Australia: A Landlord´s Right To Recover Loss Of Bargain Damages

Last Updated: 25 June 2008
Article by Justin Lethlean

The High Court's decision in Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] HCA 10 is significant for both landlords and tenants as the High Court upheld a landlord's right to obtain damages, including loss of bargain damages, following termination for a tenant's breach of an agreed essential term.

The facts

The landlord, Transit Management Pty Ltd (Transit), owned a grocery tenancy in a shopping centre. In 1993, the tenant, Duffy Bros Fruit Market (Campbelltown) Pty Limited (Duffy), took a 15 year lease from Transit of that grocery tenancy (Lease).

By 1999, Duffy was experiencing difficulty trading and fell into arrears in rent. In the interests of keeping the tenancy on foot, Duffy and Transit entered into a deed (Deed) providing:

  1. Transit would attempt to secure a sub-tenant for part of the premises
  2. the responsibility for payment of the sub-tenant's rent remained the responsibility of Duffy
  3. the rent payable by Duffy under the Lease was reduced, and
  4. the terms of the Lease be ratified and affirmed.

The Deed essentially established that so long as Duffy did not commit any further breaches of the Lease it would not have to pay the full rent originally required by the Lease.

Later in 1999, a sub-tenant was secured for a term due to expire in July 2002.

Transit sold the freehold of the premises to Gumland Property Holdings Pty Ltd (Gumland) in September 2001. However, an assignment to Gumland of Transit's interest in the Lease was not recorded in writing until May 2005.

At the expiry of the sub-lease in July 2002, the sub-tenant decided not to exercise its option to a further term and entered into a period of over holding. The sub-tenant then unilaterally began paying only half of the rent payable under the sub-lease.

As a result, Gumland claimed Duffy to be in breach of the Lease and the Deed. Gumland issued default notices upon Duffy demanding payment of all arrears. Payment was not forthcoming and in August 2003, Gumland terminated the Lease.

Gumland then sought damages from Duffy in the amount of $2,096,514 (plus interest) being:

  1. arrears of the full rent payable under the Lease and all rent due under the sub-lease
  2. loss of bargain damages being the difference between the rent and outgoings payable under the Lease from the date of termination to the scheduled expiry date of 29 March 2008 and the amounts received or likely to be received in that period, and
  3. reinstatement damages for Gumland's costs in refurbishing and re-leasing the premises.

The findings at first instance and on appeal

The Supreme Court at first instance held that the sub-tenant's failure to pay rent was a breach of a specified essential term of the Lease and the Deed. As such, Gumland was entitled to recover arrears of rent and loss of bargain damages.

On appeal, however, part of the Supreme Court's ruling was overturned. The Court of Appeal held that a breach of the Deed did not give rise to a breach of Duffy's essential obligation to pay the rent in full. As such, Gumland invalidly terminated the Lease and was only entitled to recover arrears in rent and not bargain damages.

Duffy's argument before the High Court

Duffy, relying on the decision of Gibbs CJ in Shevill v Builders Licensing Board (1982) 149 CLR 620, argued that Gumland did not have a valid termination right as the payment of rent was not an essential term of the Lease. Duffy argued that it had merely breached the Deed by not fulfilling its obligation to reimburse Gumland for any shortfall in the rent paid by the sub-tenant.

Duffy argued that even if the parties had agreed that the payment of rent was an essential term, and Duffy had breached that essential term, Gumland was not necessarily entitled to sue for loss of bargain damages. Duffy argued that such a right to sue only arose when Duffy repudiated the contract, which it had not done.

The High Court's decision

The High Court allowed Gumland's appeal and awarded all damages it sought, including arrears and loss of bargain damages.

The Court held that the Deed did not operate independently of the Lease but merely varied the terms of the Lease. By way of an agreed essential term, Duffy remained liable to pay the rent in full within 7 days of the rent becoming due.

The payment of rent was expressed by the parties to be an essential term in the Lease. The Court held that even if it was not, general contractual principles apply to leases which allow an innocent party to terminate and recover for loss of bargain damages where there is a repudiation or a fundamental breach of a condition.

The Court held that as the parties had used very clear words to define their intentions and that the Lease clearly provided that loss of bargain damages would be payable following termination for breach of an essential term, Gumland would be able to recover accordingly.

Was Gumland entitled to terminate and sue?

The High Court then had to decide whether Gumland as purchaser of the freehold of the Premises from Transit could sue for loss of bargain damages from Duffy where Gumland (as purchaser) did not take a formal assignment of the Lease at settlement.

The Court referred to the House of Lords decision of P & A Swift Investments (A Firm) v Combined English Stores Group plc [1989] AC 632 and held that the right to loss of bargain damages touched and concerned the land and that the covenant to pay rent was not expressed to be personal to Transit. As such, Gumland could rely on it and obtain damages from Duffy as a result of its breach.

What does this mean?

The High Court's decision provides a compelling example of the need for clearly drafted provisions in any leasing document which ensure the true effect is given to the parties' intentions.

The Court is clear in its findings – leasing documents are not to be treated differently from any other commercial document and the wording and effect of all provisions of leases (and their surrounding documents such as sub-leases) is crucial.

Parties should pay attention to which terms each lease defines as essential and the consequences of a breach of an essential term by either party. Particular attention should be paid to whether loss of bargain damages will become payable upon such a breach occurring. Needless to say, the consequences of such a clause can be significant.

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.

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