Australia: Commercial leasing and consequential loss

Services: Property & Projects
Industry Focus: Property

What you need to know

  • There is considerable uncertainty surrounding the extent to which consequential loss can be claimed in Australia. As a result, both landlords and tenants should carefully consider what losses they might suffer if the other party breaches their lease.
  • It is important to be specific when negotiating and drafting provisions in relation to direct or consequential loss. Express covenants around the use of the leased premises can help to inform courts that certain losses may be anticipated, and it is also a good idea to include specific reference to 'loss of bargain' damages in circumstances where a tenant breaches the lease.
  • Ultimately, precision drafting is key.

When a lease is breached, the innocent party may have a number of options. 1 One such option is the right to claim damages as compensation for any loss suffered. The way in which a court may interpret terms in a lease that relate to damages can have important consequences for both parties.

In this article we look at what loss an innocent party may seek to recover where the other party breaches its obligations under a lease.

Damages and "consequential loss"

The underlying purpose of damages is to place the innocent party, so far as damages can do, in the same position as if the contract or lease had been performed. 2

Traditionally, and in line with the English authority of Hadley v Baxendale 3, courts have held that where one party breaches an agreement and the innocent party suffers loss, damages should be provided to the innocent party flowing from losses that may be classified as:

  • direct loss: loss which may fairly and reasonably be considered as arising naturally, i.e. according to the usual course of things; or
  • consequential loss: loss which may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.

Accordingly, any loss suffered that could not be categorised as either direct or consequential loss was considered too remote from the breach and was not recoverable under the common law.

Consequential loss has since been the subject of considerable debate; although not necessarily being played out in the context of lease disputes. Australian courts have made it clear that in practice, a rigid approach to what forms consequential loss is inappropriate. 4

The Peerless Case and a shift in focus

The 2008 case of Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 (Peerless) marked a significant change in direction to the way Australian courts interpret the meaning of the words "consequential loss" in commercial agreements. The Victorian Court of Appeal in Peerless saw the true distinction as between:

  • normal loss: which is loss that every plaintiff/claimant in a like situation will suffer; and
  • consequential loss: which is any loss suffered beyond the normal measure.

Peerless essentially broadened the scope of what could be considered "consequential loss" in a particular circumstance. In doing so, Peerless, and subsequent decisions in superior courts of South Australia, 5 Western Australia 6 and most recently in New South Wales, 7 have created uncertainty as to how courts will interpret references to consequential loss and damages generally.

Tenant considerations

Tenants have the benefit of an implied promise by the landlord to ensure the tenant enjoys 'quiet enjoyment' of the premises. 8 However, prudent tenants may seek to impose additional more specific obligations on their landlords, especially in relation to the tenant's particular use of the premises.

Consider the example where a pharmaceutical wholesaler seeks warehouse premises to store medical supplies that are highly sensitive to temperature. A standard commercial lease might provide that the tenant is to take the premises in their existing state and condition and that it is for the tenant to satisfy itself that those premises will be fit for the intended purpose. In addition, there might be specific provisions restricting remedies available to the tenant for failure of services (e.g. to rent abatement alone), together with detailed releases and indemnities protecting the landlord against particular losses. 9

However, the wholesaler (being a prudent tenant) might require provisions obliging the landlord to maintain the temperature of the premises within a certain range, as well as separate covenants regarding the structural soundness and watertight qualities of the warehouse. It would be a matter of negotiation as to the consequences that would flow if the landlord breached those obligations and the medical supplies were ruined. Whilst this might be a difficult negotiation, it would be preferable for the parties to consider this issue and provide for it in the lease (including as to responsibility for insurance), rather than leave it to a court to determine where responsibility lies, what loss would be "normal" and who should bear the loss.

Landlord considerations

An important consideration for a landlord is loss of future rental income or "loss of bargain" where a lease is terminated.

Traditionally, a landlord who terminated a lease for tenant default could only claim arrears of rent up to the date of termination and not loss of bargain damages. 10 To claim loss of bargain damages, a landlord needs to show that the tenant's breach amounts to a repudiation or fundamental breach of the lease by the tenant. Repudiation and fundamental breach are legal concepts not easily inferred by conduct or circumstances. Accordingly, most leases now contain express provisions stipulating that particular covenants are essential or fundamental terms. Further clauses will provide that repudiation or breach of an essential or fundamental term by the tenant will entitle the landlord to sue for the loss of the future benefits under the lease that the landlord would have enjoyed had the lease gone full term. As penalties are not enforceable at law, the mechanism for calculating loss of bargain damages will also generally take account of the landlord's duty to mitigate its loss by re-letting the premises and for present day valuation of the damage suffered. From a landlord's point of view, it is crucial that the lease contains these sorts of clauses which are often referred to as Shevill clauses. In seeking to enforce Shevill clauses, a landlord should also be conscious of being able to adequately prove any loss of bargain damages claimed, as courts will not place a landlord in a better position than if the lease was performed. 11

Key takeaways

  • There is uncertainty surrounding the extent to which consequential loss can be claimed in Australia
  • Parties should carefully consider what losses might be suffered in given situations and how that risk is to be managed
  • When negotiating and drafting provisions in relation to direct or consequential loss it is important to be specific
  • Express covenants around the use of the premises, performance of the services or quality of the building inform courts that certain losses may be anticipated
  • Landlords should include Shevill clauses in their leases
  • Insurance should always be an important consideration for both landlords and tenants, and seeking to anticipate and allocate risk in the lease document should be used in conjunction with maintaining adequate insurances

Footnotes

1 For more information on the options available to an innocent party please see, "When the end is nigh: terminating leases and agreements for breach", 30 June 2015, http://www.dibbsbarker.com/publication/When_the_end_is_nigh__terminating_leases_and_agreements_for_breach.aspx
2 Robinson v Harman (1848) 1 Ex 850
3 (1854) 9 Exch 341
4 Alstom Ltd v Yokogawa Australia Pty Ltd and Anor (No 7) [2012] SASC 49; Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [No 2] [2013] WASC; Macmahon Mining Services v Cobar Management [2014] NSWSC 502
5 Alstom Ltd v Yokogawa Australia Pty Ltd and Anor (No 7) [2012] SASC 49
6 Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [No 2] [2013] WASC
7 Macmahon Mining Services v Cobar Management [2014] NSWSC 502
8 For more information on the covenant for 'quiet enjoyment' please see, "Quiet enjoyment – what does it mean?" 25 February 2015, http://www.dibbsbarker.com/publication/Quiet_enjoyment_%E2%80%93_what_does_it_mean.aspx
9 For more information on releases and indemnities please see, "Indemnities and releases under commercial leases" 17 December 2015, http://www.dibbsbarker.com/publication/Indemnities_and_releases_under_commercial_leases.aspx
10 Shevill v Builders Licensing Board (1982) 149 CLR 620
11 For more information on evidence to prove loss please see, "After a tenant defaults: Proving loss of bargain damages", 29 May 2014, http://www.dibbsbarker.com/publication/After_a_tenant_defaults__Proving_loss_of_bargain_damages.aspx

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.