In brief - Commercial leasing incentive agreements may not be
While incentive agreements are common in commercial leasing
transactions, a recent Queensland Supreme Court case shows that
landlords may not be able to claim for repayment of incentives if
tenants terminate the lease.
Plaintiff fails in bid to claim for repayment of
GWC Property Group brings proceedings against guarantors
The plaintiff, GWC Property Group Pty Ltd, owns office premises
at Montpelier Road, Bowen Hills in Queensland. Its predecessor in
title let the premises to Hynes Lawyers Pty Ltd. This arrangement
involved the execution of a lease and an incentive deed.
Hynes are now in liquidation and GWC brought proceedings against
the first, second and third defendants as guarantors under the
incentive deed for $1.2 million in incentives which Hynes failed to
repay on termination of the lease.
Standard form lease supplemented by incentive deed
The lease and the incentive deed were entered into on 11
November 2010. The lease was in the standard form and provided for
a term of seven years with three options to renew. In particular,
the lease provided for rent and a signage fee and prohibited the
lease from being assigned or sub-let without the landlord's
The incentive deed was "intended to supplement" the
lease and granted Hynes a fit-out incentive, rental abatement and
signage fee abatement ("the incentives").
Repayment clauses included in deed on termination
Under the repayment clauses of the incentive deed, namely 2.4,
3.3 and 4.3, the tenant was required to repay a proportion of the
fit-out incentive and all of the rental and signage fee abatements
at the date of termination.
Guarantors responsible for observance and performance of deed
The first, second and third defendants were guarantors under the
incentive deed and guaranteed the observance and performance of
Hynes' obligations under the deed. In addition, the indemnity
clause of the deed required the guarantors to indemnify the
landlord against any liability, loss and damage arising from the
tenant's breach or repudiation of the deed.
Tenant abandons premises and landlord terminates lease
GWC's predecessor in title paid out and provided Hynes with
the incentives. GWC then obtained title to the premises by way of
assignment of all the rights and interests of its predecessor under
the incentive deed.
On 20 May 2013, it was alleged that Hynes abandoned the premises
in breach of the lease. Subsequently on 12 June 2013, GWC accepted
the repudiation and accordingly, terminated the lease.
Court accepts that repayment clauses not enforceable
The court accepted the defendants' claim that the repayment
clauses of the incentive deed were unenforceable on the following
The repayment clauses were wholly penal upon breach of the
lease and were not restitutionary repayments.
The repayment clauses were only triggered by the tenant's
breach of the lease which resulted in termination.
The repayment clauses imposed obligations which were
substantially in excess of any genuine pre-estimate of damages and
any damages which would be payable to GWC at common law. Further,
if enforced, GWC was entitled to recover monies to which it would
never have been entitled had the lease not been terminated.
GWC not entitled to repayment of incentives but can sue for
common law damages
On this reasoning, clauses 2.4, 3.3 and 4.3 of the incentive
deed amounted to penalties which are unenforceable at common law.
As a result, GWC was not entitled to any repayment of the
It is important to note, however, that although GWC was
precluded from entitlements under the repayment clauses, the court
observed that it was entitled to sue on the lease and the
guarantees which were contained in the lease for common law
Landlords may not be able to claim repayment of incentives if
tenants terminate lease
Landlords and tenants should be aware of the implications of
this case, as incentive agreements which require tenants to repay
incentives if a lease is terminated may not be enforceable.
This is particularly important as incentive agreements are very
common in commercial leasing transactions and according to the
reasoning of this case, landlords may be precluded from making any
future claim against their tenants for repayment of incentives on
termination of the lease.
Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
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