Landlord Rights Extended to Protect Property from Alteration or Modification by Tenant

The High Court of Australia last month handed down a decision extending a landlords right to protect its property from alteration or modification by a tenant.

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd the High Court held that a landlord may be entitled to damages reflecting the cost of reinstatement - that is to say the costs of rectifying a tenant's alteration of property, made in breach of the lease, even if the cost of reinstatement is well in excess of any diminution in the value of the property.

Background facts

On 23 December Bowen Investments Pty Ltd ("Bowen") granted a lease to Tabcorp Holdings Ltd ("Tabcorp "), commencing 1 February 1997. Less than six months prior to Tabcorp taking possession of the building, the lobby had been renovated by Bowen. The Court spent some time describing the "high quality" of Bowen's construction of the foyer - including noting "It was made out of special materials - San Francisco Green granite, and sequence-matched crown-cut American cherry".

Tabcorp proposed to alter the lobby of the building owned by Bowen and on 11 July 1997 the Bowen informed the Tabcorp that it could not consent to the proposed alterations until these proposals were examined at a site meeting on 15 July 1997. When the director of Bowen attended the property on 14 July 1997 she discovered that Tabcorp had commenced "destruction" of the lobby (at [2]). This alteration continued until a new foyer was completed on 31 August, 1997.

Under the lease Tabcorp covenanted to, in clause 2.13:

• "not without the written approval of the landlord first obtained (which consent shall not be unreasonably withheld or delayed) to make or permit to made any substantial alteration or addition"

At Trial

Trial judge Tracey J found in favor of Bowen and described Tabcorp's conduct as involving "contumelious disregard" for Bowen's rights (at [4]). Tabcorp's breach of the covenants contained in the lease was not disputed by Tabcorp. What was in issue was the appropriate measure of damages.

Tracey J. held that damages were limited to the difference between the value of the property with the old foyer and the value of the new foyer constructed by Tabcorp. He declined to award damages based on reinstatement costs which would reflect the cost of restoring the premises to the condition in which they would have been if the obligation had not been breached.

Tracey J found that such measure of damages is applicable "... only in a relatively narrow range of cases where a tenant has so damaged or modified premises that they are un-lettable at the conclusion of the lease". Accordingly the trial judge awarded damages of $34,820 to Bowen.

Full Court of the Federal Court

On appeal the Full Court of the Federal Court accepted Bowen's argument that the appropriate method for calculating damages for breach of clause 2.13 is, prima facie, the cost of reinstatement. Accordingly Bowen was awarded $1.38 million in damages. This sum comprised of the Cost of restoring the foyer to its original, 'pre-breach' condition ($580,000), plus $800,000 for loss of rent while that restoration was taking place.

The High Court

On appeal Tabcorp attempted to rely on expert evidence, found by the trial judge to support the finding that the "old foyer was no more effective than a leasing tool than the new foyer" (at [16]). However the High Court rejected such evidence as being grounds for limiting the measure of damages to financial loss (if any) sustained by Bowen as a result of the Tabcorp's breach of clause 2.13.

The High Court explicitly rejected Tabcorp's submission that Bowen's entitlement to reinstatement damages was limited or qualified by the requirement of "reasonableness". The Tenant cited Bellgrove v Eldridge [1954] HCA 36 as authority for the proposition that the measure of damages recoverable by a building owner for the breach of a building contact must be "reasonable" however the High Court determined that "unreasonable" is satisfied only in fairly exceptional circumstances. The Court held that "... nothing in the reasoning in that case suggested that where the reasoning is applied to the present circumstances, the course which the landlord proposed is unnecessary or unreasonable". Rather the High Court looked to the bargain which Bowen had contracted by entering into the lease with Tabcorp and made it clear that;

• "... if the benefit of the covenant in clause 2.13 were to be secured to the Landlord, it is necessary that reinstatement damages be paid, and it is not unreasonable for the Landlord to insist on their payment".

The High Court upheld the order for damages of $1.38 million.

Conclusion; the protection of a property's value beyond monetary assessment

The High Court has made clear that the a tenant is not at liberty to disregard a covenant not to alter a landlords property, simply in exchange for payment of damages that compensate for financial loss (if any) sustained. The High Court agreed with Bowens assertion that Tabcorp's submission that the appropriate measure of damages is limited to compensation for financial loss suffered is an attempt to "arrogantly impose form of economic rationalism on the unwilling landlord"