In brief - Commercial leasing incentive agreements may not be enforceable
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 incentives
In the case of GWC Property Group Pty Ltd v Higginson & Ors  QSC 264, the Supreme Court of Queensland found that repayment clauses in an incentive deed which arose as a result of termination of the corresponding lease, amounted to penalties which are unenforceable at common law.
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 consent.
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 obligations
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 grounds:
- 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 incentives.
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 damages.
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.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.