Many commercial and retail landlords incentivise their tenants by providing rent free periods and fit – out contributions. Commonly, landlords require the tenant (and/or the guarantors) to repay all or part of such incentives if the lease is terminated due to the tenant’s default.
The recent Supreme Court of Queensland decision of GWC Property Group Pty Ltd v Higginson and Ors  QSC 264 has ruled that such provisions are unenforceable due to being “penalties”. Here in an incentive deed (which was entered into at the same time as the lease for the premises) the landlord provided the tenant with a reduced rental period, a fitout contribution and a reduced signage contribution.
The landlord subsequently sought repayment of the incentives from the guarantors of the lease after the tenant abandoned the premises prior to the end of the lease.
In considering whether the landlord was entitled to repayment of the incentives, the court found that while the landlord was entitled to claim damages for any loss it suffered, it was not entitled to additional payments (or penalties) which would place the landlord in a better position than what it would have been in if the tenant had not abandoned the premises.
The court considered that the incentives paid by the landlord to the tenant were part of the commercial bargain between the parties and since landlord had no right to recover the incentive amounts if the tenant had not abandoned the premises, it was improper for the tenant to pay the landlord amounts it would otherwise not have been entitled to.
Landlord’s who are using incentive provisions should:
carefully consider the amount of incentives they are willing to provide prospective tenants – these incentives are now considered part of the commercial bargain and are not claimable as damages;
reconsider the terms of their incentive deeds; and
seek legal advice before attempting to call on any provided security for repayment of incentives under incentive deeds.
This article should not be used in the place of specific legal advice and is a summary only – please contact McNamara and Associates to discuss your matter in detail on 1300 574 974.
By Belinda Pinnow, Solicitor