Luxer Holdings Pty Ltd v Glentham Pty Ltd
[2007] WASCA 209
•12 OCTOBER 2007
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: LUXER HOLDINGS PTY LTD -v- GLENTHAM PTY LTD [2007] WASCA 209
CORAM: WHEELER JA
BUSS JA
EM HEENAN AJA
HEARD: 16 APRIL 2007
DELIVERED : 12 OCTOBER 2007
FILE NO/S: CACV 113 of 2006
BETWEEN: LUXER HOLDINGS PTY LTD
First Appellant
MICHAEL JOHN McPHEE
Second AppellantAND
GLENTHAM PTY LTD
Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram :LE MIERE J
Citation :GLENTHAM PTY LTD -v- LUXER HOLDINGS PTY LTD & ANOR [2006] WASC 132
File No :CIV 2733 of 2001, CIV 2592 of 2004
Catchwords:
Property law - Commercial lease - Repudiation and termination of lease - Delay in reletting premises - Applicable measure of damages - Loss of bargain damages - Date of calculation of damages - Evidence of events occurring after repudiation and termination - The doctrine of mitigation of damage
Property law - Commercial lease - Guarantee - Nature and extent of guarantor's liability - Whether demand properly made - Whether guarantor should have been given notice to remedy default before termination of the lease
Legislation:
Nil
Result:
Appeals dismissed
Category: A
Representation:
Counsel:
First Appellant : Mr N W McKerracher QC and Mr R J L McCormack
Second Appellant : Mr N W McKerracher QC and Mr R J L McCormack
Respondent: Mr M C Hotchkin
Solicitors:
First Appellant : Stables Scott
Second Appellant : Stables Scott
Respondent: Hotchkin Hanly
Case(s) referred to in judgment(s):
AMEV‑UDC Finance Ltd v Austin (1986) 162 CLR 170
Buchanan v Byrnes (1906) 3 CLR 704
Bunbury Foods Pty Ltd v National Bank of Australasia Limited (1984) 153 CLR 491
Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 137; (2006) 65 NSWLR 648
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64
Copperart Pty Ltd v Bayside Developments Pty Ltd (1996) 16 WAR 396
Elliott v Reading [1999] WASCA 11
Fresh Express Australia Pty Ltd v Larridren Pty Ltd [2002] FCA 1312
Glentham Pty Ltd v Luxer Holdings Pty Ltd [2002] WASC 80; [2003] ANZ ConvR 23
Goldburg v Shell Oil Co of Australia Ltd (1990) 95 ALR 711
Haines v Bendall (1991) 172 CLR 60
Hughes v NLS Pty Ltd [1966] WAR 100
Johnson v Perez (1988) 166 CLR 351
Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235
Kargotich v Mustica [1973] WAR 167
Koch Marine Inc v D'Amica Societa di Navigazione ARL (The Elena d'Amico) [1980] 1 Lloyd's Rep 75
Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd (1906) 4 CLR 672
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623
Liristis Holdings Pty Ltd v Wallville Pty Ltd (2001) 10 BPR 18,801
Marshall v Mackintosh (1898) 78 LT 750
Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507
Moschi v Lep Air Services Ltd [1973] AC 331
Nangus Pty Ltd v Charles Donovan Pty Ltd (in liq) [1989] VR 184
Nikolaou v Papasavas Phillips & Co (1989) 166 CLR 394
Oldershaw v Holt (1840) 12 A & E 589; (1840) 113 ER 935
Peet & Co Ltd v Rocci [1985] WAR 164
Public Trustee v Zoanetti (1945) 70 CLR 266
Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5
Shevill v The Builders Licensing Board (1982) 149 CLR 620
Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245
TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130
The Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v The Pontypridd Waterworks Company [1903] AC 426
The National Insurance Co of New Zealand Ltd v Espagne (1961) 105 CLR 569
The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17
Vickers & Vickers v Stichtenoth Investments Pty Ltd (1989) 52 SASR 90
Watts v Rake (1960) 108 CLR 158
Wenham v Ella (1972) 127 CLR 454
Wenkart v Pitman (1998) 46 NSWLR 502
Westpac Banking Corporation Ltd v Lim (Unreported, QSC, 15 August 1995)
Wharf St Pty Ltd v Amstar Learning Pty Ltd [2004] QCA 256
Willis v The Commonwealth (1946) 73 CLR 105
Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105
Young v Lamb (No 2) [2001] NSWSC 1014
WHEELER JA: I agree with Buss JA.
