause is to limit the financial compensation a tenant can receive if the property they are leasing is condemned. Under this clause, the tenant is typically entitled to be compensated for the value of any physical improvements they have made to the property. However, it specifically prevents the tenant from recovering what is known as the "bonus value" of their lease. The bonus value represents the financial advantage a tenant might have if their fixed rent payments are lower than the current market rental value of similar properties. In essence, the clause ensures that while a tenant is compensated for their tangible investments in the property, they do not receive a payout for the favorable rent terms they secured in their lease agreement.

Here are a few examples to illustrate how a no-bonus clause works:

• Example 1: Small Business with Custom Build-Out

  Imagine "The Daily Grind," a popular coffee shop, signs a 10-year lease for a commercial space at $3,000 per month. The owners invest $75,000 to install custom counters, specialized plumbing for espresso machines, unique lighting, and built-in seating. Five years into the lease, the city decides to condemn the entire block to build a new public library. At this time, due to rising property values, similar commercial spaces in the area are renting for $5,000 per month.

  How the no-bonus clause applies: Because of the no-bonus clause in their lease, The Daily Grind can seek compensation for the remaining value of their $75,000 in improvements. However, they cannot claim the "bonus value" – the $2,000 per month difference between their $3,000 rent and the current $5,000 market rent for the remaining five years of their lease. Their compensation is limited to their physical investments, not the financial benefit of their below-market rent.

• Example 2: Manufacturing Plant with Specialized Infrastructure

  Consider "Precision Parts Inc.," a manufacturing company that leases a large warehouse for 20 years at $15,000 per month. To operate their business, they spend $500,000 installing heavy-duty machinery, reinforcing the concrete flooring, and building specialized ventilation systems. After 10 years, the state government condemns the property to construct a new highway interchange. By this point, market rates for similar industrial properties have increased to $25,000 per month.

  How the no-bonus clause applies: Precision Parts Inc. would be compensated for the remaining value of their $500,000 in specialized improvements. However, the no-bonus clause prevents them from recovering the $10,000 per month difference between their $15,000 rent and the $25,000 market rent for the remaining 10 years of their lease. They lose the benefit of their favorable long-term rent agreement without additional compensation for that specific loss.

• Example 3: Tech Startup Office Renovation

  "Innovate Solutions," a growing tech startup, leases an entire floor of an office building for 7 years at $10,000 per month. They invest $200,000 in significant interior renovations, including building custom glass-walled offices, a state-of-the-art server room with dedicated cooling, and collaborative workspaces. Three years into their lease, the federal government condemns the building to establish a new agency headquarters. Due to the area becoming a tech hub, comparable office spaces now lease for $18,000 per month.

  How the no-bonus clause applies: Innovate Solutions can claim compensation for the remaining value of their $200,000 investment in customizing the office space. However, the no-bonus clause prohibits them from recovering the $8,000 per month "bonus value" (the difference between their $10,000 rent and the $18,000 market rent) for the remaining four years of their lease. Their compensation is strictly tied to the physical improvements they made, not the financial advantage of their below-market rent.