When Lease Incentives Become Unrecoverable: Key Lessons for Landlords

A court decision has highlighted an important risk for landlords offering incentives to tenants as part of a lease.

In GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264, the court found that a landlord could not recover lease incentives it had previously given to a tenant. The landlord had attempted to recover those incentives after the tenant breached the lease, but the court ruled that the repayment clauses amounted to a penalty and were therefore unenforceable.

What Happened in the Case?

The lease included incentives such as rent reductions, signage benefits, and a fit-out contribution to encourage the tenant to enter the agreement. When the tenant later defaulted, the landlord sought to recover those incentives under repayment clauses contained in the lease documentation.

However, the court accepted the guarantors’ argument that the repayment obligations were far greater than any genuine estimate of the landlord’s likely loss. In simple terms, the clauses were seen as punishing the tenant rather than compensating the landlord.

The court also noted that the repayment provisions would have allowed the landlord to recover amounts it would never have received if the lease had continued as planned. For example, the clauses effectively treated the arrangement as if no incentives had ever been offered — even though those incentives were necessary to secure the tenant in the first place.

The judge observed that the landlord’s position resulted from its own commercial decisions and that there was no compelling reason to award additional compensation under the incentive arrangements, adding: “There is nothing compelling in this circumstance which would warrant any compensation being made to the landlord under the Incentive Deed.”

As a result, the landlord was limited to pursuing standard damages for breach of the lease rather than recovering the incentives themselves.

Why This Matters for Landlords

This decision sends a clear message: clauses requiring tenants to repay incentives may not be enforceable if they operate as a penalty rather than a reasonable estimate of loss.

Landlords often offer incentives — such as rent-free periods, fit-out contributions, or cash payments — to attract tenants. While these can be commercially effective, attempting to recover them later can be risky if the repayment provisions are drafted too aggressively.

If a court considers a clause to be punitive, it may refuse to enforce it altogether.

A similar outcome was reached in Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd (No 2) [2023] NSWSC 60, confirming that this issue is relevant for landlords in New South Wales.

Practical Considerations

Landlords and property managers should carefully consider:

• The type and size of incentives offered
• Whether repayment clauses are proportionate to potential loss
• Alternative ways to structure incentives to reduce risk

For example, offering reduced rent later in the lease term — rather than upfront — may avoid some of the complications associated with clawback provisions.

Importantly, even without incentive repayment clauses, landlords can still pursue tenants and guarantors for damages if the lease is breached.

How Legal Advice Can Help

Well-drafted lease agreements can strike a balance between protecting a landlord’s interests and ensuring enforceability. Seeking legal advice before offering incentives or entering into lease negotiations can help avoid costly disputes later.

If you are a landlord, tenant, or property manager and would like guidance on lease incentives or commercial leasing arrangements, the Commercial Team at Solari & Stock can assist with practical, tailored advice. Call us on 8525 2700 or click here to request an appointment.

Article by Michael Solari
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