BUSS JA: In April 1991, the respondent (Glentham) leased the 15th floor of the BGC Centre on the Esplanade in Perth to the first appellant (Luxer) for a term of 10 years (the 1991 Lease). Luxer was a service company for a firm of solicitors, Michell Sillar McPhee. Luxer's obligations under the 1991 Lease were guaranteed by the partners of the firm, including the second appellant (Mr McPhee) and Michael Guy Manning Barter (Mr Barter).
In 1991, Michell Sillar McPhee had eight partners. By 1995, there were only two partners, namely, Mr McPhee and Mr Barter.
A dispute arose between Glentham, Luxer, Mr McPhee and Mr Barter in relation to the 1991 Lease. The dispute was eventually settled, and the parties executed a deed of settlement dated 21 December 1995. The salient terms of the deed were these:
(a)Mr McPhee and Mr Barter agreed to pay, in total, $370,000 to Glentham, and to provide security for the payment of part of that sum.
(b)The parties agreed to terminate the 1991 Lease, and Luxer, Mr McPhee and Mr Barter promised to execute a deed of surrender.
(c)The parties agreed that Glentham would grant Luxer a new lease of the 15th floor of the BGC Centre on specified terms, and a licence for car bays.
(d)Mr McPhee and Mr Barter agreed to guarantee Luxer's obligations under the new lease.
On 21 December 1995, the 1991 Lease was surrendered, and Glentham, Luxer, Mr McPhee and Mr Barter executed the new lease agreement (the 1995 Lease). The 1995 Lease was for a term of five years. Luxer was to pay an annual rent, by successive calendar monthly instalments in advance, and was also to pay variable outgoings. The lease agreement contained provisions with respect to any default by Luxer in the payment of rent or variable outgoings or any breach of other covenants and conditions. Mr McPhee and Mr Barter guaranteed Luxer's obligations.
Also on 21 December 1995, Glentham granted Luxer a licence to use certain car bays at the BGC Centre, and Luxer agreed to pay a fee for the
licence (the 1995 Licence). Mr McPhee and Mr Barter did not guarantee Luxer's obligations under the licence.
Mr Barter died in September 1998.
Luxer failed to make payments which became due under the 1995 Lease. On 20 March 1996, Glentham, by its solicitors, served a default notice on Luxer. The notice stated, relevantly, that Luxer had failed to pay rent, variable outgoings and certain other amounts totalling $59,558.76. The notice required Luxer to remedy the default within 14 days, and stated, relevantly, that if the default was not remedied then the 1995 Lease and the 1995 Licence would be determined. Luxer did not pay any of the amounts which were demanded in the default notice. On 4 April 1996, Glentham re‑entered the leased premises and repossessed the car bays, thereby terminating the 1995 Lease and the 1995 Licence.
On 1 July 1996, Glentham's solicitors wrote to Mr McPhee, making demand for payment of various amounts including arrears of rent. The letter was accompanied by a schedule which stated the basis upon which each amount itemised in the schedule was claimed. No payment was made in response to that demand. By letter dated 24 July 1996, Michell Sillar McPhee informed Glentham's solicitors that Mr McPhee disputed the amount claimed and suggested a basis for settlement of the issues between the parties. No settlement was negotiated.
Glentham endeavoured to re‑let the 15th floor of the BGC Centre. It was only partly successful.
On 1 December 1997, Michell Sillar McPhee made a written offer to lease part of the 15th floor. On 8 October 1998, Mr McPhee made a written offer to lease the whole of the 15th floor. Glentham rejected both offers.
The 1995 Lease had been for a term which would have expired on 30 November 2000. On 31 January 2001, Glentham's solicitors wrote to Mr McPhee stating, relevantly, that Glentham's claim for damages had crystallised and setting out their calculation of damages in a schedule. The amount claimed was approximately $700,000. By letter dated 14 February 2001, Mr McPhee responded to Glentham's solicitors and asserted, relevantly, that Glentham had failed to act reasonably in the mitigation of its damage.
