Inadmissible evidence
30By the motion filed in Court at the commencement of the hearing, Gigi also sought leave to rely on four further affidavits recently served, including an affidavit which annexed a further expert's report of Mr Bell. That report sought to address an error identified in his first report. Mr Bell's second report was served only after 6pm on the Friday before the hearing, without it being identified that the effect of the report was to increase the amount of Gigi's claim by some $50,000, although that was not a complaint which Mr Schmidt pressed.
31Ordinarily the correction of an error in an expert's report is not something to which objection could reasonably be taken, notwithstanding its late service. In this case, however, the objection to the leave sought was pressed in circumstances where there was an issue lying between the parties as to whether Mr Bell's first report was admissible at all, having in mind the provisions of s 55 and s 56 of the Evidence Act 1995. They provide:
"55 Relevant evidence
(1) The evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding.
(2) In particular, evidence is not taken to be irrelevant only because it relates only to:
(a) the credibility of a witness, or
(b) the admissibility of other evidence, or
(c) a failure to adduce evidence.
56 Relevant evidence to be admissible
(1) Except as otherwise provided by this Act, evidence that is relevant in a proceeding is admissible in the proceeding.
(2) Evidence that is not relevant in the proceeding is not admissible"
32Two of the affidavits served late were lay affidavits, which sought to prove assumptions on which Mr Bell's first report rested and the third, an affidavit designed to provide evidence in support of one aspect of the claim, which had not to that point been addressed in the evidence. The latter affidavit was eventually received provisionally, but the other two were not.
33Without Gigi being granted leave to lead the two affidavits, which sought to provide a basis for the assumptions Mr Bell had been instructed to make, neither of Mr Bell's reports were admissible (see Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588). Further, if the first report was not admissible in any event, as Mr Schmidt contended, because it was not relevant to the matters lying in issue between the parties, there was clearly no point in granting the leave sought in respect of the recently served affidavits. Hence, in considering the application pressed by the motion, I heard the parties on the question of the admissibility of Mr Bell's reports and concluded that Mr Bell's reports were not admissible. These are the reasons for that conclusion.
34Prior to the hearing, it was conceded for Mr Schmidt that Gigi was entitled to take possession in February 2008 and that thereby, the lease was terminated. A number of other concessions were also made, by which the issues requiring the Court's determination in the proceedings were considerably narrowed.
35In the result it was not in issue that Gigi, having accepted Mr Schmidt's breach of a fundamental term of the contract, by failing to pay rent on time, had taken steps available to it under the lease to bring the contract to an end. That left a position where Mr Schmidt was thereupon discharged from his future obligations under the lease and Gigi was entitled to recover from him any damages which had resulted from any of his earlier breaches of the lease.
36One of the things which remained in issue was what Gigi claimed in relation to the 'lost benefit of the lease'. This claim, it was explained at the hearing, was advanced in the second further amended statement of claim in clause 12C, which provided:
"12C. Further and in the alternative, as a consequence of the matters pleaded and particularised above, the Plaintiff has lost the benefit of the Lease as a consequence of a breach or breaches by the Defendant and has therefore suffered loss and damage.
Particulars
(a) Amount claimed by the plaintiff is $321,334 being rent from 19 February 2008 to 3 July 2010 of $20,166.66 (incl GST) per month being $571,590 less the profits from the use of the premises by the plaintiff between the date of termination and the date on which the lease would otherwise have expired calculated at $250,256."
37That claim was defended in circumstances where a notice of intention to terminate the lease for breach of essential terms of 22 January 2008 had been served; the then outstanding rent had been paid; further rent had not been paid; and Gigi had then taken possession of the hotel on 19 February 2008, without giving any further notice. It then stayed in occupation and operated the hotel for itself.
