So v Dou

Background

1. On 17 October 2019, the parties entered into a fixed term residential tenancy agreement (the "lease") for premises at Northbridge, NSW.
2. The lease commenced on 29 January 2019 and was for a term of three years, expiring on 28 January 2022. Rent was in the sum of $2,200 p/wk.
3. There is no dispute that the tenants breached the lease by terminating the lease early and abandoned the premises (see the affidavit of the first respondent sworn 8 February 2022 at [12]). This was an "abandonment" of the premises within the meaning of that term in s 106 of the Residential Tenancies Act 2010 (NSW) (the "RTA").
4. The lease was generally in the Standard Form set out in Schedule 1 of the Residential Tenancies Regulation 2010 (as it was at that time) but to which was added a number of additional terms.
5. Clauses 41 and 42 of the lease (under the heading "Additional Term - Break Fee") which concerned break fees were crossed out (as was permitted).
6. Additional written terms agreed to by the tenants included the following: "52. The termination of this agreement by notice or otherwise shall not affect in anyway either party's right to compensation for breach of the terms of this agreement nor either party's obligations to comply with this agreement and the Residential Tenancies Act 2010. 53. Should the agreement be terminated by the tenant (other than as permitted under the Residential Tenancies Act 2010) before the ending date of this agreement and where Additional Term Clauses 41 and 42 have been crossed out: (a) the tenant will be required to pay rent until the tenant has moved out and handed back the keys, and (b) the tenant may be liable to pay, for the balance term of the tenancy, any loss of rent incurred by the landlord in re-letting the premises where the landlord/landlord's agent has taken reasonable steps to reduce or minimise rental losses; (c) the parties are not relieved from their obligations to mitigate any loss on termination; (d) …"
7. In the lease and on a page headed "Addendum, F1 Additional Terms", the following term appeared: "12. Breaking the lease early Should the tenant wish to vacate the property prior to the expiration of the fixed term, the Tenant will be liable to compensate the Landlord the following costs: Rent up until the property is relet or the end of the fixed term (whichever happens first). Any difference in rent should the property be leased at a rate lower than the tenant's rent. All advertising costs, $275 plus GST. Letting fee of two weeks rent plus GST.
8. We shall pause reciting the background and turn to the provisions of s 107 of the RTA about which there was some dispute and with which it is now convenient to discuss. We shall return to the background facts under the hearing "The Appellant's Evidence" later in these reasons.