On 8 November 2001, Glentham commenced proceedings in the Supreme Court against Luxer and Mr McPhee. It claimed against Luxer arrears of rent under the 1995 Lease and arrears of fees under the 1995 Licence, and also damages and interest. Its claim against Mr McPhee was for arrears of rent under the 1995 Lease, damages and interest.
Glentham's action was tried before Le Miere J, and on 18 August 2006 his Honour entered judgment for Glentham. He ordered, relevantly, that:
(a)Luxer pay Glentham the sum of $746,084.09, together with interest thereon of $365,844.30; and
(b)Mr McPhee pay Glentham the sum of $781,594.96, together with interest thereon of $387,950.52.
The amount of the judgment entered against Mr McPhee exceeded the amount entered against Luxer. The apparent explanation for the discrepancy (which is not in contest in these appeals) is that, on 20 June 2002, Master Bredmeyer awarded summary judgment in favour of Glentham and against Luxer (but not against Mr McPhee) in the sum of $66,520.68, being part of Glentham's claim.
Luxer and Mr McPhee have appealed to this court against the learned judge's judgment.
Grounds of appeal
Luxer's grounds of appeal are as follows:
1.The Learned Trial Judge erred at law in relation to the assessment of damages, namely by:
(a)Failing to require the Respondent (Plaintiff) to prove the measure of damage being the difference between the contract value of the subject Lease less the rental value of the property retained.
(b)Measuring the damage as the difference between the contract value of the subject Lease and sums for which the Respondent (Plaintiff) actually leased the premises in the balance of the term of the Lease; without reference to the overall rental value of the premises retained.
(c)By placing the legal and evidential burden of proof on the First Appellant (First Defendant) to prove the rental value of the property retained by the Respondent (Plaintiff), as a matter relating to mitigation of damage, rather than placing that burden upon the Respondent (Plaintiff) as part of the proof of damage.
(d)Regarding the loss to be mitigated as a figure calculated as the difference between the contract value and rents and outgoings actually received during the balance of the notional term; without reference to the rental value of the premises; as at the date of termination.
2.Alternatively, as a matter of fact, in relation to the alleged failure by the Respondent (Plaintiff) to mitigate its loss;
(a)Erred in failing to give credit in the assessment to rental that would have been payable by the First Appellant (First Defendant) had the First Appellant's (First Defendant's) offers, or either of them, to re‑take possession of portion of the premises, been accepted.
(b)Erred in not regarding the refusals, referred to in ground 2(a) hereof as an intervening event which broke the chain of causation of the damage claimed by the Respondent (Plaintiff).
(c)Erred in deciding the First Appellant (First Defendant) had not discharged the burden of proof that the Respondent, (Plaintiff) had taken reasonable steps to mitigate the alleged loss.
Mr McPhee's substituted grounds of appeal are these:
1.The learned Trial Judge erred in law in holding, at paragraph [88] of the reasons for judgment, that the guarantee in Clause 6 of the Lease (the 'Guarantee') was an undertaking by the second appellant that the first appellant would carry out its contract with the respondent.
Particulars
(a)Pursuant to the Guarantee the second appellant was only liable to the respondent during the term of the Lease. The liability of the second appellant to the respondent was then conditional upon compliance with the conditions of clause 6 of the Lease.
(b)The Guarantee is not an undertaking by the second appellant that the first appellant will carry out its contract with the respondent and is made up [of] two separate components:
(i)the first component requires payment of rent on demand;
(ii)the second component is a requirement that upon written request the second appellant will remedy a breach of condition, covenant or stipulation of the lease within a reasonable time and pay (if requested) to the respondent all losses, damages, expenses and costs which the respondent is entitled to recover by reason of the breach.
2.The learned Trial Judge erred in law in holding that the second appellant was liable in debt to the respondent.
Particulars
(a)The 'demand' for rent incorrectly combined rent and other amounts due under the Lease and was not a valid demand for rent under the Guarantee.
(b)The 'demand' was made after the Lease had been terminated and after any liability of the second appellant had been discharged as a result of such termination.
3.The learned Trial Judge erred in law in holding that the second appellant was liable in damages to the respondent.
