Since the GWC Property case was decided in Queensland’s Supreme Court, it appeared to be clear that a provision allowing a landlord to clawback an incentive from a tenant, on the early termination of a Lease, was a penalty and, therefore, unenforceable. Nevertheless, the practice of including such provisions in Leases or side Deeds has continued, amid suggestions that the holding in GWC Property could be differentiated on the basis that the landlord, in that case, was claiming against personal guarantors under an Incentive Deed, rather than against the tenant under the Lease.
However, in the recent decision of Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd (No. 2), the Court held that these types of clawback provisions went much further than was necessary to protect the landlord’s legitimate interests and were, therefore, akin to a punishment of the tenant for having breached the Lease i.e. a penalty. Rather, a landlord is limited to recovery of damages for contractual breach, including loss of bargain damages for any delay in locating a new tenant.
There now appears to be little doubt that an incentive clawback provision is an unenforceable penalty and not a genuine pre-estimate of loss, despite any wording in the document stating that it is. If you are a tenant whose landlord is attempting to clawback an incentive under a lease or related deed, you should seek legal advice before agreeing to repay any funds to the landlord.
Moving forward, landlords who offer incentives to proposed tenants should consider alternative methods to recover those incentives on a breach, such as financing provisions which give landlords much broader enforcement rights should the lease be terminated for breach. Alternatively, if commercially appropriate, incentives could be applied by way of abatements over the term of the lease, permitting the landlord to cease the abatements if a tenant breaches, and thus limiting the landlord’s loss.
If we can help you with an incentive issue, please do not hesitate to contact us.