Australia: Against the law to claw (back)? Leasing incentives and clawback provisions in the spotlight in Victoria

In brief

VCAT has recently applied a decision by the Queensland Supreme Court regarding clawback clauses which has the potential to affect how the clauses are applied in Victoria.

Background

When negotiating lease agreements, landlords can offer incentives to tenants as part of the bargain. Lease incentives often come in the form of a rent-free period, a reduction in rent over a period of time or a contribution to the tenant's fit-out of the premises.

It is commercially common for landlords to include a "claw back" provision which allows the landlord to recover the incentive (or part of) if the lease is terminated before the expiration date. The landlord's view is that incentive was provided on the basis that the tenant would occupy the premises for the term and if the tenant causes the lease to expire early, the landlord should have the ability to recover part of the benefit of the inducement. This is often calculated on a pro-rata basis and the landlord recovers that part of the incentive that is proportionate to the balance of the term remaining after the early termination.

GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264 (GWC Property Group)

In 2014, the Queensland Supreme Court held that a clawback clause allowing the landlord to recover the fit-out incentive granted under the lease was not enforceable.¹ The Court held that the clawback clause was more alike a penalty and the repayment of the unexpired part of the incentive is "in excess of any genuine pre-estimate of damages"² as the landlord was already entitled to contractual damages for the breach of the lease – being the proceeds that the landlord would have gained had the lease naturally expired. If the landlord is also entitled to recover part of the incentive from the tenant as well as contractual damages, the landlord would have received additional payments for the tenant's breach over and above the actual damage that it suffered.

Finetea Pty Ltd v Block Arcade Melbourne Pty Ltd (Building and Property) [2019] VCAT 1529 (Finetea)

VCAT has recently applied the test adopted by the Queensland Supreme Court when considering the landlord's right to clawback an incentive for a failed venture at the Block Arcade on Collins Street.³ The incentives consisted of a rent credit of $355,000 and a contribution to fit-out works of $200,000. The lease included a special condition which included a clawback clause requiring the tenant to repay to the landlord the part of the incentive related to the unexpired term of the lease.

The tenant's counsel relied on the GWC Property Group case mentioned above. Penalties are considered by the courts as excessive, "extravagant and unconscionable in amount" and "out of all proportion".⁴

Senior Member Walker acknowledged that the landlord can claim the costs of re-instating the premises, loss of rent and outgoings of the premises until the premises is re-let to a new tenant. These costs are the actual loss suffered by the landlord due to the tenant's default. The decision also considered that the rent-free period formed part of the bargain struck between the parties – it was the price that the landlord paid for the tenant to enter into the deal.

In applying the GWC Group case, it was determined that to recover the incentive amounts would amount to double recovery by the landlord which imposes a punishment on the tenant and is therefore not enforceable.

What do you need to know?

If the lease comes to an end early, a landlord's attempt to recover part of an incentive under a clawback clause may be challenged by a tenant. Prior to entering into a lease, landlords should consider the commercial effect of the incentives granted under leases in light of these cases and understand that recovery of the moneys associated with the incentive is unlikely.

Tenants should also consider their rights if a landlord seeks to recover incentive payments under a lease.

Footnote

¹ GWC Property Group Pty Ltd v Higginson [2014] QSC 264.

² Ibid. [39]

³ Finetea v Block Arcade Melbourne Pty Ltd (Building and Property) [2019] VCAT 1529.

⁴ Ibid [331] citing Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin [1986] HCA 63

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.