Landlord and Tenant -Termination of the tenancy - Repudiation - Damages - Commercial lease - delay in re-letting - Loss of bargain - Date of calculation - Events occurring after repudiation - Mitigation.

Judgment Number: [2023] TASSC 44

JEETAM PTY LTD v MYRTLEFOREST HOLDINGS PTY LTD and

1. On 3 March 2023 judgment in default of appearance was entered for the plaintiffs against the defendants for damages for breach of a lease of commercial premises. This is the assessment of those damages.
2. The subject premises, jointly owned by the plaintiffs, were at 210 Liverpool Street in Hobart. They comprised the ground floor and the first floor and were leased to the first defendant for use as the office of a real estate agency. The lease commenced on 15 April 2019 for a term of three years at an initial annual rental of $41,200 plus GST, payable monthly in advance. The lessor was to pay outgoings comprising rates, land tax and water. There were further terms that the rent was increased at the end of each year of the term by CPI. The second defendant, Craig Bellgrove, was the principal of the first defendant and guaranteed the obligations of the first defendant under the lease.
3. The first defendant ceased paying rent on 1 August 2019. By letter from its lawyers dated 14 January 2020 the plaintiffs notified the defendants that it accepted the "repudiation of the lease" and terminated the lease agreement. The first defendant vacated the premises on or about the same day and the defendants re-entered.
4. There is no dispute that the defendants are liable to the plaintiffs for damages for the loss of bargain. That is so whether the lease was terminated by acceptance by the plaintiffs of a repudiation by the first defendant or upon re-entry for non-payment of rent. The obligation to pay rent was an express essential term of the contract. Nor is there any substantial dispute about the plaintiffs' calculations of damages for loss of their bargain. Some money payable for rent for the balance of the term has already been paid and the calculation of the balance sum is not contentious. The damages claim also includes amounts for interest and costs which involve different issues and will be considered separately. The principal issue is whether the plaintiffs failed to mitigate their losses. The defendants contend that the plaintiffs failed to take reasonable steps to relet the premises.
5. The principles to be applied are not in dispute. Immediately following re-entry the plaintiffs were entitled to commence an action against the first defendant to recover damages assessed prospectively: Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17. The normal measure is represented by the contractual rent reserved by the lease less the rental value of the premises at the time of breach. In Gigi Entertainment Pty Ltd v Schmidt [2013] NSWCA 287 at [83], Ward JA, with whom Beazley P and Sackville AJA agreed, accepted as correct the proposition that damages are ordinarily to be assessed at the date of termination of the lease.
6. However, evidence of subsequent events may be relevant to the value of the lost bargain: Willis v Commonwealth [1946] HCA 22; (1946) 73 CLR 105 per Latham CJ at 109. Where the assessment of loss of bargain damages consequent upon the termination of the lease for breach of an essential term or repudiation occurs after the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoings that would otherwise have been payable from termination for the balance of the lease term, less any amount the lessor has obtained either by re-letting the whole or part of the premises or otherwise: Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209, 35 WAR 254. In Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10, 234 CLR 237 at [72] the High Court said that while in some circumstances it may be more difficult to assess loss of bargain damages where no privity of contract governs an entitlement to relief:

"..there is no such difficulty in the case of loss of bargain damages after termination for breach of an essential term in the form of a covenant to pay rent: the court simply compares the rent payable under the lease with that recovered or to be recovered from any new lease, discounting to obtain present value."

1. In Gumland the Court had earlier said at [55]:

"If landlords obtain possession, they can only recover loss of bargain damages if they have tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease. The monetary equivalent of what they would have got if they had not taken possession of the property reflects the fact that they cannot obtain tenants, or cannot obtain tenants who promise to pay as much as the defaulting tenants promised."