Section 107

1. At the time the lease was entered into s 107 of the then applicable RTA said: 107 Landlord's remedies on abandonment (1) The Tribunal may, on application by a landlord, order a tenant to pay compensation to the landlord for any loss (including loss of rent) caused by the abandonment of the residential premises by the tenant. (2) The landlord must take all reasonable steps to mitigate the loss and is not entitled to compensation for any loss that could have been avoided by taking those steps. This subsection does not apply in the case of a fixed term agreement that provides for the payment of a break fee. (3) The compensation payable by a tenant under this section in respect of a fixed term agreement is the amount of the applicable break fee for the tenancy, if the agreement provides for the payment of a break fee. (4) The break fee for a fixed term agreement for a fixed term of not more than 3 years is: (a) an amount equal to 6 weeks rent if less than half of the fixed term had expired when the premises were abandoned, or (b) an amount equal to 4 weeks rent in any other case. (5) The break fee for a fixed term agreement for a fixed term of more than 3 years is the amount set out in subsection (4) or, if an amount is specified in the agreement, the amount specified. An agreement must not specify a break fee exceeding the amount (if any) specified by the regulations. (6) The amount of any money paid by a tenant to a landlord on terminating a fixed term agreement before the end of the fixed term or before otherwise abandoning the premises (other than money previously due to the landlord under the residential tenancy agreement) is to be deducted from any amount payable to the landlord under this section. (7) This section does not prevent a landlord from obtaining an occupation fee under Division 2 of Part 6 for goods left on the residential premises.
2. That section was replaced by a new s 107 by the Residential Tenancies Amendment (Review) Act 2018 (NSW). It differed in some respects to the old s 107 and in particular provided for a different regime of break fees.
3. In that respect the new s 107, which did not come into force until 23 March 2020, provided the following: (1) The Tribunal may, on application by a landlord, order a tenant to pay compensation to the landlord for any loss (including loss of rent) caused by the abandonment of the residential premises by the tenant. (2) The landlord must take all reasonable steps to mitigate the loss and is not entitled to compensation for any loss that could have been avoided by taking those steps. This subsection does not apply in the case of a fixed term agreement for a fixed term of not more than 3 years. (3) The compensation payable by a tenant under this section in respect of a fixed term agreement for a fixed term of not more than 3 years is the amount of the applicable break fee for the tenancy calculated under subsection (4). (4) The break fee for a fixed term agreement for a fixed term of not more than 3 years is - (a) if less than 25% of the fixed term had expired when the premises were abandoned - an amount equal to 4 weeks rent, or (b) if 25% or more but less than 50% of the fixed term had expired when the premises were abandoned - an amount equal to 3 weeks rent, or (c) if 50% or more but less than 75% of the fixed term had expired when the premises were abandoned - an amount equal to 2 weeks rent, or (d) if 75% or more of the fixed term had expired when the premises were abandoned - an amount equal to 1 week's rent.
4. The practical effect of the change, in a case such as the present where more than 75% of the fixed term had expired, was to change what the landlord was entitled to if the tenants abandoned the premises and, if a break fee was payable, prima facie changed the amount payable from four weeks to one week.
5. However, it was the old s 107 which applied to this case and not the new s 107. That is because cl 25 of Schedule 2 of the RTA says: 25 Application of substitution of section 107 Section 107, as substituted by the Residential Tenancies Amendment (Review) Act 2018, does not apply to a residential tenancy agreement entered into before the substitution of that section.
6. Under the old s 107, and where a lease did not specify a break fee (as was the case here for reasons to which we will come), a landlord was entitled to claim any losses he suffered as a result of the tenants abandoning the premises, subject to the landlord's obligation to mitigate his losses as required by s 107(2).
7. There was no valid break fee clause in this lease.
8. Clauses 41 and 42 (which concerned break fees) were crossed out and Additional Clause 12 does not operate as a break fee clause and is otherwise void for being inconsistent with the RTA (for the reasons we set out at [56] below).
9. In contrast, under the new s 107, a landlord may only claim as compensation for abandonment what is provided for in s 107(4) (in this case that would be one weeks rent) but the landlord is not required to mitigate his losses where the lease was for a fixed term of three years or less.
10. What is common to both the old and new s 107 is that s 107(1) remained unchanged. The effect of that section is that the Tribunal has a discretion to refuse to award compensation to the landlord in appropriate cases - Abdel-Messih v Marshall [2018] NSWSC 648 at [36].
11. The result of all of that is that the landlord in this case was entitled to apply to the Tribunal for compensation for the tenants' abandonment of the premises (but not a break fee), the Tribunal had a discretion whether to award any compensation, the landlord had a positive obligation to take all reasonable steps to mitigate his loss and the landlord was not entitled to compensation for any loss that could have been avoided by taking those reasonable steps (if he had not taken those steps).

