Which case won?

The case for the guarantors (and, in effect, the tenant)
  • As the landlord is entitled to recover damages for the breach of the lease, the landlord’s additional recovery of the incentives amounts to an extravagant and unconscionable penalty.
  • The recovery of the incentives is a penalty, because if the lease proceeded to completion and the tenant had not breached the lease, the incentives would never have been recoverable by the landlord.
  • The landlord would not have secured the lease if it hadn’t offered the incentives. The incentives simply brought the lease into line with the prevailing market conditions at the time.
  • Therefore, recovery of the incentives would mean that the total amount received by the landlord would substantially exceed any genuine pre-estimate of the actual loss.
  • The incentives are a penalty and should not be recoverable by the landlord.
The case for the landlord
  • The incentive deed should be looked at separately from the lease.
  • Our ability as the landlord to recover the incentives was expressly agreed to by the tenant and was part of the consideration for the transaction. We are simply suing for a contractual sum due on a specified event – the termination of the lease.
  • The purpose of the incentive deed was to persuade the tenant to enter into the lease. The repayment clauses in the deed are restitutionary in nature, rather than penalties, because they came into operation only when we did not obtain what we had paid the incentives for.
  • The incentives are a genuine pre-estimate of the damages we have suffered as a result of the tenant’s breach of the lease and are therefore not a penalty.
  • As the incentives are not a penalty, they are recoverable.

So, which case won?

Cast your judgment below to find out
Case A Case B

Case A won. You were right!

How people voted
case a43%
case b57%

Expert commentary on the court's decision

“The court agreed with the arguments for the guarantors, that the repayment clauses in the incentive deed imposed obligations which were substantially in excess of any genuine pre-estimate of the landlord’s damages.”
Court finds that incentive repayments constitute a penalty and so are unenforceable

In GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264, the court found that the landlord was not able to recover the incentives. The attempted recovery of the incentives by the landlord was a penalty.

The court agreed with the arguments for the guarantors (and, in effect, the tenant), that the repayment clauses imposed obligations which were substantially in excess of any genuine pre-estimate of damages.

The repayment clauses enabled the landlord to recover money to which it would never have been entitled if the lease had run its course. In effect, the clauses entitled the landlord to recover as though the tenant had agreed to the rent and signage fees without any abatement, and as though it had not been necessary for the landlord to pay the fit-out incentive in order to complete the bargain with the tenant.

As the judge noted, the situation in which the landlord found itself was a result of its own commercial decisions, adding: “There is nothing compelling in this circumstance which would warrant any compensation being made to the landlord under the Incentive Deed.”

As a result of the court’s judgment, the landlord was left only to pursue the tenant and the guarantors for damages arising from the tenant’s breach of the lease.

Implications for landlords and their agents

Lease incentive clawbacks by landlords, whether in the lease or in an incentive deed or other document, are unlikely to be enforced by the court.

Landlords and their agents should consider carefully the type and extent of incentives offered during lease negotiations. In particular, landlords should avoid the temptation to overreach in the leases they offer to their tenants.

A lease already enables a landlord to pursue the tenant and the guarantors for damages arising from the tenant’s breach of the lease. Adding lease incentive repayment clauses to the lease or to other documents can potentially lead to at least two negative outcomes.

The first is that the landlord basks in the delusion that the tenant can be contractually forced to repay the lease incentives. And secondly, it can lead to protracted and expensive legal proceedings that the landlord is likely to lose.

An experienced lawyer can draft a lease that avoids these pitfalls, while still allowing the landlord to offer the tenant lease incentives. One simple example is offering a rent-free period (or reduced rent) at the end of a lease, rather than at the beginning.

NOTICE: This article is accurate as at the time of publication and does not constitute legal advice. Please see our legal notices page for more information. Information related to coronavirus can be outdated very quickly.

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