Leases – Landlord Unable to Rely Upon Incentive Deed for Damages

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It is not uncommon for Landlords and Tenants to enter into an “Incentive Deed” contemporaneously with a lease. These Incentive Deeds commonly provide for a Landlord’s contribution to the Tenant’s fit-out of the leased premises, or even a “Rent-Free Period”.

It is also not uncommon for those Incentive Deeds to require repayment of the incentives, or a transfer of the ownership of the fit-out, if the Tenant fails to remedy their default under the lease.

However, parties to a lease need to be aware that in certain circumstances, these repayment obligations can be invalid and unenforceable.

Case Summary: GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264

On 29 October 2014, the Supreme Court of Queensland delivered the decision of GWC Property Group Pty Ltd v Higginson & Ors (“Higginson”).

In Higginson, the Plaintiff (“Landlord”) claimed “some $1.2 million as the amount of incentives which [the Defendants (guarantors for the “Tenant”)] received pursuant to the provision of the Incentive Deed and has failed to repay on termination, in accordance with terms of the deed.

In Higginson, the Incentive Deed was prepared by the parties to be a confidential document separate from the lease.

However, the Court took the view that the lease and the Incentive Deed were to be considered as one document.

This is because the documents:

  1. were entered into at the same time;
  2. were entered into between the same parties; and
  3. dealt with the same subject matter.

The lease was a standard form long-term commercial lease for a significant sum of rent.

The Incentive Deed had the following key terms:

  1. the Landlord would contribute a payment per square meter of the net-lettable area of the premises;
  2. the Landlord would own all items paid for with the fit-out contribution;
  3. there would be a proportional (according to the time remaining to the ordinary expiration date of the lease) repayment by the Tenant of the Landlord’s contribution in the event the lease is terminated early;
  4. a rent abatement would be granted by the Landlord to the Tenant for the first three (3) years of the lease;
  5. in the event of an early termination of the lease, the Landlord would be entitled to claim the Rent Abatement Amount as a liquidated debt;
  6. a signage fee abatement would be granted by the Landlord to the Tenant for the first three (3) years of the lease; and
  7. in the event of an early termination of the lease, the Landlord would be entitled to claim the signage fee abatement as a liquidated debt.

The lease was terminated early by the Landlord, who pleaded that:

  1. on 20 May 2013 the Tenant abandoned the premises, which constituted a breach of the lease; and
  2. on 12 June 2013 the Landlord accepted that repudiation and terminated the lease.

In the Decision, Her Honour, Dalton J considered a number of cases which established the principle that there is no right to a “penalty” payment under a common law breach.

Dalton J held that the repayment obligations under the Incentive Deed were indeed a “penalty”, and therefore, the Landlord should not be entitled to claim the repayment of the incentives sought.

In particular, Dalton J considered the following:

  1. “The Triggering Event” – The Landlord’s right to repayment under the Incentive Deed could only be triggered by the wrongful termination of the lease by the Tenant (i.e. by way of the Tenant’s breach) or termination of the lease by the Landlord for the Tenant’s breach. Therefore, the amount claimed was “plainly a sum to be paid in consequence of the breach.”
  2. “Payment not Conditional” – The Court rejected the argument that the repayment obligations under the Incentive Deed were conditional payments that were part of the price or consideration of the parties’ bargain. As an example, the Court contrasted the repayment obligations under the Incentive Deed with an acceleration clause under a lease. Unlike an acceleration clause (i.e. a right to early payment of monies payable under a lease as a result of a tenant’s unremedied default), the repayment obligations under the Incentive Deed would not have arisen if the Tenant had not breached the lease agreement.
  3. “Not a Genuine Pre-Estimate of Damages” – The Court held that the repayment clauses imposed obligations that were substantially in excess of any genuine pre-estimate of damages (i.e. the repayments were extravagant and unconscionable in comparison with the maximum loss that might be suffered by the Landlord on breach of contract).

Our Comments

When drafting leases and incentive documentation, Landlords should exercise proper prudence in choosing to invoke default and termination provisions in the most cost-effective and appropriate manner.

In the event a “claw-back” is held to be a penalty, a Landlord would not be entitled to recover this amount.

Landlords will also need to consider the taxation implications of the repayment of an incentive, in the event the “claw-back” is held to be enforceable.

Conversely, Tenants should be aware that a Landlord is unable to demand amounts from a Tenant where it is above the maximum loss that might be suffered by the landlord for the Tenant’s breach.

Both parties should also be aware that other “ancillary” agreements (such as licences and supporting deeds) may form part of the lease, and be interpreted as such by a Court.

For more information regarding Incentive Deeds

Please contact our Business Development Team or call us on (07) 3252 0011 to book an appointment with one of our specialist Commercial Lawyers today.