Landlords Alert - Recovery of lease incentives found to be penalties
A recent Supreme Court decision has sent a clear message to all landlords across all states that incentive claw back provisions are unlikely to be enforced.
Landlords sometime include fitout contributions, rental rebates, and other abatements in leases or separate incentive deeds (Incentives) to encourage tenants to enter into leases. Leases or incentive deeds often include clauses that provide for the Incentives to be paid back to the landlord on certain events such as default by the tenant and termination of the lease (Clawback Provisions).
In the recent case of GWC Property Group Pty Ltd v Higginson & Ors  QSC 264, the plaintiffs sued the tenant’s guarantors under an incentive deed for repayment of Incentives of $1.2 million. Justice Dalton found that such Clawback Provisions were penalties and unenforceable against the guarantors as they were not genuine pre-estimates of damage caused by the breach.
The reasoning was that if the lease had been performed according to its terms, the landlord would only have been entitled to be paid the rent and other repayments under the lease (and not the Incentives). Therefore, if the Clawback Provisions were allowed, the landlord would have obtained an advantage it would never have had if the lease had run its course.
The Landlord was only able to claim damages at common law for its losses under the lease.
GWC v Higginson confirmed that the penalties doctrine could not be avoided by including the Incentive and Clawback Provisions into a separate deed rather than including them in the lease, and that the lease and related deeds would be looked at together as one bargain between the parties.
Landlords should reconsider their use of Incentives and Clawback Provisions in their leases and other agreements in light of this single judge decision. We will keep you advised if there is any appeal of the decision.
Jennie Keane, Senior Associate