38That Gigi had suffered the loss claimed, as the consequence of Mr Schmidt's breach of the lease was denied. In his defence Mr Schmidt said that:
"(d) without limiting subparagraphs (a) to (c) of this paragraph says that, if (which is denied) the Lease was terminated in the manner alleged (if at all) and if (which is denied) the Plaintiff is prima facie entitled to damages for the "lost .. benefit of the Lease":
(i) the correct measure of damages for any "lost ... benefit of the Lease" is :
A. the rent that Defendant would have been liable to pay the Plaintiff had the Lease not been terminated; minus
B. the rent capable of being earned by re-letting of the demised premises;
[see, eg, Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at [55]-[56]]
(ii) the rent capable of being earned by a re-letting of the demised premises was the same or more than the amount of rent that the Defendant would have been liable to pay the Plaintiff had the Lease not been terminated;
(iii) in the premises:
A. the Plaintiff has not suffered any loss or damage as result of any "lost ... benefit of the Lease"; and
B. the Plaintiff is not entitled to the amount claimed or any amount on the account of any "lost ... benefit of the Lease"; "
39Mr Bell's report showed that he had identified that under the lease, between 19 February 2008, when Gigi took possession and 3 July 2010, when the lease was due to expire, net rent and outgoings payable by Mr Schmidt under the lease would have amounted to some $571,590. That mathematical calculation was not in issue between the parties.
40On the basis of assumptions he was instructed to make, Mr Bell concluded that during that period, Gigi had operated the hotel at a profit of some $302,868. Mr Bell's calculations took no account, however, of the benefit which Gigi had received from its occupation of the hotel. The damages Gigi claimed were the difference between the profit Mr Bell had calculated and the $571,590 rent and outgoings which Gigi would have received from Mr Schmidt under the lease, had it not taken possession.
41Mr Schmidt's case was that Gigi was not entitled to damages so calculated and that accordingly, Mr Bell's report was not admissible, not being relevant to any fact in issue in the proceedings, that is, the issues in the proceedings defined by the pleadings and the substantive law (see Australian Broadcasting Corporation v McBride [2001] NSWCA 322; (2001) 53 NSWLR 430 at [90]).
42There was no issue between the parties that upon the termination of the lease, the obligation to pay rent came to an end, but that Gigi was entitled to pursue any loss of bargain damages which it suffered. They also agreed that such damages had to be assessed as at the date of termination of the lease; that Gigi then had an obligation to mitigate its damages; and that evidence as to subsequent events were relevant to be taken into account, in assessing both whether the obligation to mitigate had been met and whether damages had been suffered. Mr Schmidt also accepted that Gigi's decision itself to remain in possession of the premises and to operate the hotel, satisfied its obligation to mitigate.
43What was in issue was how loss of bargain damages were to be assessed in those circumstances, that is, where after taking possession the landlord remained in occupation of the property, rather than seeking another tenant. Mr Bell's report did not deal with this issue.
44The parties were unable to find any authority where such a situation had arisen for consideration. There appears to be an obvious explanation. If a landlord such as Gigi, who takes possession of a property after changing the locks decides to occupy the premises itself for the balance of the term of the lease, rather than obtaining another tenant, the landlord thereby obtains the benefit of that ongoing occupation. The value of that benefit has to be considered, if an action for loss of bargain damages is later pursued against the former tenant, when damages are assessed.
45Unless the rental market is falling, such a landlord is unlikely to be able to establish that it has suffered any loss. In a static or rising market the value of the landlord's occupation of the property will be equal to, or greater than the rent which the former tenant would have had to pay under the lease. In those circumstances the landlord will not have sustained any damages. By way of contrast, in a falling market, the landlord will be able to lead evidence to establish that the property could only have been let for a lesser rent, or in the worst case, that no tenant could be found at all. In those circumstances, the landlord may be able to recover damages from the former tenant, on evidence which establishes the difference between the rent the former tenant had to pay under the lease and what it could have been rented for in the market.
46Mr Schmidt's case was that his obligations under the lease ceased on termination and Gigi was not entitled to ignore the value of its occupation of the hotel. That value could not be assessed by reference to what profit Gigi achieved by its operation of the hotel. Its value had to be assessed by reference to what rent Gigi could have obtained from another lessee, in the particular market conditions then prevailing. Gigi did not propose to lead any evidence about such matters. They were not dealt with in Mr Bell's report. Mr Schmidt, on the other hand, intended to lead evidence that there was another purchaser of the lease available, prepared to pay Gigi the rent he had been paying.
