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Hanrick Curran actively work with commercial property owners so are very familiar with the challenges and opportunities present in the Queensland property market. A key strategy to attract and lock in tenants that has become increasingly popular in commercial leasing deals is to incorporate lease incentives including fitout contributions, rent abatements and cash payments. As part of the incentive arrangements, landlords commonly insist on a right to 'clawback' the whole incentive, or a pro-rata proportion of the incentive, if the lease is terminated early for breach by the tenant.

In speaking with McMahon Clarke’s Real Estate Partner Mark Lyons recently, he highlighted a recent Queensland case that sends a clear message to landlords that incentive clawbacks are unlikely to be enforceable in many circumstances.

What happened?

In GWC Property Group Pty Ltd v Higginson, a law firm leased commercial office space under a seven year lease and entered into an incentive deed at the same time as signing the lease. The incentive was in the form of contributions towards fitout, rental and signage abatements.

The incentive deed required the law firm to repay the incentive on termination of the lease for breach. The partners of the law firm personally guaranteed the law firm's obligations under the incentive deed (including the obligation to repay the incentive).

The law firm went into liquidation two years after the lease commenced, and the landlord terminated the lease for breach.

In an attempt to clawback the incentive, the landlord claimed $1.2 million under the partners' personal guarantees. The partners disputed the landlord's claim and argued the incentive clawback was a 'penalty'.

The court agreed and said the clawback provision was unenforceable because it was a penalty, so the partners were not liable to pay the $1.2 million under the personal guarantees.

What does it mean?

Generally speaking, a penalty arises where a contract is breached and the party not in breach receives an advantage it would not have received if the contract was fully performed. If the provision is a penalty, then it is likely to also be unenforceable.

In the Higginson case, the judge said the clawbacks were not a genuine pre-estimate of the damage suffered by the landlord. As a result, the repayment of the clawback would give to the landlord an unfair advantage well over and above what the landlord would be entitled to in a claim for damages.

Importantly, the judge also indicated other triggers for incentive clawbacks (such as provisions stating the incentive is personal to the tenant and must be repaid on an assignment of the lease) may also be unenforceable.

Key message for landlords

Landlords should give serious consideration as to how they structure lease incentives and whether to insist on clawback provisions. Depending on the circumstances of each leasing transaction, there may be factors (which can be recorded in the drafting of lease documents) which help in an argument that a clawback provision is not a penalty.

Should you require advice associated with structuring lease incentives or other property transactions, please speak with your usual Hanrick Curran adviser or call 07 3218 3900 and ask for Jamie Towers, Tim Taylor, Nathanael Lee or call 07 4052 7524 to speak with Peter Maletz in Cairns.

 

Thank you to Mark Lyons McMahon Clarke for contribution to content.