“Claw back” of lease incentives thrown into doubt

In GWC the tenant and the landlord entered into a lease and on the same day entered into an incentive deed. The incentive deed was recited to “supplement the lease” and recited that the landlord had agreed, among other things, to contribute to the tenant’s fit-out and grant a rent abatement. The lease did not require the tenant to undertake a fit-out. The incentive deed also provided for repayment of part of the landlord’s contributions if the lease was terminated (other than by expiry of the term or the lessor’s default) or if the tenant parted with possession without the landlord’s consent. The obligation to repay was guaranteed by guarantors.

The landlord terminated the lease after the leased premises were abandoned by the tenant. The court decided that:

• the lease and the incentive deed had to be construed as if they were one document;
• the obligation to repay only arise if there a termination;
• the tenant could be obliged to repay the landlord’s contributions for reasons other than the tenant’s breach – for example where the tenant went into liquidation or following a natural disaster;
• the repayment obligation should not be viewed as a restitutionary payment;
• in addition to contractual damages for breach of the lease, the landlord was entitled, by the repayment clauses, to recover substantial additional payments;
• the repayment obligation were not a genuine pre-estimate of damage.

The court decided that the obligation to repay landlord’s contributions was a penalty and was therefore not enforceable.

The case contains a good discussion about the law of penalties. Thanks to Tony Burke of Burke & Associates Lawyers Pty Ltd for alerting me to GWC.