Particulars
(a)The Guarantee does not give the respondent a direct claim for damages against the second appellant for breach of a covenant of the lease.
(i)The particulars to ground one are repeated.
(ii)If the second appellant after proper request failed to remedy a breach of a covenant, condition or stipulation of the lease within a reasonable time and to pay damages (if requested) flowing from such breach, the second appellant would be in breach of its contract of guarantee and may be liable in damages. Until such failure by the second appellant, the respondent would have no cause of action against the second appellant.
(iii)The damages payable by the second appellant after a failure to comply with a proper request from the respondent would be the cost of remedying the breach and all damages flowing from the breach, payment of which had been the subject of the request from the respondent.
(b)The Guarantee does not give the respondent any claim (whether direct or indirect) against the second appellant for loss of bargain damages or damages as a result of a repudiation by the first appellant of the lease.
(c)Any liability owed by the second appellant as guarantor, with the exception of rent up to the time of termination, ceased upon termination of the lease.
4.The learned Trial Judge erred in law in determining at para [107] of his reasons for judgment that it was not an implied term of the lease that written notice required to be given to the second appellant calling on him to remedy the first appellant's default must be given before the expiry or termination of the lease.
Particulars
The Guarantee on its proper construction in particular the condition reflected in clause 6(b) thereof contemplated that opportunity should be given to the guarantor to preserve the security of the lease and to remedy a breach of the lease prior to any termination of the lease.
5.The learned Trial Judge erred in law in holding that demand or request was made under the terms of the Guarantee.
Particulars
(a)The lease terminated on 4 April 1996.
(b)The alleged demand was made some 3 3/4 years after the lease was terminated and was of no effect.
6.The learned Trial Judge erred in law in holding that the demand was a valid demand.
Particulars
(a)The alleged demand was not a demand at law or in terms of the Guarantee in that it did not:
(i)specify any actual breach of any condition, covenant or stipulation of the lease;
(ii)request remedy of the breach within a reasonable time;
(iii)request payment of any loss or damage suffered as a result of that breach,
but instead referred to loss of bargain damages.
(b)The alleged demand was not made within a reasonable time of the breach.
Luxer's grounds raise two broad complaints. First, it contends that the learned judge erred, in circumstances where there was a very substantial delay in re‑letting the premises, by failing to hold that the applicable measure of damages which Glentham had to prove was 'the difference between the contract value of the subject lease less the rental value of the property retained at the date of the breach'. Secondly, Luxer contends that his Honour should have held, on the facts as found by him, that Glentham had failed to mitigate its damage.
In summary, Mr McPhee contends that the learned judge misconstrued the guarantee; in particular, the nature and extent of his liability as guarantor. Mr McPhee also contends that his Honour erred in failing to hold that a proper demand had not been made on him as required under the guarantee, and in failing to hold that Glentham was required to give a written notice to Mr McPhee calling on him to remedy Luxer's default before terminating the lease.
None of the grounds of appeal challenges the correctness of the arithmetical calculation of the amounts for which the learned judge entered judgment. No point on that issue was raised in argument before this court.
Luxer's appeal: ground 1: the learned judge's reasons in relation to the measure of damages
The learned judge's reasons in relation to the measure of damages are set out, at [33] ‑ [35]:
[Glentham] is entitled to recover damages resulting from [Luxer's] repudiation of the Lease and the Licence. Ordinary principles of the law of contract, including principles with respect to repudiation, apply to leases: Progressive Mailing House v Tabali Pty Ltd (1985) 157 CLR 17 at 29 per Mason J. Where the lessee has repudiated, damages are awarded to the lessor to compensate them for loss of the benefit of the lessee's covenants to pay rent and outgoings: Progressive Mailing (supra) at 55 per Deane J and 47 per Brennan J.
The trial commenced on 13 March 2006. By that time the Lease would have expired. Therefore, [Glentham] submitted, the damages to be assessed were for, in effect, a past loss. That loss was to be measured by loss of rent, rates and taxes, variable outgoings, the cost of making good, costs incurred to attract a new tenant, marketing costs and leasing agent fees.
An injured party can recover money reasonably spent in mitigating or attempting to mitigate the effects of a breach of contract: Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 356. In particular, a lessor is entitled to recover from a lessee who has repudiated the lease money reasonably spent in trying to attract new tenants, including making alterations to the premises for that purpose.
