121First, I deal with the fit out contribution refund. Clause 61 obliges Footwear to pay the landlord 40 per cent of a $60,000 fit out contribution if the tenant "ceases to be the lessee or ceases to occupy the premises" in the fourth year of the lease. In the fifth year the fit out contribution reduces to 20 per cent.
122On 30 August 2011 Footwear ceased to occupy the premises in fact, although by means of the August Agreement the two parties agreed:
"The surrender of the lease will not take effect until we locate an acceptable permanent replacement tenant and enter into a binding lease agreement".
123This event, locating a permanent tenant and entering into a binding lease agreement occurred on 17 April 2012 when the officers of Reidwell signed a document dated 12 April 2012, agreeing to lease terms. As the commencement date of the lease with Footwear was 6 March 2008, the final year of the lease commenced on 6 March 2012. Thus, the agreement with Reidwell occurred in the final year of the lease. This results in only 20 per cent of the fit out contribution being payable to the landlord. This is a sum of $12,000, which is 20 per cent of $60,000 plus GST.
124The landlord submits that as the lease was terminated on 15 December 2011, that date should be the date from which the tenant's fit out contribution repayment is calculated.
125Ignoring the effect of the August Agreement for the purpose of the hypothetical calculation, this submission appears to be correct. Once the lease has ended the tenant ceases to be a lessee and thus ceases to occupy the premises. In that event, $24,000 would be payable. However, that amount may operate as a credit in respect of damages, a matter to which I will return.
126The August Agreement makes express reference to clause 61.1. It provides Footwear "will be liable for...[repayment of] our fitout contribution in accordance with clause 61.1 of the lease". When read with clause 3 it is unclear whether the August Agreement imposes a 40 per cent fee on the tenant because it was vacating the premises on 30 August 2011 (and thus, in practical terms ceasing to occupy) or left the amount of the fee uncertain because the tenant was not surrendering the premises. I favour the second construction. It is consistent with the future tense indicated in the first bullet point on page 2 of the August Agreement, because at that stage it was unclear whether the surrender would happen and when, whether in the fourth year, in the fifth year, or at the end of the fifth year.
127Also the purpose of the 30 August Agreement seems to be to "Minimise exit costs" which would occur if the fit out contribution percentage was postponed and potentially reduced.
128Thirdly, the rationale for repayment appears to be, at least in part, that if an incentive payment is made in return for a five-year lease and only a part of the five-year lease eventuates then the related proportion of the incentive should be refunded. As the intent of 30 August Agreement was to preserve the lease, postpone surrender and retain the obligation on the tenant to pay the rent and other payments under the lease, it seems unlikely that the parties intended that the incentive should be refunded while the premises have not been surrendered and the lease remained on foot.
129I recognise that clause 61.1(c)(2) may indicate an alternative view.
130The landlord appeared to accept my preferred construction of this aspect of the August Agreement in submissions. It contended that the fit out repayment contribution became payable not on 30 August but on 15 December 2011 when the purported termination occurred.
131Clause 3 of the August Agreement also gave the option to the landlord to "require the surrender to take effect without this requirement being satisfied". The meaning of "this requirement" is unclear. It could mean "enter into a binding lease agreement" or it could mean "locate an acceptable permanent replacement tenant and enter into a binding lease agreement". In the former case, the landlord's option is still restricted by the need for a permanent replacement tenant to be located and, in my view, it may be difficult to find that this has occurred without some form of agreement.
132With some hesitation I favour the second construction, which regards the obligation to locate the replacement tenant and enter an agreement as one "requirement". However, in this case there is no evidence that the landlord exercised the option to make the surrender take effect "without this requirement being satisfied".
133The landlord submitted that by the purported termination of 15 December 2011 the August Agreement was terminated ab initio and could be disregarded. This submission is faulty in two respects. The purported termination was of the lease not of the August Agreement. Indeed the August Agreement is ignored in the notice of termination. There is no evidence of any action taken by the landlord to terminate the August Agreement.
134Secondly, termination does not avoid a contract but only precludes new rights accruing after the date of termination.
135As Dixon J said in McDonald v Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457 at pp 476 to 477:
"When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach."
136Accordingly, the obligations created by the August Agreement could not simply be disregarded. Accrued rights remained unaffected by any termination. According to the terms of the August Agreement there was no surrender until a new lease was entered or until the landlord exercised its option to require the surrender to take effect. Nor was there any purported termination of the August Agreement. From 11 October 2011 the landlord simply ignored the existence of the August Agreement.
137I find that the landlord did not exercise its option to require the surrender to take effect, and the new lease was entered into the final year of the Footwear lease. Thus, if the August Agreement was valid, as I have found, the tenant was liable to pay the fit out contribution sum of $13,200, being 20 per cent of the tenant's incentive plus GST.
138The remainder of the items alleged together make up the claim for damages. In the period until 21 May 2012 the landlord took in short term licensees. After that date the premises were handed over to the permanent tenant, Reidwell, pursuant to an agreement to lease the premises for ten years, although Reidwell was given a four-month rent-free period and some significant incentives.
139The landlord is obliged to mitigate the tenant's loss, but the onus of proving that there has been a failure to mitigate the loss lies upon the party alleging it: see 93 GSP Pty Ltd v Advent 8 Pty Limited [2013] NSWDC 135 at [66] to [72] and the authorities there cited.
140There is no allegation here of a failure to mitigate. No evidence of a failure to mitigate has been tendered. The agent of the landlord gave evidence. His affidavit reveals no advertising but some contact with about five potential tenants. The evidence did not persuade me that the landlord had diligently attempted to secure the best return for the premises, but as the issue was not raised and there was no contrary argument for evidence put by the defendants, I am not persuaded (nor can I be in the absence of a contrary pleading) that there has been a failure to mitigate by the landlord.