47Mr Schmidt submitted that the profits which Gigi had achieved in its operation of the hotel business, which Mr Bell's report dealt with, were irrelevant to the facts in issue in the proceedings, namely, whether Gigi had suffered any damage as the result of taking possession of the premises. Mr Bell's report ignored that while Gigi had lost the rent which Mr Schmidt would have paid under the lease, it gained the benefit of vacant possession and occupation of the hotel, which had permitted it to conduct the hotel business for itself, at a profit. That possession had a value, which Mr Bell did not seek to establish or deal with in his reports and, in the result, they were inadmissible.
48Mr Schmidt relied on Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) [2008] HCA 10; (2008) 234 CLR 237, pointing particularly to what was discussed at [56] and [64]:
"[56] To some extent the Lessee's argument rested on an idea of repugnancy - that there was a repugnancy between landlords having possession of property, but also being given a monetary equivalent for the rent they would have got had they not taken possession of the property and instead continued to allow it to be leased. But there is no true repugnancy. There can be no double recovery by landlords. 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.
...
[64] The need for a landlord to recover loss of bargain damages from a tenant only arises when the market is falling, for if the market is static or rising, the landlord can re-enter against the defaulting tenant, recover arrears of rent, and promptly install a new tenant at the same or a higher rent. The consequence of the Lessee's submission is that landlords are unable to protect themselves as satisfactorily in a falling market as distinct from one which is static or rising. It is difficult to see why landlords should bear the risks of a falling market rather than their defaulting tenants, particularly where, as the Lessor and the Lessee did in the Lease, the parties explicitly, in many places and in an integrated way, placed that risk on the tenant. It is also difficult to see why the law - whether the relevant rule which the Lessee was urging be a rule of construction or some rule of substantive law - should have the result of placing the risks of a falling market on landlords, and of depriving them of the opportunity by agreement to allocate the risk otherwise. The effect of the Lessee's submission is to cut down on party autonomy, to increase the chance of disputes and to reduce certainty. If the Lessee is wrong, it is open to parties to agree that a particular term is essential, and to agree on the consequences of breach. That avoids arguments about whether the term in question is or is not essential independently of the parties' agreement that it is, and what the consequences of breach of it are. If the Lessee is correct, these dangers increase."
49Mr Schmidt's case was that Gigi was in no different position to that of a landlord of a residential property, who, having decided to take vacant possession of a property, by changing the locks when the tenant failed to pay rent, then decided to live in the property him or herself, rather than letting it out to another tenant. Such a landlord, it was argued, could not also seek to recover the amount of the rent which the tenant would have paid, had the lease not been terminated when he changed the locks, having had the benefit of living in the property himself after taking possession. That would give the landlord the double benefit which the High Court said it could not have.
50Gigi's case was that such a landlord was entitled to both possession and the rent which the former tenant would have had to pay under the lease as damages.
51Gigi submitted that seeking another tenant was not the only way in which a landlord's obligation to mitigate its damages could be met. A landlord was also entitled to mitigate by taking possession. In those circumstances, even having had the benefit of that possession, the landlord was also entitled to recover damages, calculated by reference to the rent which the tenant like Mr Schmidt would have had to pay under the lease, had he not been excluded.
52In calculating such damages, no account need be taken of the benefit which the landlord had received from its own occupation of the premises. Nor did the landlord have to lead evidence as to what rent another tenant would have been prepared to pay, if a tenant had been sought. In such a case it would be a matter for the tenant to establish that the landlord's decision to occupy was not reasonable, so as to mitigate the landlord's damage. That was not a claim here advanced by Mr Schmidt's defence.
53Gigi's case rested on the observations of Buss J in Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] ASCA 209; (2007) 35 WAR 254 at [40] - [41] where his Honour observed:
"[40] Where the trial of the lessor's action against the lessee occurs after the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoings etc that would otherwise have been payable after the date of termination, less any amount the lessor has obtained as profits from the use of the premises between the date of termination and the date on which the lease would otherwise have expired (by re-letting the whole or part of the premises or otherwise). A further deduction will be required if the lessor has failed to mitigate its damage. It will usually be appropriate to order the payment of interest on the award of damages.
