Commercial Leases: Goodbye to Claw-back Provisions?

READ LATER – Download this Article as a PDF >> CLICK HERE <<

Clawbacks

LANDLORDS WHO PROVIDE lease incentives to tenants (including fitout contributions, rent free periods and rent abatement periods) often attempt to secure themselves by requiring tenants to repay the incentives.

They usually request this in the event the lease is terminated due to the tenant’s default.

This is on the basis that the incentive is provided to the tenant on the assumption that the lease is not terminated before the end of the term due to the tenant’s default.

However, in the recent Queensland Supreme Court decision of GWC Property Group Pty Ltd v Higginson [2014] QSC 264, the Court stated that such claw-back provisions are not unenforceable.

This article explores the decision in more detail.

Key Facts

  • The original landlord of an office building provided the tenant with an initial rent abatement and an up-front lump-sum contribution to the tenant’s fit out.
  • These incentives were documented in a separate incentive deed (rather than the lease).
  • The incentive deed included a claw-back right for the landlord, requiring the tenant to repay a proportionate part of the incentive (having regard to the period of the term that had expired as of the date of termination).
  • The claw-back was included in the event of the lease being terminated due to the tenant’s default. The tenant’s obligations under the incentive deed were guaranteed by guarantors.
  • The tenant abandoned the premises and the new landlord (who had purchased the property) brought the lease to an end.
  • The new landlord then sued the guarantors under the incentive deed to recover a portion of the incentives under the claw-back back provision.

Outcome

The Court found that the claw-back provision was unenforceable due to it being characterised as penalty. Clauses that aren’t a ‘genuine pre-estimate of loss’ are considered penalties under common law and are consequently unenforceable.

The Court held that these claw-back provisions weren’t proportionate to the landlord’s loss caused by the termination of the lease as the provisions ‘[could] not restore the landlord to [its] pre-contractual position’.

Bottom Line: There is a high risk that other jurisdictions will follow this decision, meaning lease provisions attempting to recover money spent on lease incentives may be unenforceable.

Such claw-back rights need to be carefully drafted to ensure they have the best possible chance of being valid and enforceable.

Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice. And, you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.

Xenos

READ LATER – Download this Article as a PDF >> CLICK HERE <<