Lease incentives – even of the most complex variety – are usually applied over the course of a commercial lease as the parties had intended without disputes between landlord and tenant.
It is rare for such arrangements to come into debate even before the lessee has begun to trade.
The lease incentive granted to Birdies Mini Golf – concurrently with it signing an agreement for a 12 year lease of premises at Gympie Road, Strathpine – was by way of fitout contribution to the extent of $1.25m and three months free rent.
The tenant intended to operate there, an 18-hole mini golf course, bar and restaurant similar to the operations it already conducted in NSW and Victoria
The incentive deed required the fitout contribution to be paid by four instalments, the final one 30 days after the commencement date of the lease – pegged at 7 December 2021 – by when the landlord’s works and the tenant’s fitout were expected to have been completed.
Due to delays to the landlord’s works, the start date was pushed out by several months but in the meantime ownership of the site and all the landlord’s rights and obligations are under the agreement and incentive deed were transferred to YFG Strathton Pty Ltd.
By that time, three of the four incentive instalments had already been paid.
Despite YFG’s agreement to perform additional works at its own cost, Birdies did not complete the fitout – due to a bitter dispute with its shopfitter – in time to launch by the revised start date in August 2022.
In response to the tenant’s several heated demands that the landlord commit to yet further works at its own expense before resuming its fitout construction, YFG terminated the agreement.
It also demanded repayment of a proportion of the $1 million in fitout contributions already been advanced by reference to the clawback provisions set out in identical terms in the lease and the incentive deed.
Birdies responded by seeking a declaration that the lease had not been validly terminated.
By “failing to progress the Fitout Works and demand[ing] further concessions as a prerequisite to resuming what it was already contractually obliged to do,” Justice Lincoln Crowley ruled that the tenant’s conduct “went beyond a mere breach of the Lease”.
“BMG’s conduct demonstrates that it was only prepared to perform its existing obligations if YFG made the further concessions,” he observed in concluding the landlord was entitled to rely on Birdies’ repudiation to validly terminate the agreement.
Was though the landlord entitled to demand the pro rata repayment of the incentive?
It was contended against YFG – that because repayment was only required on termination and repayment conferred benefits over and above what it would have received had the lease been performed – the provision constituted a penalty and was therefore void.
Justice Crowley agreed.
He did not accept YFG’s contention that the clawback provision – recovery of the financial incentive reducing to $0 over the lifetime of the lease – was a “rough and ready” genuine pre-estimate of loss.
Neither did he accept that the repayment provision simply operated to withdraw a conditionally-given benefit.
The correct measure of the landlord’s loss was the rental shortfall and costs associated with installing another tenant.
“If the Lease ran its course, the Landlord would effectively ‘recoup’ the Fitout Contribution amounts paid by it through the total rent received [which] would notionally include a component for repayment of the Fitout Contribution”.
It should be noted that the incentive deed provided not only for a fitout clawback but also that it was to remain the property of the landlord.
YFG calculated the pro-rata clawback at $994k and then allowed $114k being its estimate of value to it of the retained fit out. That though did not cure the penal nature of the clawback provision.
“The Repayment Clauses do not provide for any adjustment of the repayment amount calculated by application of the relevant pro-rata formula to account for the Landlord electing to assume ownership of the Fitout Works”.
Justice Crowley concluded that the clawback provision “imposed a punishment” for Birdies’ default and did not “protect any legitimate interest of the Landlord”.
“The proper construction and characterisation of the effect of the Repayment Clauses is that they instead operate to secure the tenant’s compliance with, and adherence to, its primary obligations under the Lease by a payment stipulation that is extravagant and out of all proportion with the Landlord’s legitimate interest in the commercial leasing of its premises”.
In arriving at its decision, the court approved the reasoning of Justice Jean Dalton in GWC Property Group Pty Ltd v Higginson  QSC 264 where she observed: “Before the lease and Incentive Deed were signed the landlord was in the position that its potential tenant would contract only on the basis that it received abatements and a fit-out. Only with those substantial financial concessions did the landlord obtain the lease it did”.