A landmark decision in the Supreme Court of Queensland may have
far reaching implications for tenants and landlords alike. In the
case of GWC Property Group Pty Ltd v Higginson & Ors  QSC
264, the Court considered the clawback of lease incentives
following specified events, including where the tenant does not
complete the full lease term.
A lease's claws
Incentives in lease agreements can be structured in various ways
contributions to tenant's fit outs;
rent free periods; or
rent abatement over all or part of the lease term.
They are often given to a tenant on the basis that the tenant
will comply with the terms of the lease and be in occupation for
the whole of the lease term.
The greater the landlord's investment, the greater the risk
of loss that may be suffered on early termination. Given this,
landlords often include a clawback provision, which provides for a
formula for repayment of part or all of the incentive if the lease
is terminated early.
Landlord sharpening its claws
In this case, a 7 year lease was signed with incentives that
included a contribution to the tenant's fit out, a rent
abatement and a signage fee abatement, all spread over the first 3
years of the term. The clawback provisions required the tenant to
repay a proportion of the landlord's fit out contribution on
certain events, including termination of the lease for certain
reasons. The rental and signage abatement amounts had to be repaid
in full if the lease was terminated by the landlord.
The landlord terminated the lease on the grounds of repudiation
due to the tenant entering liquidation. The landlord then sued the
tenant's guarantors for payments under the clawback
The Supreme Court of Queensland held that the clawback
provisions were in fact penalties and were not enforceable against
the guarantors. One of the reasons was that the provisions provided
for significant sums to be paid over and above damages payable at
common law which amounted to a windfall gain for the landlord above
what the landlord would have had if the lease were performed.
Keep your claws in check
Other Australian jurisdictions may be swayed by this Queensland
decision although only on a persuasive basis. Importantly,
landlords and tenants should be aware of the risks of incentive
clawback provisions being potentially unenforceable following early
termination of leases. It may well be time for landlords and
tenants to sharpen the drafting of incentive deeds.
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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