The learned judge noted, at [36]:
[Luxer and Mr McPhee] dispute the amount claimed by [Glentham] for loss of rent and loss of variable outgoings. More fundamentally, [Luxer and Mr McPhee] claim that [Glentham] is not entitled to any damages because it failed to act reasonably in mitigation of any loss and damage which it claims against [Luxer].
The learned judge awarded loss of bargain damages calculated by reference to the rent, outgoings and other amounts that would otherwise have been payable by Luxer during the balance of the term, less amounts obtained by Glentham from re‑letting the premises.
Luxer's appeal: ground 1: Luxer's submissions in relation to the measure of damages
Luxer submitted that the measure of damages payable by a lessee for repudiation of a lease is as described in McGregor on Damages (17th ed, 2003) at [23‑038]:
(A) FAILURE TO ACCEPT
Where the lessee refuses to proceed with the contract the lessor may claim specific performance, or treat the contract as discharged, or sue for damages. If he pursues his remedy in damages the normal measure is represented by the contractual rent reserved by the lease less the rental value of the premises at the time of breach. This was applied in Marshall v Mackintosh ((1898) 78 LT 750), where the claimant had relet the premises at a lower rent, which was all they would now command, and damages were assessed on the basis of the difference between the contractual rent under the broken agreement and the new rent. If, however, the claimant has succeeded in reletting at a higher rent than the contractual rent because of market improvements, then he will only be entitled to nominal damages: this was the position in Oldershaw v Holt ((1840) 12 A & I 59). (emphasis added)
I should also set out [23‑039] from McGregor on Damages:
Beyond this there are no authorities. Consequential losses will be recoverable under ordinary principles but are not very likely to arise.
It was submitted, on behalf of Luxer, that the learned judge examined only one element of the measure of damages, namely, the 'contract value' of the premises, but did not examine the 'rental value' of the premises as at the time of the breach in consequence of there being no evidence on that issue. His Honour found that the 'contract value' was the relevant measure of damages, with 'everything else' being referable only to mitigation.
Luxer's appeal: ground 1: the measure of damages and its interaction with the doctrine of mitigation: common law principles
The ordinary principles of contract, including those relating to termination for breach of an essential term or for repudiation, apply to leases, even though a lease also involves the grant of an estate or interest in land. See Shevill v The Builders Licensing Board (1982) 149 CLR 620 per Gibbs CJ (with whom Murphy J substantially agreed, and Brennan J agreed) at 625 ‑ 627; The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 per Mason J (with whom Wilson and Deane JJ agreed in general, and Dawson J agreed) at 29 ‑ 31; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623.
The general contractual principle is that the innocent party suing for breach of contract is to be placed in the same position, so far as money can do it, as if the contract had been performed. See Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 per Mason CJ and Dawson J at 80; Wenham v Ella (1972) 127 CLR 454 per Gibbs J at 471. In Wenham, Walsh J referred, at 466, to the appellants' argument in relation to the measure of damages for breach of a contract for the transfer of an interest in land, and said:
In my opinion the error that is contained in the argument for the appellants consists in treating rules which constitute useful guidance in the ascertainment of damages as rigid rules of universal application, instead of treating them as prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation for a breach of contract without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept. The achievement of such a result is the purpose of the principles laid down in Hadley v Baxendale ((1854) 9 Exch. 341 [156 E.R. 145]) as explained in subsequent cases, including those to which Gibbs J has referred in his judgment in the present case.
If a lessor terminates the lease agreement in consequence of the lessee's breach of an essential term or by acceptance of the lessee's repudiation, the lessor is entitled, in accordance with ordinary contractual principles, to sue the lessee for damages for loss of the benefit of the lessee's covenant to pay future rent, outgoings and other amounts. See Progressive Mailing House per Mason J at 31, per Brennan J at 46 ‑ 47, per Deane J at 55. In other words, the lessor is entitled to sue the lessee for loss of bargain damages.
