Clawing back lease incentives

A landmark decision in the Supreme Court of Queensland may have far reaching implications for tenants and landlords alike. In the case of GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264, the Court considered the clawback of lease incentives following specified events, including where the tenant does not complete the full lease term.

A lease’s claws

Incentives in lease agreements can be structured in various ways including:

contributions to tenant’s fit outs;
rent free periods; or
rent abatement over all or part of the lease term.

They are often given to a tenant on the basis that the tenant will comply with the terms of the lease and be in occupation for the whole of the lease term.

The greater the landlord’s investment, the greater the risk of loss that may be suffered on early termination. Given this, landlords often include a clawback provision, which provides for a formula for repayment of part or all of the incentive if the lease is terminated early.

Landlord sharpening its claws

In this case, a 7 year lease was signed with incentives that included a contribution to the tenant’s fit out, a rent abatement and a signage fee abatement, all spread over the first 3 years of the term. The clawback provisions required the tenant to repay a proportion of the landlord’s fit out contribution on certain events, including termination of the lease for certain reasons. The rental and signage abatement amounts had to be repaid in full if the lease was terminated by the landlord.

The landlord terminated the lease on the grounds of repudiation due to the tenant entering liquidation. The landlord then sued the tenant’s guarantors for payments under the clawback provisions.

Claws clipped

The Supreme Court of Queensland held that the clawback provisions were in fact penalties and were not enforceable against the guarantors. One of the reasons was that the provisions provided for significant sums to be paid over and above damages payable at common law which amounted to a windfall gain for the landlord above what the landlord would have had if the lease were performed.

Keep your claws in check

Other Australian jurisdictions may be swayed by this Queensland decision although only on a persuasive basis. Importantly, landlords and tenants should be aware of the risks of incentive clawback provisions being potentially unenforceable following early termination of leases. It may well be time for landlords and tenants to sharpen the drafting of incentive deeds.

PPSR warning noises become a chorus