141If the landlord, GPT, was entitled to recover loss over the period of the Footwear lease that loss includes, as a component, loss incurred in the period from the end of the lease to Footwear to the commencement of the lease with Reidwell, the period is from 15 December 2011 until 20 May 2012. The loss is the rent payable under the lease less the licence fees received from the casual licensees. Those sums amounted to $72,407.84 under the Footwear lease, less the $21,202.76 licence fees, equating to damages for lost rent to 21 May 2012 of $51,205.08.
142In addition, the landlord would be entitled to the difference between the value of the lease to Reidwell over the period of the lease to Footwear compared to what was payable under the Footwear lease. This is for the period 21 May 2012 (when the casual licences ended and Reidwell had access to or occupation of the premises) until 5 March 2013, the anticipated end to the five-year lease to Footwear. The rent anticipated over this period under the Footwear lease was $168,888.02. The return on the Reidwell lease, a credit to the tenant against this sum, is not so straightforward.
143Reidwell took a lease for ten years from 24 September 2010. It also occupied the premises from about 22 May 2010 after it had signed the agreement to lease, but no rent was paid in the eighteen weeks from 22 May until 23 September. Further, some expenses were incurred by the landlord to secure the ten-year lease, including works costing $51,600, legal costs of $1,450, and tenant's incentive by way of a fit out contribution of $170,000 (including the "Defit Costs").
144As I have indicated, whilst these amounts seem very high, again, I do not propose to reduce them because a failure to mitigate has not been established. These amounts do appear to relate to the shop and the attempt to secure a tenant.
145However, on a proper analysis these expenses need to be properly apportioned against the whole of the new lease.
146The starting rent of the new lease was $150,500 with a four per cent uplift each year. Doing the best I can on the evidence, I propose to ignore the uplift on the basis that it largely compensates for inflation over the deferred payment of the rent. Thus, in the ten years Reidwell will be expected to pay $1,505,000 in rent (since the ten years appear to commence at the end of the rent-free period). From this amount must be deducted the total expenses. I have allowed $223,050 being the sum of $170,000 incentive, the $51,600 works and the $1,450 legal fees. Thus, the net return on the lease after these expenses incurred was $1,281,950. This return has been achieved over a period of 10 years and 18 weeks or 10.35 years, once the rent-free period is included.
147Thus, the Reidwell lease produces a return of $123,859.90 per annum. As the lease obligation of Footwear was $213,694.98 per annum, the loss is $89,835.08 per annum or $246.12 per day, being the difference between the return on the Reidwell lease and the obligation in the Footwear lease. When calculated over the period from 22 May 2012 until 5 March 2013, a period of 41 weeks or 287 days, this difference produces a loss of $70,637.44 for this period.
148Thus, the loss after 15 December 2011 is the summation of $70,637.44 and $51,205.08, being $121,842.52. From this must be deducted the amount of $22,713.67, being the amount in credit to the tenant's account after the bank guarantee was called upon. Thus, the amount of damage (excluding interest) that I would allow if the lease was validly terminated and the covenantors were liable to pay for the loss under clause 46.1 would be $99,128.85.
149In respect of this amount I note the following matters. In my view, the repayment of the fit out contribution (in whatever amount) should not be added to this sum. If the fit out contribution was paid the damages would need to be reduced by a corresponding amount, as the damages represent what the landlord has lost by Footwear not abiding by the lease. Had Footwear done so, the fit out contribution payment would not have been paid. To allow the fit out contribution payment in addition to damages would place GPT in a position more favourable than if Footwear had met its obligations under the lease.
150Secondly, the landlord sought to have the tenant pay the sum of $223,050 for costs expended by GPT to secure the new tenant. But the landlord receives a benefit from these costs over the next ten years. It is not appropriate to attribute them to the period of less than one year that remained in the Footwear lease. The method I have adopted is to amortise these costs over the entire period of the new lease and the rent-free period in an attempt to assess the true value of the new lease.
151Thirdly, GPT submitted that there is a risk that the new tenant, Reidwell, might not honour its obligations. I accept this possibility but I am disinclined to add a further amount in the absence of any evidence. In the event that the current lease is terminated before the ten-year period has elapsed a further tenant may be obtained on as favourable or possibly even more favourable terms than the present tenant.
152Further, the four per cent annual uplift is currently in excess of the rate of inflation and in excess of what I would regard as an appropriate discount factor to be applied to the postponed payment of money (although again I am not favoured with any evidence on this matter). To that extent the four per cent offers some compensation for future vicissitudes.
153However, I do think some interest would be appropriate. The loss of $99,128.85 was incurred largely over the period from December 2011 to March 2013. Adopting a midpoint of end July 2012, there should be interest for 12 months to today. At the statutory interest rate this would equate to $7,127.77. Thus, the total quantum of damage would be an amount of $106,256.62 inclusive of interest if Footwear were liable for damages after 15 December 2011, according to the following interest calculation:
From (date) To (date) Interest rate per year (%) No. of days in period Interest rate per day (decimal) Interest per day ($) Interest for period ($)
31-Jul-2012 31-Dec-2012 7.5 154 0.000205 20.37 3,136.82
01-Jan-2013 30-Jun-2013 7 181 0.000192 19.01 3,440.99
01-Jul-2013 30-Jul-2013 6.75 30 0.000185 18.33 549.96
Total interest 7,127.77
Principal $99,128.85
Principal plus interest $106,256.62