How strong are a landlord’s claws?.

In the current leasing landscape, it is not uncommon for landlords to offer lease incentives to entice prospective tenants.

The claw’s jaws

An incentive in a lease can be structured in various ways, including:

• a rent free period;
• a fit out contribution; or
• a rent abatement over the lease term.

Lease incentives are often accompanied by certain conditions which prescribe circumstances where the landlord may clawback all or part of the value of the incentive. A common condition is, for example, where the lease is terminated or assigned prior to the expiry date. The logic being that the incentive was offered on the basis that the tenant will occupy the premises and comply with the lease for the full lease term.

A flawed claw

There have been instances where the landlord’s ability to clawback an incentive was deemed a penalty (and therefore unenforceable) by the courts, on the basis that the clawback was excessive and unconscionable in comparison to the maximum loss suffered for the breach. The relevant considerations in how to apply this test were described in our previous article on the relevant Queensland Supreme Court case.

This issue was once again considered (albeit briefly) in the case of 148 Brunswick Street Pty Ltd v Strategix Training Group Pty Ltd [2021] QDC 38. In this case the landlord granted the tenant:

• a 6 month rent free period;
• a $50,000 fit out contribution;
• reduced rent for the balance of the term; and
• a right to terminate the lease early.

Importantly, if the tenant exercised the right to terminate the lease early, the tenant was required to refund the value of the incentive provided.

Sharpening the clause

The judge acknowledged (in passing) the strength of the landlord’s case on this point, noting that:

• the relevant clause operated to grant an option for the tenant to reduce the length of the lease in exchange for repayment of the incentives provided;
• there are therefore prima facie good grounds for the court to find that the clause is simply the result of a fairly negotiated, even though possibly harsh, commercial bargain; and
• the penalty doctrine cannot be applied simply to relieve a person from the harsh consequences of a bargain freely entered into.

Key takeaways

It is important to be attentive and thorough when drafting lease incentive clauses. When offering an incentive, landlords should be aware that the full amount may not be properly recoverable on default or another event triggered by the tenant.

Whilst the Brunswick case was not a decision made on the merits, it is clear that there is no ‘one size fits all’ approach to structuring an incentive clawback. Landlords may be able to recover incentives if they are drafted carefully, as courts are open to interpreting such clauses as not being a penalty where they are in consideration or exchange for a further obligation or right.

The Bespoke Leasing Team assists landlords and tenants with regards to lease incentives and incentive deeds. Please reach out to us with any queries.