The Obligation to Mitigate

1. What obligation did the landlord have to mitigate his losses under s 107(2) (as it was at the time the lease was entered into) if the tenants abandoned the premises?
2. In Abdel-Messih Walton J was concerned with the old s 107. His Honour held that common law rights were inapplicable to s 107(1). His Honour said at [35(4)(b) and (c)]: "(b) Furthermore, whether or not Mr Abdel-Messih has common law rights for breach of contract (the reference to s 107 is in a note accompanying the clause - it is unclear as to whether it forms part of the provision), the relevant legislation is not dealing with common law rights for damages for breach of contract. The RT Act deals with a special class of rights to redress residential tenancy disputes before the Tribunal in an informal manner allowing the exercise of a discretion to order compensation for loss. These are, in law and are conceptually, different classes of remedy. Specialist tribunals for residential tenancy disputes were established to ensure that residential tenancy legislation operates fairly, considering access to courts was seen as a disadvantage to tenants because of the role of lawyers in presenting cases. (c) Whilst the common law might give some guidance on how to construe the statute, it ultimately comes down to the construction of the statute itself that is relevant for the purposes of determining whether or not the Tribunal had a discretion."
3. Nothing was said by his Honour about the content of the obligation to mitigate set out in s 107(2) because it was not an issue in that case, but in our view common law principles concerning mitigation of damage in breach of contract cases would be applied by analogy to the obligation to mitigate in s 107(2) unless those principles conflicted with the words of the sub-section.
4. We hold that opinion because the concept of mitigating one's losses after a breach of contract (abandonment of premises by a lessee is a breach of contract) is a common law concept, it is a familiar and often raised issue in contract cases and no other guidance is provided in the RTA as to the content of the duty to mitigate set out in s 107(2).
5. General common law principles applicable to the duty to mitigate in the old s 107(2) include, in our opinion, the following.
6. In Halsbury's Laws of Australia, online edition, at [135-25] the authors say (footnotes omitted): "Plaintiffs who are the victims of a tort or breach of contract are required to respond reasonably to the defendant's wrong. They cannot simply lie by and let the losses flowing from that wrong multiply. Rather, they must act to keep the damages down as far as is reasonable in all the circumstances of the case. If they fail to do so, their award of damages will exclude recovery for those losses which could reasonably have been avoided. … Thus, it is apparent that the application of the principle of mitigation, which acts as a qualification of the principle of compensation, can result either in the reduction or augmentation of the plaintiff's damages. Failure to mitigate loss is not actionable, but merely reduces the damages payable by the defendant." (Emphasis ours)
7. That passage makes clear that the common law obligation is only to act reasonably in all of the circumstances, and a failure to do so does not exclude all loss but only reduces the damages to exclude those damages that could have been reasonably avoided. As to the latter, and put another way, a respondent is only liable for the portion of the applicant's loss caused by the respondent's breach and not for loss caused by the failure of the applicant to act reasonably. This latter point was referred to in In the matters of Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) [2021] NSWSC 966 Ward CJ in Eq (as her Honour then was) said at [546]: "It is well understood, when taking into account the assessment of damages that a failure to mitigate ensures the defendant is only liable for the portion of the plaintiff's loss caused by the defendant's breach (see Chand v Commonwealth Bank of Australia [2015] NSWCA 181 (Chand) at [181]; Sotiros Shipping Inc and Aeco Maritime SA v Sameiet Solholt [1983] 1 Lloyd's Rep 605 (The Soholt))."
8. We see no difference in substance between the common law obligation to act to keep the damages down as far as is reasonable and the statutory obligation in s 107(2) to "take all reasonable steps to mitigate the loss".
9. What we would particularly apply in this case (because the Tribunal did not do so) is the common law requirement that the landlord's actions must be judged "in all the circumstances of the case".
10. Otherwise, the common law principle that a failure to mitigate loss reduces the damages payable by the defendant is to the same effect as the words in s 107(2) that a landlord is not "entitled to compensation for any loss that could have been avoided by taking those steps."
11. At [135-35] in Halsbury's, and in relation to the test of reasonableness (in taking steps to reduce the loss), the authors say (footnotes omitted): "The reasonableness of the plaintiff's notional or actual response to the defendant's wrong is a question of fact to be determined in the light of all the circumstances of the case. In commercial cases, the 'ordinary course of business' sets the standard of reasonableness. More generally, the standard of reasonableness is not set at a high level since the defendant is a wrongdoer. Nor is the plaintiff's response to the defendant's wrong judged with the critical eye of hindsight. Rather, plaintiffs are entitled to consider their own interests before determining how the defendant's damages should be minimised, or, where relevant, how third party interests should be accommodated. Thus, on the one hand, plaintiffs will not generally be required actively to promote the interests of the wrongdoer; nor to place at undue risk their property, money, reputation, persons or other rights …" (Emphasis ours)
12. The authors noted that the standard of reasonableness is not set at a high level. In Earth Civil Australia Ward CJ in Eq referred to, at [2157] and with apparent approval, the plaintiff's submission that: "The plaintiffs point out that even at common law mitigation is not weighed 'in nice scales at the insistence of the party whose breach of contract had occasioned that difficulty' (citing Banco De Portugal v Waterlow & Sons Ltd [1932] AC 452 at 506 per Macmillan LJ)."
13. In Karacominakis v Big Country Developments Pty Ltd & Ors Big Country Developments Pty Ltd v Chadlace Pty Ltd & Ors J W Wall Investment Co Pty Ltd & Ors v Big Country Developments Pty Ltd & Ors Hollingsworth & Anor v Big Country Developments Pty Ltd & Ors [2000] NSWCA 313 Giles JA, with whom Handley and Stein JJA agreed, summarised the general principles - all of which are applicable in this case in our opinion - at [187]. His Honour said: "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) AC 452; Pilkington v Wood (1953) Ch 770; Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd (1976) 1 NSWLR 5)."
14. In our opinion those same principles (at [34]-[36] above) should apply to the obligation to mitigate in the old s 107(2) with the exception that, contrary to the common law position described by Giles JA, s 107(2) does impose a positive obligation on a landlord to mitigate his losses. The question of onus of proof may also be different because of that positive obligation, but that is not something we need to decide here.

