Lease Incentive Agreements

When acting in leasing transactions, our Gold Coast leasing lawyers often come across situations where a landlord will agree on a particular rental but then deliver a lease containing a higher rental and then a side agreement (usually called a lease incentive agreement) providing that there will be a discount or rebate on rental, often for the entirety of the term.

The justification used by many landlords for this practice is that they are offering a “special deal” to the tenant or that the discount applies for payment on time.

In fact, these documents can be very dangerous for both landlords and tenants for a number of reasons. Furthermore, lawyers acting in transactions involving these lease incentive agreements would need to consider whether they are participating in an arrangement which is dishonest, and the consequences of that.

Risks associated with lease incentive agreements

While many lease incentive agreements would be perfectly appropriate, the difficulty arises where the lease on its face says one thing and the lease incentive agreement makes the lease incorrect. Take an example where the rental stated in the lease is $100,000 per annum increasing for a 5 year term. That lease will often be registered and become part of the public record and capable of being searched. But then there is a (usually confidential) incentive agreement which says that the rental will be discounted by 20% per annum for the entirety of the term, which means that the true rental is $80,000 per annum.

Potentially:

(a) The landlord would be able to mislead other tenants into believing that the rental was $100,000 per annum and not $80,000 per annum which would impact both incoming tenants and other tenants having market reviews;

(b) The landlord might mislead its financier into believing the return on the property as higher, resulting in it being able to borrow more against the security of the property;

(d) A transferee of the building is not likely to be bound by the incentive agreement, as a result of which the tenant could end up having to pay the higher rent anyway and be left only with a claim against the former landlord (possibly);

(e) If the landlord was put into liquidation, the liquidator might not be bound by the incentive deed, and similarly the case if a mortgagee entered into possession or appointed receivers to the property;

(f) If there was litigation over the conduct of the landlord, it is possible that the tenant would be drawn into it as a party to the misleading arrangement.

As a result of those matters, our Gold Coast leasing lawyers consider that lease incentive agreements must be examined carefully to ensure that the tenant is not exposing themselves to significant risk for no benefit.

The question of whether the lease incentive agreement should be considered as part of the overall “deal” between the landlord and the tenant has been considered by the Queensland Supreme Court in the matter of GWC Property Group Pty Ltd v Higginson & Ors [2014] QSC 264, in which we acted. It was also considered in Finetea Pty Ltd v Block Arcade Melbourne Pty Ltd (Building and Property) [2019] VCAT 1529. Both of those matters involved failed attempts on the part of the landlord to claw back lease incentives, when it was considered that the recovery of those incentives would result in the landlord receiving more than it had originally bargained for. In other words, and going back to our example of the lease at $100,000 per annum, if over the term of the lease the landlord expects to recover 5 years rent at $80,000 per annum, that would make a recover of $400,000. If however the breach of the lease meant that the landlord could recover discounts given under the incentive deed, it would mean that the landlord would benefit by $100,000 as a result of the tenant’s breach. That would potentially amount to a penalty.

For advice on leasing and lease incentive agreements, please contact Peter Muller at peterm@qbmlaw.com.au or Megan Hanneman at meganh@qbmlaw.com.au