The Facts

Tenant and landlord agree terms of lease and incentives

A law firm was negotiating with a landlord for the lease of office premises in the inner Brisbane suburb of Bowen Hills, in Queensland. In November 2010, the parties agreed a deal and the terms were recorded in two documents:

  • A standard form lease for a term of seven years, with three options to renew. Rent was to be paid monthly and a signage fee was to be paid annually; and
  • An incentive deed, by which the landlord offered several incentives to the law firm to secure the deal, including a contribution to the fit out of the offices and a three-year reduction in the rent and signage fees payable under the lease.

Three guarantors provide personal guarantees

Both documents contained personal guarantees provided by three guarantors, who guaranteed to the landlord that the law firm would meet its obligations.

The incentive deed also contained repayment clauses so that if the lease was terminated because of a default by the law firm, the landlord could claim back a proportion of the cost of the fit out as well as the amounts by which the rent and signage fees had been reduced.

Tenant abandons premises and landlord commences legal proceedings

In May 2013, the law firm tenant abandoned the premises in breach of the lease. The landlord accepted the repudiation of the lease by the tenant and terminated the lease.

The law firm went into liquidation and the landlord pursued the three guarantors for monies owed under the lease as well as under the repayment clauses of the incentive deed.

The guarantors refused to pay the amounts claimed by the landlord under the incentive deed (in the sum of around $1.2 million) and the landlord commenced proceedings in the Queensland Supreme Court.

It was up to the court to decide whether the repayment clauses in the incentive deed were enforceable or whether they amounted to penalties, in which case they would be unenforceable.

case a - The case for the guarantors (and, in effect, the tenant)

case b - The case for the landlord
  • As the landlord is entitled to recover damages for the breach of the lease, the landlord's additional recovery of the incentives amounts to an extravagant and unconscionable penalty.
  • The recovery of the incentives is a penalty, because if the lease proceeded to completion and the tenant had not breached the lease, the incentives would never have been recoverable by the landlord.
  • The landlord would not have secured the lease if it hadn't offered the incentives. The incentives simply brought the lease into line with the prevailing market conditions at the time.
  • Therefore, recovery of the incentives would mean that the total amount received by the landlord would substantially exceed any genuine pre-estimate of the actual loss.
  • The incentives are a penalty and should not be recoverable by the landlord.
  • The incentive deed should be looked at separately from the lease.
  • Our ability as the landlord to recover the incentives was expressly agreed to by the tenant and was part of the consideration for the transaction. We are simply suing for a contractual sum due on a specified event – the termination of the lease.
  • The purpose of the incentive deed was to persuade the tenant to enter into the lease. The repayment clauses in the deed are restitutionary in nature, rather than penalties, because they came into operation only when we did not obtain what we had paid the incentives for.
  • The incentives are a genuine pre-estimate of the damages we have suffered as a result of the tenant's breach of the lease and are therefore not a penalty.
  • As the incentives are not a penalty, they are recoverable.

So, which case won?
Cast your judgment below to find out

Vote case A – the case for the guarantors (and, in effect, the tenant)
Vote case B – the case for the landlord

David Crossan
Property disputes
Stacks Law Firm

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