[41] There is a clearly-established conceptual difference between the measure of damages, on the one hand, and the doctrine of mitigation, on the other. The onus is on the lessor to prove, according to the applicable measure, that it has suffered damage. But the onus is on the lessee to prove that the lessor has failed to take reasonable steps to mitigate its damage, and to demonstrate the extent to which there has been a failure to mitigate. See Watts v Rake (1960) 108 CLR 158 per Dixon CJ at 159; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 per Murphy J (with whom Brooking and Nicholson JJ agreed) at 512-513; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 per Hope JA (with whom Meagher JA agreed) at 158; Goldburg v Shell Oil Co of Australia Ltd (1990) 95 ALR 711 per Sweeney and Ryan JJ at 714."
:
54I was satisfied that Gigi's submissions could not be accepted. In neither Gumland nor Luxer did the circumstances which arose for consideration involve a landlord who had decided to mitigate its damages by occupying the property itself, rather than seeking another tenant.
55Buss J contemplated that there could be such mitigation when he referred at [40] to the lessor 'reletting the whole of the premises or otherwise'. In such a case the benefit of the occupation by which the landlord has mitigated the loss, is not properly characterised as a 'profit', but still it is a valuable benefit which the landlord may not ignore, when seeking to establish the damages which have been suffered after the date of termination of the lease. That is not a matter for the former tenant to prove, by way of establishing that there has been a failure to take reasonable steps to mitigate. Retaining possession is not such a failure. To the contrary, it is a reasonable method of mitigation available to be taken by a landlord. In such a case, if the value of the benefit of the occupation is the same as, or more than the rent which the landlord would have obtained from the former tenant under the lease, the landlord will not have suffered any damage.
56Here it was not in issue that Gigi had taken reasonable steps to mitigate its loss by occupying the premises, in order that it could itself operate the hotel. That occupation enabled Gigi to operate the hotel at a considerable profit.
57After Gigi brought the lease to an end, by changing the locks, it obtained vacant possession. It then mitigated its damages, by itself occupying the property for the balance of the term of the terminated lease, operating the hotel itself, rather than seeking a new tenant. It was entitled so to mitigate its damages, but having done so, it was not also entitled to recover damages from Mr Schmidt, calculated without regard to what the property could have been rented for to another tenant, given the then state of the market.
58Some light was cast on the value of its occupation of the hotel by the rent which Mr Schmidt had agreed to pay under the lease. It could also have been established by evidence as to the rent someone else was prepared to pay.
59That Gigi might have been better off, had it rented the property out to someone else prepared to pay what Mr Schmidt had agreed, is not a basis upon which damages may be ordered against Mr Schmidt. That, in reality, is what Gigi's claim amounted to, that Mr Schmidt should pay it damages because it would have achieved a more profitable outcome, had it not terminated the lease or had it leased the hotel to someone else, rather than having operated the hotel itself.
60On Gigi's approach, even if the market had been rising, it would have been entitled to mitigate its damages by occupying the property, operating the business at a profit and still recovering from Mr Schmidt the difference between the profits it generated in its operation of the hotel and what was payable under the lease. On its approach, Gigi's damages would increase, the more unprofitable its operation of the hotel was
61This is because the damages sought were calculated by reference to the amount payable under the lease for the balance of its term and deducting from that amount, the profits Mr Bell assessed had been generated by Gigi's operation of the hotel. He did not consider the value of Gigi's occupation of the property. It followed that his was an exercise which was not relevant to any issue lying between the parties.
62Gigi's approach paid no regard to a relevant consideration to its claim for loss of bargain damages, namely the value of its occupation of the property, which must of necessity be assessed by reference to what the property could have been rented for in the marketplace. Instead it rested on an irrelevant consideration, namely its ability, or success, in operating the hotel business it chose to conduct there. That did not depend on what rent the property could have commanded in the marketplace at the time, but other matters, such as Gigi's business acumen and operational skills, or lack of them, as well as the impact of other extraneous matters, on the successful operation of the business.
63In the result, it had to be accepted that Mr Bell's reports were inadmissible, being irrelevant to any fact in issue in the proceedings. Gigi made a commercial decision to occupy the property itself in order to operate the hotel, thereby satisfying its obligation to mitigate its damages. Its success in that operation during the period the lease would have run, had it not been terminated by the lockout, is not a basis upon which any damages flowing from its termination of Mr Schmidt's lease, when he fell two weeks in arrears in payment of his rent, could be assessed.