Graham v Markets Hotel Pty Ltd

The appellants, the lessees of a licensed hotel, appealed to the High Court of Australia from a decision of the Supreme Court of New South Wales. The dispute concerned a sub-lease granted by the appellants to one Costin, which was subsequently assigned to the respondent company. The core of the disagreement was the respondent's failure to yield up the demised premises with a usable lavatory at the expiration of the sub-lease, despite a covenant to repair, maintain, and keep the buildings and appurtenances in good condition, and to yield them up in repair.

The legal issues before the High Court were whether the dismantling and non-restoration of the lavatory constituted a breach of the sub-lease covenant, and if so, what was the appropriate measure of damages. Specifically, the court had to determine if the cost of extensive remodelling and installation of new sanitary accommodation, necessitated by statutory requirements and the removal of the original lavatory, was recoverable from the respondent. The court also considered the application of section 133A of the Conveyancing Act 1919-1939 (N.S.W.) to the assessment of damages.

The High Court, by majority, found that the respondent's actions did constitute a breach of the covenant. The court reasoned that the covenant imposed an obligation to maintain and yield up the premises with a lavatory, and the removal of this facility, even if it was inconvenient or outdated, was a breach. The court held that the measure of damages should be the cost of providing sanitary accommodation of the capacity and quality that was demised, including consequential alterations reasonably necessary for its re-establishment. However, the court clarified that damages should not extend to the cost of improvements unconnected with the re-establishment of the original sanitary accommodation. Furthermore, the court determined that the structural alterations were rendered necessary by the respondent's breach, and therefore, section 133A of the Conveyancing Act, which limits damages to the diminution in the value of the reversion, did not preclude recovery in this instance, as the alterations were not made irrespective of the state of repair.

Consequently, the High Court set aside the decision of the Full Court and the £100 verdict, remitting the case to the trial judge for a reassessment of damages in accordance with the principles established. The appellants were awarded the costs of the proceedings in the Supreme Court and the High Court.