It could feel like the stars are aligning if you recently found the right premises to lease and the landlord sweetens the deal by throwing in lease incentives for the first few months while you set up shop. Some may go one step further and offer to pay for your fit-out costs in addition to granting a rent-free period. But have you ever wondered if there’s a catch? The short answer is yes. The lease can require you to repay the lease incentive on the happening of particular events (also known as a clawback provision). This article will explore clawback provisions in more detail and discuss whether or not the landlord can legally ask you to repay the lease incentive.
What Are The Different Types of Lease Incentives?
The landlord can offer lease incentives in a variety of ways, including:
- Rent-free periods: The landlord suspends the rent for a specified timeframe such as the start of the lease until a particular date (usually enough time for you to complete your fit-out works).
- Rent reduction: The landlord reduces a proportion of the monthly rent by an amount the parties agree to until the tenant uses up the total incentive amount.
- Contribution to fit-out costs: The landlord pays for the fit-out up until an agreed amount. This payment can be by way of reimbursement for your fit-out works, or the landlord can carry out the fit-out works in agreement with approved plans and specifications.
What are Clawback Provisions?
The parties will usually document an incentive in either the lease document or a separate document often referred to as a side deed or incentive deed. A provision that requires you repay the lease incentive amount for a breach of the lease or an assignment of the lease is called a clawback provision.
Can the Landlord Legally Ask You to Repay the Lease Incentive?
The High Court decision in GWC Property Group Pty Ltd v Higginson and Others  QSC 264 held that clawback provisions may be unenforceable.
In that matter, the landlord offered the tenant a 7-year lease with a lease incentive consisting of a fit-out contribution and rent and signage fee abatement over the first three years of the initial term. Its directors personally guaranteed the obligations of the tenant. The tenant then went into liquidation after entering into the lease, and the landlord sued the guarantors for money owing under the incentive clawback provision.
The Court’s legal reasoning, in this case, rests upon the new penalty doctrine established in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 (‘Andrews’). The doctrine of penalties applied to a leasing scenario is as follows:
- If a lease contains a provision which contemplates a genuine pre-estimate liquidated damages (i.e. a pre-agreed sum of compensation), then that provision is enforceable.
- If a lease provision is intended to be a penalty, then it is unenforceable.
The Court held in GWC Property Group Pty Ltd v Higginson and Others  QSC 264 that the landlord was entitled to recover ordinary damages for breach such as the rental during the time that it took to re-let the premises. However, the landlord would have been in a better position than if the tenant had not breached the lease than if the landlord was allowed to recover the incentive amount.
The landlord had no right to ask for the incentive repayment had the tenant continued with its lease until the expiry date. On that basis, the Court concluded that the clawback provision was a penalty provision and therefore unenforceable.
Before entering into a lease and accepting a lease incentive ensure that you understand what the landlord expects if you choose not to continue with the lease down the track. If you need assistance reviewing your lease documents or have any questions about your terms, get in touch with our commercial leasing team on 1300 544 755.