Lease incentives given by landlords to induce tenants to enter
leases are a very common feature of the property landscape in
Australia. These usually take the form of fit out contributions or
rent abatements (or a combination of both). Frequently, the
landlord requires the inclusion of a 'claw back' provision,
so that if the lease is terminated, the tenant must repay to the
landlord a pro rata part of the incentive (in addition to any other
remedies which the landlord may have arising from the
A recent decision of the Supreme Court of Queensland has cast
considerable doubt over the enforceability of these claw backs.
The facts in GWC Property Group Pty Ltd v Higginson and
others  QSC 264 are uncontroversial and quite commonly
In 2010, Hynes Lawyers Pty Ltd entered a lease of commercial
office space in Brisbane for a term of seven years (plus options)
at a commencing rent of AUD767,715 per annum. At the same time, it
entered a separate incentive deed with the landlord under which the
tenant was to be paid a very substantial fit out allowance and was
given a rent abatement to apply during the first three years of the
term. The tenant's obligations under the lease and deed were
guaranteed by the directors of the tenant.
The incentive deed provided for claw back (on a pro rata basis)
of the fit out incentive if the lease was terminated for any reason
other than default by the lessor or if there was an unauthorised
assignment or subletting. It also provided for claw back of the
whole of the rent abatement amount if the lease was terminated by
reason of the lessee's default.
The incentive deed did not contain any substantial obligations
on the parties other than for payment, and repayment, of the
In 2013, the tenant abandoned the premises. The landlord
accepted the tenant's repudiation and terminated the lease. The
tenant went into liquidation and the landlord commenced proceedings
against the guarantors under the incentive deed for recovery of the
amounts due under the claw back provisions (approximately AUD1.2
million in total).
The guarantors resisted the proceedings on the basis that the
claw back provisions amounted to penalties and were therefore
unenforceable at common law.
Findings of the Court
The Court (Dalton J) found that:
the incentive deed and the lease are to be construed as if they
were one document having been entered at the same time, between the
same parties and dealing with the same subject matter
since the events triggering the obligation to repay the
incentive amounts were based upon failure by the tenant to observe
its primary obligations under the lease, the claw back provisions
fell squarely within the description of what constitutes a
potential penalty under the decision of the High Court in
Andrews v ANZ Bank  247 CLR 205
having regard to the true nature of the bargain struck by the
parties, it would be commercially artificial to characterise the
incentive payments as being conditional payments and the claw back
provisions as merely restitution because the conditions have not
the claw back provisions must accordingly be examined to see
whether they are penalties (and therefore unenforceable) or
pre-estimates of liquidated damages (and therefore
the test of whether the claw back provisions are a penalty is
if they require payments which are extravagant and unconscionable
in comparison with the maximum loss that might be suffered arising
from the tenant's breach and, in this context, the test is
objective and not related to the state of mind of the parties
the claw back provisions are penalties as they impose
obligations which are substantially in excess of any genuine
pre-estimate of loss taking into account the extent of the damages
which the landlord is entitled to recover at common law upon
termination of the lease and that the claw back provisions would
otherwise allow the landlord to recover additional amounts in
excess of its actual loss
the claw back provisions are therefore unenforceable.
Impacts of the Decision
The decision may well have a significant impact. It is likely
that most claw back provisions contained either in leases or in
separate deeds will be unenforceable as penalties, as the
provisions in this case are in a form which is widely used in the
property industry throughout Australia. It is also difficult to
envisage a way in which these types of provisions could be used
which would avoid that outcome.
We are yet to see how this will play out over the longer term
and whether, in particular, the inability to include enforceable
claw back provisions will have any effect on the future structure
of incentives and rental arrangements.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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