When enticing a Brisbane law firm to sign up in November 2010 for premises at Montpelier Road Bowen Hills, the owner offered incentives to the tune of $1.2 million – documented separately – but like the lease, supported by directors’ guarantees.
With Hynes Lawyers’ demise before the halfway mark of the seven-year term, the new owner sued its three directors under their personal guarantees in the incentive deed.
At stake were allowances the original owner had “confidentially” granted for abatement of the $770k annual rent and a $15k annual “signage fee”; and a fit out contribution.
In a summary dismissal application the guarantors contended the net effect of the deal with incentives accounted for, reflected what the market commanded and the parties had agreed. Any clawback that yielded the landlord a “windfall” was penal and therefore unenforceable.
The rent and signage clawbacks were as commonly drafted with amounts required to be repaid only those rebates allowed up to the date of early termination. The fitout repayment calculation was a proportion of the total allowance adjusted pro rata, for the period between early termination and the lease expiry date. The landlord was to own the fitout and each of the repayment clauses expressly preserved the landlord’s common law rights.
The landlord – whose buy price was presumably arrived at by reference to the higher yield – contented that the repayments were merely “restitutionary”.
In examining the events that triggered the obligation to repay, Justice Jean Dalton noted they included some circumstances of lease termination irrespective of the tenant being in breach – indicative of the provisions not being penal – for example if it came to an end by reason of a natural disaster; “or the tenant going into liquidation in circumstances where it does not promise to prevent that”.
While recognising the different character of the incentives for the rent abatement and the signage fee abatement on the one hand – these directly corresponding to the tenant’s obligations under the lease – and the fit out contribution on the other (there was no obligation for the tenant to perform the fit out), Justice Dalton noted that all three payments “share the characteristic that had the tenant not breached the lease agreement, or had it breached only in ways which did not move the landlord to terminate, the sums of money claimed in this proceedings would never have been payable.”
Rejecting the landlord’s assertion it claimed only contractual sums due upon the occurrence of a specified event, the court took the view that “the bargain between the parties as evidenced by the combined terms was that the tenant would pay the abated prices for rent and signage fees on condition that the landlord paid for the fit out”.
The clawback provisions “sought to give the landlord an advantage which it would not have if the lease were performed according to its terms”. They went much further than restoring the landlord to a pre-contractual position.
Having convinced the court that the repayment clauses should be examined, the guarantors needed also to show that the payments due “were extravagant and unconscionable in comparison with the maximum loss that might be suffered on breach of contract”.
This was achieved via the landlord’s expert market rent evidence which demonstrated that the incentives reflected prevailing market conditions as at the date of the lease and the corollary, that re-payments required over and above such sums, reflected a higher rent that the landlord “might have obtained had market conditions been better.”
It was clear to the court the provisions were a penalty and thus unenforceable: “The repayment clauses were wholly penal in operation, providing for significant sums to be paid over and above damages which would be payable to the landlord at common law for breach of contract,” which would in any event, be an adequate remedy.
In a decision that has major ramifications for Queensland’s commercial leasing and property investment industries, the landlord’s claim was dismissed and judgment entered for the guarantors with costs.
The landlord’s recoupment measures are not entirely at an end. It may still be able to bring a breach action under the lease guarantee, for loss of rent up to the date it re-lets the premises and possibly also for some of the cost of a new fitout to suit the requirements of the new tenant.