Supreme Court Rules Incentive Clawbacks Unenforceable

What goes up must come down, and vice versa. In a town that’s seen more than its share of booms and busts, landlords understand the concept all too well. In this town, when the cold winds of the economic winter blow, you cut your cloth to meet the market. If capturing a plum tenant means gifting them a rent-free period, or even shelling out for a fancy fit out, so be it. What you lose on the swing, you pick up on the merry-go-round. Or do you?

Late last month a Brisbane judge ruled landlords can no longer necessarily claw back lease incentives from their defaulting tenants. In the case of GWC Property Group Pty Ltd v Higginson [2014] QSC 264 Supreme Court Justice Jean Dalton found that clawback provisions in a commercial lease were in fact penalties, and consequently unenforceable.

The case involved a law firm tenant which had entered into an incentive deed in conjunction with a commercial lease, providing for a fit-out contribution from the Landlord, as well as rental abatement and other incentives. The incentive deed provided for the repayment of the fit-out contribution and rent reductions in the event the lease was terminated by the landlord as a result of the tenant’s default. When the tenant went into liquidation the landlord terminated the lease, and sued the guarantors under the incentive deed. But Justice Dalton found that the clauses requiring repayment were in the nature of a penalty, because there was no genuine pre-estimate of damages.

Her Honour’s decision followed the 2012 High Court ruling in Andrews v Australia and New Zealand Banking Group Limited, which dealt with the validity of bank fees and charges. In that case the High Court found contractual clauses requiring a bank customer who breached a term of their contract with the bank to pay sums well in excess of the actual loss suffered by the bank were void and unenforceable.

Justice Dalton’s decision brings into serious question the value of creating separate incentive deeds (or relying too heavily on such arrangements), and of creating clauses which are likely to be construed as wholly penal. Landlords need to think more carefully than ever, and take competent and informed advice, on what abatements and fit-out incentives they should offer to a prospective tenant upon entering into a lease, and how they might legitimately recoup those incentives in the event of a default.

Justice Dalton’s decision can be found at http://www.sclqld.org.au/caselaw/QSC/2014/264

Brendan Nyst

Gold Coast Lawyer

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