Looking closer at lease incentives

health professional at computer with magnifying glass

Are they repayable to a landlord if a tenant breaches the lease? Stephanie McGrath investigates

An incentive is something offered to a tenant by a landlord when striking a lease deal to make the lease more appealing, for example, a rent-free period or fit-out contribution.

Many leases include clauses that permit a landlord to “clawback” the value of the incentive or part of it based on the unexpired portion of the lease term if the tenant breaches the lease, assigns the lease or otherwise breaks the lease term early.

A test arising from a 2014 Queensland Supreme Court decision[i] has been adopted by VCAT in a 2019 case in the Building and Property Division.[ii]

In the Queensland Supreme Court matter, the Court held, in summary:

  • a clawback amounted to a penalty and that part of the incentive required to be repaid was “in excess of any genuine pre-estimate of damages”[iii];
  • the right to a repayment of the incentives, or part, enabled the landlord to recover money to which it would never have been entitled if the lease had run its course; and
  • the giving of incentives was part of the bargain struck with the tenant to pay the fit-out incentive in order to complete the bargain with the tenant.

In the VCAT matter, incentives were granted to the tenant in the form of a rent credit and contribution to fit-out works. The lease also included clawback provisions requiring part or all of the incentive to be repaid in respect of the unexpired term of the lease.

The tenant successfully argued that the clawback was a penalty (i.e. an unenforceable punishment) based on the test applied in the Queensland Supreme Court decision. That is, it is difficult for a landlord to justify the clawback amount as actual loss suffered by a landlord due to a tenant’s default.

Landlords and tenants must proceed cautiously when it comes to clawback provisions in leases.

As a landlord, you should seek the assistance of a leasing expert to draft your lease and assist you with legal options to help negotiate terms with your tenant rather than relying on enforceability of incentive clawbacks. If you already have a lease in place and intend to exercise your rights to clawback an incentive, or part, seek expert legal advice first.

As a tenant, you should obtain expert advice before accepting a lease that contains a clawback clause. Do not rely on disputing the enforceability of the clawback at a later stage as this could have commercial consequences (e.g. if you are seeking to assign the lease which triggers a clawback and are subject to a deadline such as a settlement date).

[i]GWC Property Group Pty Ltd v Higginson [2014] QSC 264

[ii]Finetea Pty Ltd v Block Arcade Melbourne Pty Ltd (Building and Property) [2019] VCAT 1529 (Finetea)

[iii]GWC Property Group Pty Ltd v Higginson [2014] QSC 264 at 39

If you require any specific information or assistance to protect your interests, please do not hesitate to contact the writer on 8628 2039 or stephanie@robertjames.com.au.

Stephanie McGrath is a Senior Associate at Robert James Lawyers practising in commercial law with a focus on health, business and property across Australia.

Stephanie’s significant pharmacy experience includes buying and selling interests in pharmacies Australia-wide, advising clients in relation to compliance with the requirements of different State and Territory Pharmacy Regulatory Bodies, applications to Medicare, applications and objections under the Pharmacy Location Rules and Ministerial Discretional Applications, partnership disputes and much more.

Disclaimer: The content of this article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other professional advice before acting or relying on any content of this article. 

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