1. The evidence about the events which occurred after the first defendant vacated the premises is in affidavit form. The deponents were cross-examined. The first plaintiff, Trevor Edwards, gave evidence for the plaintiffs. Evidence was called by the plaintiffs from two real estate agents, Richard Steedman and Hayden Peck. The second defendant, Craig Bellgrove, also gave evidence.
2. In February 2020, soon after termination of the lease, the plaintiffs engaged Mr Steedman to re-lease the premises. However, another tenant was not found until a new lease was entered into on 4 February 2022. The lease to the first defendant, had it continued, would have expired on 14 April 2022. Although there was a two month overlap, due to the terms of the new lease, the plaintiffs received nothing from an alternative tenant for any part of the balance of the term of the lease entered into by the first defendant. It is not in dispute that, taking into account payments already made by the defendants, the total unpaid rental for the balance of the term, adjusted annually for CPI with allowance for the effect of the COVID-19 Disease Emergency (Commercial Leases) Act 2020, amounts to $84,502.74. The last monthly payment of rent would have been due on 14 March 2022. The calculations are correctly made exclusive of GST because the amount to be recovered is not a "supply" within the meaning of the GST legislation. There are additional claims for interest and costs which I will address later in these reasons.
3. The defendants assert that the failure to find another tenant for, in effect, any part of the balance term resulted from a failure of the plaintiffs to mitigate their loss. The defendants assert that the plaintiffs did not do all they reasonably should have to find another tenant.
4. A landlord must take reasonable steps to mitigate the loss which results from the lessee's breach. If the landlord takes reasonable steps to mitigate the loss, any costs incurred in taking those steps are also recoverable. The plaintiffs cannot recover loss that was avoidable if they had taken reasonable steps because that loss is not regarded as loss caused by the defendant: Chand v Commonwealth Bank of Australia [2015] NSWCA 181 at [180]; Netline Pty Ltd v QAV Pty Ltd [2022] WASCA 131 at [42]. Although the onus is on the plaintiffs to prove their loss according to the principles enunciated earlier in these reasons, the onus is on the defendants to prove that the plaintiffs failed to take reasonable steps to mitigate their damage and to demonstrate the extent to which there has been a failure to mitigate: Watts v Rake [1960] HCA 58; (1960) 108 CLR 158, 159. The test of reasonableness which is applied to the steps taken or not taken by the plaintiffs is not a high standard: Chand at [182]. The innocent party will not have acted unreasonably merely because the defendant can suggest other and more beneficial action if it was reasonable for the innocent party to act as it did. The principles were summarised by Giles JA, with whom Handley JA and Stein JA agreed, in Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313, 10 BPR 18, 235; [2000] NSWCA 313; [2001] ANZ Conv R 577 at [187]:

"A plaintiff who acts unreasonably in failing to minimise his loss from the defendant's breach of contract will have his damages reduced to the extent to which, had he acted reasonably, his loss would have been less. This is often misleadingly referred to as a duty to mitigate, although the plaintiff is not under a positive duty. The plaintiff does not have to show that he has fulfilled his so-called duty, and the onus is on the defendant to show that he has not and the extent to which he has not (TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130). Since the defendant is a wrongdoer, in determining whether the plaintiff has acted unreasonably a high standard of conduct will not be required, and the plaintiff will not be held to have acted unreasonably simply because the defendant can suggest other and more beneficial conduct if it was reasonable for the plaintiff to do what he did (Banco de Portugal v Waterlow and Sons Ltd [1932] UKHL 1; (1932) AC 452; Pilkington v Wood (1953) Ch 770; Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd (1976) 1 NSWLR 5)."

