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.
