No More Lease Claw-Backs?

No More Lease Claw-Backs?

Lease incentives are commonplace in today’s market, as are the corresponding right under the Lease for a Landlord claw-back the payment of the incentive from the Tenant if the Tenant defaults on the Lease later down the track.

However, a recent decision from the Supreme Court of Queensland (below) has found such claw-back to be invalid in certain circumstances, raising interesting implications for Leases which contain such claw-backs.

The Court Decision

In this case of GWC Property Group v Higginson & Ors [2014] QSC 264, the parties entered into a commercial Lease and an accompanying Incentive Deed. The Incentive Deed granted the Tenant an abatement of rent and other charges and it also provided that if the Tenant defaulted on the Lease, the Tenant must pay to the Landlord the amounts abated.

That is, in those circumstances the Landlord was ‘clawing back’ the incentive granted.The Court considered whether the clawback mechanism was a “penalty”, noting that a penalty is not legally enforceable. A penalty is considered to have arisen where there is a breach of Contract and the breaching party is required to pay an amount which far exceeds the compensation to cover the loss incurred.

In these circumstances, the Court noted that the Landlord would be in a far more advantageous position if they were able to enforce the clawback clause than if the Lease remained on foot.

That is, the compensation for the breach would be calculated at the higher rental rate disregarding the abatement and therefore giving the Landlord a monetary advantage that they would otherwise not have.

For this reason, the clawback clause was considered to be a penalty and therefore invalid, meaning that the Tenant did not have to repay the incentive.

Implications

This case highlights that when there is an incentive clawback clause in a Lease upon a Tenant’s default, in many cases such clawback is likely to be invalid.

Accordingly, Lessors should factor this into their decision when granting the incentive in the first place and ether consider not including such clawback mechanism in the Lease, or at the very least, be informed that such clawback is likely not going to be enforceable if the circumstances arose.

The MacDonnells Law Leasing team has extensive knowledge in commercial and retail leasing. For further information please contact us.

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