Clawback of Lease Incentives – An Interesting Turn in Tasmanian Ports Corporation Pty Ltd v Resources Australasia Pty Ltd [2024] TASSC 60

Lease incentive clawback provisions are common but usually difficult to enforce. This has been the case in most circumstances until Tasmanian Ports Corporation Pty Ltd v Resources Australasia Pty Ltd [2024] TASSC 60 (Tas Ports).

Tas Ports is an unusual case with unique circumstances but worthy to note particularly when acting for tenants.

What is an incentive and how do clawback provisions work?

Incentives are commonly granted by landlords for the benefit of tenants to encourage tenants to sign or renew commercial leases. It is particularly important in a competitive leasing market.

Incentives are typically in the form of rent-free periods, rent abatement or monetary contributions towards fitout works. There may be other forms of incentives.

Incentives are often subject to clawback provisions.  Clawback provisions typically apply if leases were terminated early due to the tenant’s default.  The amount repayable by the tenant to the landlord pursuant to the clawback provision will usually be a portion of the amount of incentive paid to the tenants.

Clawback deemed a penalty

Courts have traditionally viewed clawback provisions as a penalty if the provision would have the effect of providing the landlords greater compensation than they would otherwise have been entitled to have the leases run their course.

This was reinforced in the NSW Supreme Court decision of Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd (No 2) [2023] NSWSC 60, where the NSW Supreme Court held that the clawback provision for a fit-out contribution was punitive in nature and went further than was necessary to protect the landlord’s legitimate interest.

Tas Ports – why is it different?

Background

Tasmanian Ports Corporation Pty Ltd as landlord (Landlord) entered into a lease with Resources Australasia Pty Ltd as tenant (Tenant) for a term of 5 years with an option for renewal for a further term of 5 years (Lease).

At the time of entry into the Lease, the Landlord also granted an incentive in favour of the Tenant (Incentive) pursuant to a deed (Incentive Deed). The Incentive was split as follows:

1. rent free period of 6 months (commencing roughly 6 months after the Lease commencement date); and then
2. rent abatement of:
   1. $2,000 excl GST per month in the second lease year;
   2. $1,500 excl GST per month in the third lease year; and
   3. $500 excl GST per month in the fourth lease year.

The Incentive was conditional upon the Tenant complying with its obligations under the Lease.  It is unclear from the decision whether there was an express clawback provision in the Incentive Deed.

The Tenant breached its obligations in the Lease (which were essential terms) by:

1. occupying land outside of the leased premises for storage without permission of the Landlord; and
2. constructing an awning without obtaining the required approval from the Landlord and securing a building permit from the Local Council.

The Landlord requested the Tenant to remedy its breaches but the Tenant did not do so (or at least not in full and properly) within the required period.

The Landlord terminated the Lease on 2 occasions, both of which are expressly permitted under the Lease as follows:

1. first, the Landlord terminated without cause by 12 months’ notice; and
2. subsequently, the Landlord terminated immediately due to breaches of essential terms by the Tenant.

On termination of the Lease, the Landlord claimed payment from the Tenant the difference between the full rent and the reduced rent in respect of the period the Lease was in force (Repayment Sum), amongst other things.

Decision of the Court

Termination of the Lease

The Court held that the Landlord validly terminated the Lease on both occasions.

The Court rejected the Tenant’s pleading for relief against forfeiture of the Lease under equity, s15(2) of the Conveyancing Law of Property Act 1884 (Tas) (which is similar in principle to s129(2) of the Conveyancing Act 1919 (NSW)) and s237 of the Australian Consumer Law (ACL).

The Court found nothing unconscionable in the Landlord’s conduct, particularly in light of the duration of the Tenant’s breaches and exposure of the Landlord to possible prosecution by the Local Council.

Claim for Repayment Sum

The Court then considered the Landlord’s claim for the Repayment Sum.

The Court ordered the Tenant to repay the difference in rent from the commencing date of construction of the awning (date of breach) to the date of immediate termination of the Lease.

In opposition to the Landlord’s claims, the Tenant contended that:

1. the Landlord had waived its contractual right to claim the Repayment Sum or part of it or was estopped from doing so on acceptance of payment of the reduced rent.
2. the Landlord engaged in misleading and deceptive conduct; and
3. in not claiming the full rent under the Lease at any time, the Landlord had acted unconscionably under the ACL.

The Court rejected each of the Tenant’s contentions.  The Court clarified that the right to accept payment of the reduced rent and the right to claim the Repayment Sum or part of it were not alternate rights. The Landlord’s acceptance of payment of the reduced rent was not a representation that the Landlord would not press for payment pursuant to the Incentive Deed.  The Court also said that there was nothing misleading or unconscionable in the Landlord relying upon its contractual rights under the Incentive Deed which was negotiated at arm’s length between experienced business people and their solicitors.

Difference

In Tas Ports, the Incentive was negotiated because the Tenant incurred substantial expenses in upgrading the power supply to the leased premises. This is unusual as incentives are usually granted to reflect the true effective rent in the market, or to win a transaction.

Interestingly, no argument was advanced by the Tenant to the effect that the Tenant had received the benefit of the Incentive due to the electrical upgrade.

The defence of penalty was also not raised by the Tenant.

Key takeaway

Tas Ports is an unusual case with unique circumstances. It is a good example of what not to do if you are a tenant.

It is not clear whether a portion of the Incentive would still have been repayable by the Tenant if the reason for granting the Incentive (electrical upgrade) was set out in the Incentive Deed, and that fact had been raised as part of the Tenant’s argument.  Alternatively, the outcome of the case might have been different if the Incentive was equally distributed throughout the term of the Lease instead of staggered.

When negotiating incentives and their deeds for tenants, it is important to:

1. understand the rationale behind the grant of incentives and clearly note them in the deeds – do not assume that it is always for the same reason;
2. remove incentive clawback provisions (if possible);
3. seek to limit grounds for clawback and formulate a reasonable repayment amount; and
4. avoid upfront payment of incentives and elect for rent abatements of equal amounts over the term if possible.

Tenants are also reminded to treat each default notice from the landlords seriously and take prompt action to remedy their defaults timely and properly.

As a landlord, it is equally important to ensure that clawback provisions are carefully drafted to avoid them being considered as a penalty at law.

If you would like to discuss this article with us, please contact Yanlie Leung, Senior Associate on (02) 9261 5900.