The Appellant's Evidence

1. The appellant appeared before the Tribunal, but the respondents did not. Notwithstanding their non-appearance the Tribunal had before it what the Tribunal called the respondents "submissions" in which they raised the question of mitigation, and the Tribunal considered that issue (ultimately in the respondent's favour).
2. Notwithstanding the contents of the additional cl 12 (quoted at [11] above) which entitled him to claim a number of things in addition to rent, the landlord expressly limited his claim to four weeks rent (being $8,800).
3. The appellant told the Tribunal the following.
4. He said that since the premises were completed in 2012 and up until the lease with the respondents the premises had been rented on multiple occasions for a usual rent of $2,500 p/wk.
5. The rent under the subject lease was reduced to $2,200 p/wk because a major renovation/ addition and extension project was taking place next door causing noise and the landlord had found it difficult to find a tenant. Hence, he reduced the advertised rent in order to find a tenant, which ultimately turned out to be the respondents.
6. Since about March 2021, and in anticipation of the expiry of the lease in January 2022, the landlord had been monitoring the trajectory of the rental market in or around Northbridge (where the premises were situated) and tendered to the Tribunal his handwritten notes recording addresses of the comparable properties he researched, the rental sought in respect of each property and sometimes the historical rentals achieved. There were 13 such properties, the last three of which concerned rental amounts sought or obtained in September and October 2021.
7. On 28 September 2021, the first respondent sent him a text message indicating that the tenants would move out at the end of October 2021. A more precise date was not specified in that message.
8. On 10 October 2021, the first respondent sent him a text message, saying 'we have finished all cleaning and repairs. What day can we drop off the keys?' That was done later that same day.
9. The following day, 11 October 2021, the landlord contacted a real estate agent who had previously listed the premises for rental purposes. The landlord discussed with the agent what rent could be obtained for the premises and the agent agreed that the sum of $2,750 was a reasonable rent to seek. The landlord's written evidence was ("Bradley" being a reference to the agent): "In order to firstly determine a reasonable asking price, Bradley and I referred to a few premises that had just been leased out in Northbridge. For example, the premises at 7 Neeworra Rd that first appeared on Domain on 5 October was with the price tag of $2,690 per week. It was smaller, older than the subject premises but it has a pool when the subject premises is without. For example, another comparable premises at 20 Aubrey Rd had been leased for $3,000 per week in July, also handled by Bradley. So we agreed that the adequate asking price was to be $2,750. To further save time and costs we used the old photos and floor plans for promotion."
10. The following day, on 12 October 2021, the landlord signed a Leasing Agency Agreement with that agent in which the agent was given authority to rent the premises for $2,750 p/wk.
11. On 13 October 2021, the advertising of the premises commenced.
12. The landlord's written evidence was: "A few days into the promotion we found that there were not many enquiries except one lady expressing strong interest but required a second inspection by her children. Eventually it was not a successful outcome from negotiation so we lowered the asking price to $2,500 per week in an attempt to increase the probability of securing a tenancy sooner."
13. On 8 November 2021, an application for tenancy was received and a holding deposit paid.
14. On 22 November 2021, a new lease was entered into at a rent of $2,500 p/wk.
15. Thus there was a period of six weeks between the date of vacant possession (10 October 2021) and the signing of a new lease (22 November 2021) although as we have previously mentioned, the landlord, both in writing and orally, limited his claim before the Tribunal to four weeks rent.
16. The landlord told the Tribunal that he could have commenced advertising earlier but for the uncertainty of the date the tenants were to vacate. He told the Tribunal: "Had I received the notice on 28/9/21 that (the tenants) was going to leave on 10/10/21 … the advertisement could have started by 5 October, providing an alternative option for the renter who chose 7 Neeworra Rd, Northbridge. In the case that the renter chose mine between the 2, the vacancy period could have been reduced from 6 to 3 or 4 weeks."

