In today’s blog post we will be exploring fitout clawback provisions and looking at whether they are enforceable or not.
What is a fitout clawback provision?
A fitout clawback clause or provision is a lease term whereby a fitout contribution provided by a Lessor, can under certain circumstances, be partially recovered by the Lessor. These applicable circumstances may include repudiation, assignment, default or surrender of the lease. The provisions act to prevent the loss of any financial incentives offered to a tenant by a landlord. Other incentives include rent free or reduction periods, interest-free loans and relocation costs, although these rarely form part of a clawback provision.
A typical example of a fitout clawback provision would be where the Lessor can recover 80% of the fitout contribution in the second year, 60% in the third year, and so forth.
What is the current position on their enforceability?
Whilst theoretically, fitout claw back clauses in Australia intend to protect the financial investments of a Lessor into a Lessee, in practicality, these provisions can be burdensome and may unfairly force a Lessee to remain in a lease they would otherwise not continue in.
Fitout clawback provisions which exceed reason and cannot justifiably be taken as a genuine estimate of damages are therefore often not enforceable. This was recently affirmed in the case of GWC Property Group Pty Ltd v Higginson  QSC 264.
GWC Property Group brought a case to the Queensland Supreme Court in attempt to claim approximately $1.2million in incentive payments after Higginson’s termination of the lease following their going into liquidation.
Although the plaintiffs argued the clawback provisions were restitutionary, Justice Dalton’s judgment ultimately held the clawback provisions were deemed penalties, invoking the penalties doctrine, and making the provisions unenforceable.
This decision reaffirms the 2012 judgment in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 which held a landlord should not be unjustly enriched by imposing liability for payments which it would not otherwise have been entitled to. Thus, although a landlord may nonetheless attempt to enforce a fitout clawback provision, it is important to seek advice as to whether the clawback will be lawfully admissible.
Furthermore, in the occurrence of an event not triggered by a breach, for instance, assigning a lease, a clawback provision is less likely to be legally enforceable.
It remains a moot point that a clawback provision may be found to be enforceable only in the case it is established as a genuine estimate of damages, rather than punitive in nature. However, in this case, it is important for legal advice to be sought.
What do I do when dealing with a fitout clawback provision?
When undertaking a lease negotiation, fitout clawback provisions should where possible, be removed. This is to eliminate the possibility of significant confusion or the incurrence of legal costs in the future.
This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.