Many retail and commercial transactions for landlords generally provide an Incentive for Tenant’s to enter into a Lease.
What is an incentive?
Standard Lease Incentives can include Landlord’s contributing towards the cost of the Lease fit out works / improving the premises, rent free periods, rent reductions over the term of the Lease.
Most Incentive Deeds, being separate to the Lease agreement, will also include a Clawback Provision – which allows a Landlord to demand payment for the incentive amount (reduced rental payments) in the event of default by the tenant of a term of the Lease.
In the realm of commercial leasing, disputes between landlords and tenants can lead to significant costs and delay.
A recent case in NSW, Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd (No 2) [2023] NSWSC 60, sets out the complexities surrounding lease agreements, particularly regarding the enforceability of clawback provisions in Incentive Deeds.
Background
The case involves a Lease agreement between Alamdo Holdings Pty Ltd (Landlord) and Croc’s Franchising Pty Ltd (Tenant), concerning the leased premises at Castle Hill, and the rental arrears incurred during the COVID-19 pandemic.
The Tenant fell behind in rent during the period from March 2020 to December 2020. As a result the Lease was terminated by the Landlord on 3 December 2020 due to the Tenant’s default.
An Incentive Deed was also entered into which included a $250,000 fitout contribution paid the Landlord, and included a Clawback Provision for recovery of that amount, calculated on a pro-rata basis over the term of the Lease, payable on default by the Tenant and termination of the Lease.
The Tenant argued that the Clawback Provision was a penalty and unenforceable.
The Court applied the general law principles summarised in GWC Property Group Pty Ltd v Higginson [2014] QSC 264, in its consideration of whether the clawback clauses were:
- characterised as a threat (or punishment) in the event of the Tenant’s failure to comply with the Lease terms; or
- served to guard the legitimate interest of the Landlord and were a genuine pre-estimate of the Landlord’s loss / damages.
The Court found in Alamdo Holdings that the Landlord’s specific fit out contribution Clawback Provisions was disproportionate to protecting the Landlord’s legitimate interests, and was a penalty and unenforceable.
The Landlord could not recoup the proportion of the incentive payment, as that loss would be recoverable from Tenant by way of rental arrears and damages (upon that loss being incurred) after termination of the Lease.
At Matthews Folbigg Lawyers, our experienced property law team is ready to assist. For further information or advice, contact our Property Team.