The Tribunal's Reasons

1. The Tribunal's reasons were brief. The Tribunal said: "The Tribunal is satisfied that the tenant gave vacant possession during the period of the fixed term and the landlord is entitled to claim a break lease fee. The Tribunal accepts the landlord's submission on the relevant applicable law for the claim of a break lease fee in these circumstances. The lease was signed on 17 January, 2019. At that time the break lease fee provided for in Section 107(4) was:- 'The break fee for a fixed term agreement for a fixed term of not more than 3 years is(a) an amount equal to 6 weeks rent if less than half of the fixed term had expired when the premises were abandoned, or (b) an amount equal to 4 weeks rent in any other case.' The amendments to the Section 107 in March, 2020 are not relevant to this case. The statutory break lease fee was provided in the standard form residential tenancy agreement applicable in 2019 in clause 41. The agreement signed between these parties deleted clause 41 and instigated an "Additional Clause 12". The Additional Clause 12 states that the tenant would be liable to compensate the landlord for rent up until the date the property is relet or the end of fixed term (whichever occurs first), advertising fees and reletting fees. This Additional Clause is subject to Clause 53 of the residential tenancy agreement that provides that the landlord has a duty to mitigate any loss on termination. By marketing the property at a substantial increase from the rent payable by the tenant during the balance of the fixed term, the Tribunal is finds that the landlord has not properly mitigated the loss and it is not reasonable to make order for the payment of a break lease fee."
2. The Tribunal was incorrect in referring to the landlord's entitlement to a break lease fee.
3. Additional Clause 12 is very similar in form, and the same in substance, to the clause considered in Bayfield v Everall [2016] NSWCATAP 227 and which the Appeal Panel in that case held could not operate as a break fee clause and was otherwise void as being inconsistent with s 219 of the RTA - see at [52]-[60]. In our opinion the additional cl 12 fails for the same reasons given in Bayfield and is void.
4. Ultimately, nothing turns on this in terms of the result of the case because cl 12 included an obligation to mitigate (and s 107(2) did not impose such a duty where the claim was for a break fee) and so the Tribunal ultimately got to the correct issue albeit by an incorrect path.
5. The result is that in this case the landlord's claim was for compensation and not a break fee.
6. His claim for compensation was subject to his obligation to mitigate in the old s 107(2) and the exercise of the Tribunal's discretion referred to in s 107(1). As the Tribunal did not decline the landlord's claim for any discretionary reason under s 107(1) that aspect of the case need not be further considered.
7. Rather, and the real point in issue in this appeal, was whether the Tribunal erred in the last paragraph of its decision (quoted above) rejecting the landlord's claim because of a finding that the landlord had failed to mitigate his loss.

