An argument over how the value of lease incentives should be treated in the settlement documents ultimately torpedoed the contract of a commercial office complex opposite the Royal Brisbane Hospital. It highlights how lease incentives can potentially have unforeseen consequences on value and sale-ability.

The parties had entered into a contract for a purchase price of $81.2M to be adjusted by a subsequently agreed value of lease incentives. A special condition to the contract provided that at settlement, the seller must pay to the buyer, by way of an adjustment to “the balance Purchase Price payable on settlement”, an amount equivalent to the value of any outstanding incentives, which was later agreed at just over $2.0M.

The party’s lawyers disagreed on how the consideration should be reflected in the transfer documents citing transfer duty and other tax implications. The transaction did not settle, the seller subsequently terminated the contract and claimed breach of contract.

The Court held that the Seller was not contractually entitled to insist on its version of the transfer because the maximum amount which could be paid was not the $81.2M but that amount less the rental incentive deduction.

In hindsight, it would seem preferable to construct a contact that was less complex and vulnerable to potential disagreement.

It is standard Valuation practice to adjust ‘face value’ rental income taking into account lease incentives (and other items relevant to cash flow) to arrive at ‘net effective’ rental incomes used to determine a market value, thus producing a value amount that does not require further adjustment.

Sentinel Citilink Pty Ltd v PS Citilink Pty Ltd [2018] QSC 239

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