1. The evidence of Mr Edwards, who lives in New South Wales, was that he instructed Mr Steedman to "do everything possible" to re-lease the premises. According to Mr Edwards, he relied on the agents to manage this and the plaintiffs' other commercial rental properties and to give advice about leases and rent. At the time that the agents were looking for a new tenant for the premises he had various conversations with the agent and was told that there were "very few people looking around." At some point he gave instruction to the agent to offer a "rent free period" as an incentive to a prospective new tenant, but that still there was "no-one to negotiate with."
2. Mr Steedman is employed by Knight Frank Commercial. He had been working as a real estate agent dealing with commercial property in Hobart for more than 25 years. Knight Frank had a significant proportion of the commercial rental business in Hobart and many agents within the firm worked in the area. The initial annual rental payable under the lease to the first defendant was $41,200 plus GST, with the landlord paying the outgoings. When Mr Steedman was first instructed by Mr Edwards to find a new tenant he organised that the property be listed on the internet on commercialrealestate.com, on realcommercial.com and on the Knight Frank website. It was listed at an annual rental of $37,000 plus GST plus outgoings. On commercialrealestate.com he was instructed to, for 90 days, use an advertising package called "Elite Plus" which provided, at extra cost, additional benefits such as by ensuring that the property appeared at the top of internet search results. The property was advertised once in the Mercury Real Estate Guide on 19 March 2020. On-site signage was put in place.
3. According to Mr Steedman, the leasing market in Hobart at that time was "very soft". The unfortunate reality was that the attempts to relet the premises coincided with the commencement of the COVID-19 pandemic. It was very difficult to find commercial tenants. When Mr Steedman had no initial success he was instructed by Mr Edwards to advertise that there were "incentives available" for a prospective tenant, which he did in December 2020. In February 2021 the advertised rent was reduced to $35,000, and in April 2021 to $33,000. The realcommercial.com internet listing was removed in December 2021 but reposted in January 2022 to refresh the listing. Between February 2020 and April 2022 Mr Steedman inspected the premises with potential tenants but without success. For a period during that time the external signage was removed so the exterior of the premises could be re-painted.
4. In October 2021 one of Mr Steedman's colleagues at Knight Frank, Hayden Quinn, was contacted by a person who made an offer to lease the premises. Between October 2021 and December 2021 there were negotiations about the terms of a lease and a new lease agreement was signed to commence on 4 February 2022. As part of the negotiations for the new lease it was agreed that the first three months of the term would be rent free. The monthly rental was $2,708.33, an annual rental of $32,500 plus GST, but with the tenant paying outgoings. According to the best estimate Mr Edwards could give during his evidence, the outgoings were about $4,000 per annum.
5. The substance of the criticism made by the defendant is that the plaintiffs unreasonably failed to make more aggressive attempts to advertise their willingness to offer incentives such as reduced rental and rent free periods. The defendants contend that had the plaintiffs been willing to agree more quickly to the terms ultimately agreed in February 2022, it was more likely that another tenant would have been found at an earlier stage. The defendants submit that if there had been a "25 per cent reduction at the outset" there would have been "no problems renting." The submission was also made that I should infer that the plaintiffs were content to wait for expiry of the term without doing what they should have done to find another tenant because they had the reassurance of recovery from the defendants.
6. The defendants' contentions must be rejected. They are not borne out by the evidence. I am satisfied that the plaintiffs took reasonable steps to find another tenant. As has already been explained, the standard to be expected of a plaintiff in these circumstances is not a high one. It is not enough for the defendants to identify, with the benefit of hindsight, other measures that the plaintiffs might reasonably have taken. The defendants must establish that the plaintiffs acted unreasonably. I accept the evidence of Mr Edwards and Mr Steedman that concerted efforts were made to find a new tenant but, at the time, the market conditions meant that there were very few, if any, prospective tenants who were willing to make an offer or even to commence a negotiation about a new lease. Although there was only one advertisement in the newspaper, the evidence of both Mr Steedman and Mr Quinn was that the vast majority of enquiries were generated through internet advertising, and the property was advertised through the largest and most established internet sites. The initial advertised rent was less than the rental payable by the first defendant, although it was comparable when allowance for outgoings was made. Rent reductions and incentives were offered at reasonable times. Moreover, according to Mr Steedman, owners of commercial property may be significantly affected by rent reductions because of the potential effect on the capital value of the premises. There is no evidence adduced by the defendants from which it could properly be inferred that some other step reasonably open to the plaintiffs would have made any material difference to the ultimate result.
7. The second defendant suggested that the premises were left to become untidy and unpresentable. However, I accept the evidence of Mr Steedman that the property was maintained in marketable condition throughout the relevant period.
8. The plaintiffs also claim interest pursuant to the provisions of the Supreme Court Civil Procedure Act 1932. I am satisfied that the claim is a proper one. The defendants made no submission to the contrary. The interest claim is expressed to be made under s 34. It is a case in which the sums claimed are payable pursuant to the terms of the written lease at a certain time. Interest could also be awarded under s 35A. The interest calculations are made at the prescribed rate specified from time to time pursuant to the Supreme Court Rules 2000, r 5A, from the date each monthly payment of rent fell due until the end of the lease term. Interest is calculated on each monthly payment so as not to result in the payment of interest on interest. The total amount so claimed to 25 May 2023, the date of Mr Edwards' affidavit, is $6,972.71. That amount should be allowed. It is presently not clear whether further interest is claimed since that calculation was prepared.
9. The plaintiffs also claim legal costs. The evidence establishes that the plaintiffs were invoiced for legal costs totalling $19,124.26, inclusive of GST. Of that sum, the amount of $3,346.90 is already the subject of an award for costs made in earlier recovery proceedings in the Magistrates Court. The balance claimed, adjusted to exclude GST, is $14,211.48. The plaintiffs claim to be entitled to that sum, effectively indemnity costs, as damages pursuant to cl 4.3(d) which provides that "in the event that the Lessee's conduct constitutes a repudiation of this lease the Lessee covenants to compensate the Lessor for the loss or damage suffered by reason of the repudiation...".
10. I do not intend to make an award of damages for costs on that basis. Copies of the various legal bills are annexed to Mr Edwards' affidavit. In 2019 and 2020 the plaintiffs engaged the firm Ogilvie Jennings. The work done by that firm was for "enforcement of rental arrears" and included the Magistrates Court proceedings which resulted in a default judgment in that jurisdiction. The plaintiffs' currents solicitors were engaged in early 2022, again for "debt recovery". Part of the costs concerned issue of a bankruptcy notice in respect to the default judgment. Beyond that description, there is very little to explain how or why those costs were incurred. Very substantial costs were incurred throughout 2022, well before the institution of proceedings.
11. Whether under that covenant or when assessing damages according to ordinary principles, the plaintiffs must establish that the amount claimed must have been reasonably incurred "by reason of" the first defendant's repudiation. In the case of the balance costs not already the subject to a costs order and the costs claimed during 2022 prior to the institution of proceedings, I do not have sufficient material to so persuade me. I would decline to include allowance for costs as a component of the damages to be paid by the defendants. Rather, there should be an order as to the costs of the proceedings.
12. Subject to any other matters which may be material to an award of costs, there should be an order that the defendants pay the plaintiffs' costs of the action, including the assessment, to be taxed if not agreed. Because all of those costs clearly arise from the first defendant's repudiation of the order, and because the case for the plaintiffs on the assessment was so clear, I would exercise my discretion to make the order on a solicitor/client basis. I will hear the parties further before making final orders.