What is the proper measure of damages payable by a tenant for
breach of promise not to alter premises without landlord consent? A
decision handed down by The High Court this month confirms that the
appropriate measure of damages for breach of such promise is the
cost to reinstate the building rather than the loss in value of the
building caused by the alteration.
In the case, the landlord had constructed the foyer of a
commercial building with particular care using high quality
materials including special granites. It then leased the building
and, six months later, the tenant partially demolished and
reconstructed the foyer without the landlord's consent. Consent
was sought but not given pending provision of details of the
proposed works. The tenant proceeded to alter the foyer in breach
of the alteration provision despite the landlord's protests.
The tenant's conduct was described by the trial judge as being
in "contumelious disregard" of the landlord's
The trial judge found in favour of the landlord but determined
that the appropriate measure of damages was the diminution in the
value of the building due to the foyer alteration (approximately
$34,000). Further, that damages should only be assessed on a
reinstatement basis in limited cases where the tenant has so
damaged the premises that they are unlettable at the conclusion of
On appeal, the approach preferred by the High Court was that a
contracting party should receive what they contracted for or
damages sufficient to put them in that position: not merely the
difference in value due to the breach. The one exception to this
rule was that a test of reasonableness should be applied to the
application of the reinstatement measure. One formulation of that
exception was that the party to be compensated must be seeking
compensation for a genuine loss and not merely using a technical
breach to secure an extra profit.
In the circumstances, the tenant was held liable to
reinstatement damages in the sum of $1.38 million comprising
$580,000 to reinstate the foyer and $800,000 for loss of rent
during the period of reinstatement.
The tenant might have achieved a reduced award by putting
argument at trial on the appropriate methodology to calculate the
reinstatement damages amount. It appears that the tenant focused at
the trial on diminution in value as the appropriate measure without
arguing in the alternative as to the appropriate methodology to
arrive at the reinstatement damages (should reinstatement damages
be applied). In particular, the tenant could have sought a discount
for betterment and also made submissions on the timing of the
damages assessment having regard to the lease expiry (which could
have involved an assessment of the reinstatement damages at the
date of the breach, assessing damages at the date of the proceeding
or arguing for an assessment of the damages at lease expiry
together with interest or discount allowances to arrive at present
The decision is heartening for landlords, in that it confirms
they may rely on the strength of covenants not to alter without
consent. The lesson for tenants is either to ensure observance of
alteration restrictions or, in the case of a breach, to take care
in the argument of the damages claim in order to best minimise
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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