This case has potential consequences for builders with respect to receiving payment for works undertaken on behalf of tenants of commercial buildings.

In 1997 Bowen Investments, owner of a unique commercial building in Melbourne, discovered that its corporate tenant Tabcorp had engaged its own architect, internal designer and contractors to renovate the premises. The contractors jack-hammered and filled with debris the building's foyer. The original foyer featured San Francisco Green Granite and Sequence and Matched Crown Coat American Cherry.

Tabcorp had agreed in the lease not to make any substantial alteration or addition to the premises without the prior consent of Bowen Investments. Tabcorp had also agreed in the lease to make good any damage incurred to the premises. Bowen Investments had not given prior consent to the alterations to the foyer, and Tabcorp refused to make good the damage it caused. The estimated cost of restoring the premises was $1.38 million.

In January 2009, all 5 judges of the High Court of Australia determined that the actions of Tabcorp showed "contumelious disregard" for the rights of Bowen Investments as landlord.

At the first hearing of this case, the Federal Court of Australia awarded damages to the landlord of only $38,820.00 (the difference between the value of the premises with the original foyer and the value of the premises with Tabcorp's newly constructed foyer). As a result, Bowen Investments felt that the law essentially allowed tenants complete liberty to breach their leases provided they paid adequate damages to compensate the landlord ("the doctrine of efficient breach").

Bowen Investments appealed the decision to the Full Federal Court of Australia, which awarded Bowen Investments damages of $1.38 million to restore the foyer to its original condition.

Tabcorp appealed to the High Court of Australia which, in January 2009, upheld the previous decision to award Bowen Investments $1.38 million in damages, and noted that the "ruling principle" in relation to damages for breach of contract is that the innocent party is to be placed, so far as money can do it, in the same situation as if the contract had been properly performed. The Court found that the landlord's loss was the cost of restoring the premises to the condition it would have been in had the lease not been breached by the tenant. The Court said restoration was necessary to produce conformity with the condition of the foyer as it was at the start of the lease. The Court did not find that Bowen Investments' requirement to restore the foyer was unnecessary or unreasonable.

Tabcorp neglected to request a discount in the damages awarded against it to account for the fact that if Bowen Investments used the damages to restore the foyer after the expiry of the lease, it would be 'better off' with a brand new foyer it wouldn't ordinarily have had. As a result, the High Court did not allow for that discount.

The lessons from Tabcorp Holdings Ltd –v– Bowen Investments Pty Ltd are that:

  • Tenants can no longer impose a form of economic rationalism on an unwilling landlord by making substantial alterations or additions to premises without prior consent, as it will likely result in restoration of the premises at great cost to the tenant.
  • Builders engaged by tenants should ensure that the prior approval of the landlord has been given to any building alterations. Builders should at least obtain appropriate indemnities from the tenant, as (although it didn't occur in this case) tenants may find themselves financially overburdened by builders' claims for progress payments in addition to landlords' claims for substantial damages, which will in turn affect the ability of the tenant to pay the builder on time or perhaps at all. Building contracts AS 4000 – 1997 (cl 15.2) and AS 2124 – 1992 (cl 17.2), for example, provide that a principal must indemnify the contractor in respect of claims challenging the right of the principal to carry out the work under the contract.

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