"Claw back" of lease incentives thrown into doubt

Landlords often offer incentives to a tenant to encourage the tenant to enter a lease. Common incentives are rent free periods and contributions to the fit out. The logic behind the inducement is that the landlord will benefit because the tenant will occupy the premises for the term of the lease. Landlords sometimes require a “claw back” provision in the lease so that if the landlord terminates the lease before the expiry of the term the lease incentive (or part of the lease incentive) must be repaid.

The enforceability of “claw back” clauses has been thrown into doubt by the decision of the Queensland Supreme Court in GWC Property Group Pty Ltd v Higginson [2014] QSC 264.

In GWC the tenant and the landlord entered into a lease and on the same day entered into an incentive deed. The incentive deed was recited to “supplement the lease” and recited that the landlord had agreed to, among other things, contribute to the tenant’s fit-out and  grant a rent abatement. The incentive deed also provided for repayment of part of the landlord’s contributions if the lease was terminated (other than by expiry of the term or the lessor’s default) or if the tenant parted with possession without the landlord’s consent. The obligation to repay was guaranteed by guarantors.

The landlord terminated the lease after the leased premises were abandoned by the tenant. The court decided that:

(a)          the lease and the incentive deed had to be construed as if they were one document;

(b)          the obligation to repay only arise if there a termination;

(c)           the tenant could be obliged to repay the landlord’s contributions for reasons other than the tenant’s breach – for example where the tenant went into liquidation or following a natural disaster;

(d)          the repayment obligation should not be viewed as a restitutionary payment;

(e)          in addition to contractual damages for breach of the lease, the  landlord was entitled, by the repayment clauses, to recover substantial additional payments;

(f)           the repayment obligation were not a genuine pre-estimate of damage.

The court decided that the obligation to repay landlord’s contributions was a penalty and was therefore not enforceable.

The case contains a good discussion about the law of penalties. Thanks to Tony Burke of Burke & Associates Lawyers Pty Ltd for alerting me to GWC.

The fog is beginning to clear

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Section 52 of the Retail Leases Act 2003 implies into a lease a term that the "landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into:

"(a)      the structure of, and fixtures in, the retail premises; and

(b)      plant and equipment at the retail pemises; and

(c)      the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.

The section was considered in  Computers & Parts Land Pty Ltd [2010] VCAT 2054 where it was held that a landlord was not required to maintain premises in “state of disrepair" that was "identical" to the state of disrepair when the lease was entered into; the state of repair "need not be any better than at the commencement of the lease" but had to be "the same benefit to the lessee as was agreed to be provided by the demise" (para [75]).  Section 52 was a "keep in repair" obligation as opposed to a "put in and keep in repair" obligation (paras [84] and [85]). The expression “keep in repair”:

 “…could mean, in extreme circumstances, that the only course open to a landlord is to replace some aspect of rented premises, but only to the degree that it is necessary to give the tenant the same conditions as at the commencement of the tenancy.”

If parts failed they had to be replaced with replacement parts that  "in the absence of adequate second hand parts, might need to be new" (para [85]). While s 52 did not mandate compliance with any legislative standard, a landlord could not contravene "a building or related law or regulation" and if there were an "aspect of the building that was legal at the date of its construction but is no longer legal, repair of that aspect of the building would not be a betterment for the Tenant."(para [88]). 

The Tribunal rejected contentions that a landlord had to re-design an air conditioning system to remove design flaws or anomalies (para [90]) and replace the  system with one that operated better than the original system (para [96]) but accepted that there might be circumstances where a roof had to be replaced rather than repaired if it were to survive the duration of the tenancy (para [127]).

My clerk can be contacted via this link for bookings http://www.greenslist.com.au/

Distress for rent

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Section 12 of the Landlord and Tenant Act 1958 provided that distress for rent was abolished on13 August 1948.

Section 12 has been repealed.

The purpose of s.12 was not to abolish distress for rent but to make it clear that distress for rent had been abolished.

Practitioners should be aware that the repeal of s.12 does not revive a landlord’s right to engage in distress for rent.

My clerk can be contacted via this link for bookings  http://www.greenslist.com.au/