Landlords can’t claw back fit-out contributions from defaulting tenants

A recent decision in the Victorian Civil and Administrative Tribunal (VCAT) has cemented the position in Victoria and Queensland that landlords can’t claw back fit out contributions from tenants that have defaulted, even if there is an express provision in the lease that says a landlord can, where damages would be an adequate remedy. 

In 2014, the Queensland Supreme Court said in GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264 that provisions in leases that purported to require tenants to repay fit-out costs or an incentive paid to the tenant (upon default) were “wholly penal in their operation: providing for significant sums to be paid over and above damages which would be payable to the landlord at common law”. 

In that case, the presiding judge, Dalton J, said that for the defendants to establish that the clauses were penal (and therefore unenforceable), they needed to show that the stipulated repayments were extravagant and unconscionable in comparison with the maximum loss that might be suffered on breach of the contract. 

VCAT applied this test in Finetea Pty Ltd v Block Arcade Melbourne Pty Ltd (Building and Property) [2019] VCAT 1529. The landlord and tenant entered a lease of a premises situated in the basement of the Block Arcade in Collins Street, Melbourne. When the tenant defaulted, the landlord sought to recover the value of incentives totalling $555,000 divided into a rent credit of $355,000 and a cash incentive of $200,000 towards fit out works, pursuant to Special Provision 4.4 of Annexure C to the Lease. 

The Court held on the issue of the repayment clauses that the landlord obtained the benefit of the Lease and a contractual right, after the rent-free period had expired, to receive rent and outgoings for the term of the Lease. The rent was struck on the expectation that the premises would be fitted out in the manner contemplated at the expense of both parties and then occupied by the tenant for the period of the lease. Had the tenant not broken the lease, it would not have been responsible for paying rent and outgoings for the rent-free period, nor would it have been responsible to repay the landlord its contribution towards the fit out. The rent-free incentive and the fit out contribution were part of the consideration for its entry into the lease. 

The lease preserved the landlord’s entitlement to recover common law damages. To seek to recover the incentives in addition to those damages would be a “double recovery” and plainly “extravagant and unconscionable in amount” and out of all proportion to the damage it has suffered. 

You’ll find that the team at Conditsis Lawyers is here to demystify commercial leases. 

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