When entering a retail lease, the landlord may offer an incentive to entice you into the lease. If offered an incentive, you will likely be asked to enter into an incentive deed. Within the incentive deed, there will probably be a clawback provision stating that you must repay the amount of the incentive if a particular event occurs. These are commonly inserted into incentive deeds, serving to benefit and protect the landlord. This article will identify the effect of clawback provisions in incentive deeds on tenants.

Incentive Deeds

An incentive deed is a document that sits alongside the lease agreement. The deed sets out the agreement for the incentive, which could be a:

Usually, landlords offer these types of incentives on the basis that:

  1. the tenant will stay in the lease for the entire term; and
  2. the tenant will not sell their business, thereby transferring the premises to another tenant.

Clawback Provisions

Having a clawback provision in an incentive deed means that if a certain trigger event occurs, you will have to repay any amounts you received as an incentive. Some trigger events can include the:

  • lease being terminated for any reason;
  • tenant selling its business and assigning the lease to the new owner of the business;
  • tenant failing to comply with a default notice;
  • landlord terminating the lease as a result of a tenant’s breach and default; or
  • tenant abandoning the premises.

Some clauses apportion the amount you are liable to repay according to how much time remains in the lease term.

The purpose of a clawback clause is to protect the landlord’s investment in the tenant. Ultimately, it tries to prevent a situation where the landlord has provided financial incentives to the tenant, and the tenant abandons the premises or defaults on the lease early. This will result in the landlord losing their financial investment.

However, the practical effect of this clause is that tenants are forced to remain in their lease for the entire term. Sometimes, clawback provisions can be onerous, rather than a fair indication of the actual loss of the landlord.

Considerations for Tenants Signing Incentive Deeds

It is essential to review the clawback provision in your incentive deed and understand its scope. In particular, tenants need to understand what events will give the landlord the right to demand repayment of all or part of the incentive amount.

This right will usually kick in upon early termination of the lease. However, depending on the wording of the clause, this may apply where a specific party terminates the lease. The specific party could be:

  • the tenant;
  • landlord; or
  • either party.

Usually, the landlord can terminate the lease early as a result of a tenant assigning or breaching the lease. Essentially, this means that as long as you do not assign or breach the lease during the term, the clawback provision will not apply. It is vital that tenants understand what breaches will lead to the termination of the lease.

When Can Landlords Not Rely on Clawback Provisions in Incentive Deeds?

The case GWC Property Group Pty Ltd v Higginson and Others [2014] discusses the issue of landlords relying on clawback provisions and outlines when they will be unenforceable. Here, the tenant entered into a lease with an incentive and signed an incentive deed containing a clawback provision.

During the term of the lease, the tenant abandoned the property, resulting in the landlord terminating the lease. The landlord tried to claim the incentive amount under the clawback provision.

The Court stated that the clawback provision was unenforceable. This was because the incentive amount was not a legitimate estimate of the loss the landlord was suffering. If the tenant did not breach the lease, the landlord would never have received this amount.

Key Takeaways

Where you are offered an incentive to enter into a lease, you may be required to repay this amount if the lease is terminated early. It is important for tenants to carefully review their lease and incentive deed to consider the clawback provision. Tenants must understand their obligations under this clause and what events will result in early termination.

However, courts are unlikely to enforce clawback provisions where they are too harsh or unreasonable. If you have any questions, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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