Decision

1. In our opinion the Tribunal erred in finding that the landlord had failed to mitigate his loss by failing to apply the principles we have set out earlier in these reasons.
2. The only reason given by the Tribunal for finding the landlord had failed to mitigate his loss was the initial (increase in the) rental asking price of $2,750.
3. Of course, that was a relevant consideration, but the Tribunal's error was in failing to have regard to the other evidence led by the landlord and which placed that sum in context. All the circumstances of the case must be considered - see [29] and [34] above.
4. The premises had, before the respondent's lease, been rented out, usually, at $2,500 p/wk. It was reduced at the time immediately preceding the respondent's lease because of noise from an adjoining site.
5. From March 2021 the landlord had investigated the rental market for comparable properties in the local area and up to at least October 2021. He approached a local agent and sought his opinion as to the appropriate rent on the tenants' abandonment of the premises. The landlord was aware there were only a few enquiries from potential lessees after the first few days of advertising except for one person with whom he had some ultimately unsuccessful negotiations. Thereafter, the asking rent was reduced to $2,500 p/wk (which had been the usual rent between 2012 and 2019) whereupon a lease was signed shortly thereafter.
6. On those facts it is difficult to see how the landlord could be said not to have acted reasonably.
7. The tenants submitted the landlord should have advertised earlier, but the landlord gave evidence (see at [53] above) that he could not do so because he had originally been told the tenants would vacate at the end of October, and then, without advance warning, the tenants told him they were leaving on 10 October 2021.
8. The tenants submitted the landlord could have signed the agency agreement earlier, had his marketing ready to go and taken pictures ready to put up on a website. There would have been obvious difficulties in taking pictures of the interior of the premises whilst the tenants and their goods remained in the premises, the landlord signed the agency agreement only two days after the tenants vacated and advertising commenced three days after they vacated using old photos and floorplans.
9. As the common law authorities say, the landlord's actions are not to be judged critically in hindsight and he was entitled to consider his own interests (in achieving the best market rental) before determining how his loss caused by the tenants' wrongful abandonment of the premises should be minimised - see [34] above.
10. A high standard of conduct was not required and the landlord should not have been held to have acted unreasonably because the tenants could suggest other and more beneficial conduct (to them i.e. by seeking $2,200 or perhaps $2,500 p/wk from the beginning of advertising rather than $2,750) if it was reasonable for the landlord to do what he did - see [36] above.
11. The landlord had researched the local rental market and sought the advice of a local agent who would be expected to have reasonable insight into the prevailing market conditions at the time. All that information suggested an asking price of $2,750 was not unreasonable and it was reasonable for the landlord to act on that information.
12. For those reasons, in our opinion, the Tribunal erred in failing to apply the correct legal principles to the issue of mitigation. Had the Tribunal done so the result should have been a rejection of the allegation of a failure to mitigate.
13. Accordingly, the appeal is upheld.
14. We need not say more about the Tribunal's second error, namely the treating of the plea of mitigation as a complete defence, because our decision on the first error is dispositive of the appeal.
15. Nevertheless, we wish to add that as the premises were rented out at $2,500 p/wk, it would seem that the landlord indisputably acted reasonably in seeking that amount. It follows that on the Tribunal's reasoning (assuming it was otherwise correct) the landlord's losses should have been restricted to the period in which he sought $2,750 p/wk because any award of damages will only exclude recovery for those losses which could reasonably have been avoided - see [29] above - and the evidence is tolerably clear that the asking rent of $2,750 was reduced to $2,500 within the four week period for which the landlord claimed.
16. The final matter to note is that the tenants made some submissions along the lines that they were entitled to some compensation from the landlord. However, they did not commence proceedings in the Tribunal for any claimed compensation and no Tribunal has determined whether they are entitled to any compensation. In those circumstances it is not a matter to be considered on an appeal.

Orders

1. We make the following orders: 1. Appeal upheld. 2. The orders of the Tribunal dated 21 February 2022 are set aside. 3. The respondents are to pay the appellant the sum of $8,800 immediately.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 May 2022