A lessor may claim damages from the lessee for breach of the lease agreement whether the agreement is terminated or not. But loss of bargain damages are recoverable only if the lease agreement has been terminated. See Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 per Mason CJ (with whom Deane, Dawson and Toohey JJ agreed) at 260. Where a lessor terminates the lease agreement for breach of an essential term or for repudiation, it may claim arrears of rent in respect of the period before termination, in addition to damages for loss of the benefit of the lessee's covenant to pay future rent, outgoings and other amounts in respect of the period after termination.
A lessor's cause of action for damages, for loss of the benefit of the lessee's covenant to pay future rent, outgoings and other amounts, accrues on the date on which the lessor terminates the lease agreement. See Progressive Mailing House per Deane J at 55; Moschi v Lep Air Services Ltd [1973] AC 331 per Lord Reid at 345; Nangus Pty Ltd v Charles Donovan Pty Ltd (in liq) [1989] VR 184 per Kaye and Southwell JJ (with whom Young CJ agreed, subject to some additional comments of his own) at 189.
Although damages for breach of contract are ordinarily to be assessed as at the date of the breach (Johnson v Perez (1988) 166 CLR 351 per Wilson, Toohey and Gaudron JJ at 367), the critical date for the assessment of loss of bargain damages is the date on which the innocent party terminates. See Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 per McHugh JA at 146 ‑ 149; Nangus at 189; Copperart Pty Ltd v Bayside Developments Pty Ltd (1996) 16 WAR 396 per Kennedy J at 401; Elliott v Reading [1999] WASCA 11 per Ipp J (with whom Malcolm CJ and Pidgeon J agreed) at [47]. Accordingly, where a lessor terminates the lease agreement for breach of an essential term or for repudiation, loss of bargain damages are ordinarily to be assessed as at the date of termination.
The normal measure of damages where a lessor sues the lessee for damages for loss of the benefit of the lessee's covenant to pay future rent, outgoings and other amounts was referred to by Brennan J in Progressive Mailing House, at 47:
Subsequently, in Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd ((1906) 4 CLR. 672) at p 684, Griffith CJ stated the measure of the damages:
'In the ordinary case of a demise for a term of years with an express covenant to pay the rent, if the lessee unequivocally repudiates the lease and abandons the land, the lessor may at his option bring an immediate action for breach of covenant, in which he will be entitled to recover the full amount of the agreed rent for the whole term, less such sum as a jury may think he is likely to derive as profits from the use of the land during the residue of the term: Buchanan v Byrnes ((1906) 3 CLR 704) This is the ordinary rule of damages.'
Thus in Hughes v N.L.S. Pty Ltd ([1966] WAR 100 (affd. on different grounds (1966) 120 CLR 583)) a repudiation of a lease by the lessee was followed by a surrender and Jackson J (at p 102), applying Buchanan v Byrnes, held that 'Until surrender, [the lessor] can sue for rent as such; after surrender, he is limited to damages for loss of rent flowing from the lessee's breach of contract.'
It appears that Brennan J was of the view that the lessor's taking of possession in Buchanan v Byrnes (1906) 3 CLR 704 and in Hughes v NLS Pty Ltd [1966] WAR 100 constituted both a surrender by operation of law and the acceptance of the lessee's repudiation of the lease. See, in this regard, the observations of McHugh JA in Wood Factory at 148 ‑ 149.
The rule that a lessor's loss of bargain damages are ordinarily to be assessed as at the date of termination does not mean that evidence is excluded of events occurring after that date. Evidence of subsequent events which are relevant to the assessment process may be taken into account. For example, subsequent events may be relevant to the value of the lost bargain or whether the lessor has mitigated its damage or not. See Nangus at 189 and, more generally, Willis v The Commonwealth (1946) 73 CLR 105 per Latham CJ at 109; Johnson v Perez per Wilson, Toohey and Gaudron JJ at 368 ‑ 369; Nikolaou v Papasavas Phillips & Co (1989) 166 CLR 394 per Wilson, Dawson, Toohey and Gaudron JJ at 403 ‑ 404. As Latham CJ explained in Willis, at 109:
[W]here actual facts are known, speculation as to the probability of those facts occurring is surely an unnecessary second-best. Damages are awarded for injury actually suffered and for prospective injury. Prospective injury can only be estimated with more or less probability. But where the extent and character of what would at one time be described as prospective injury depends upon the happening or non-happening of a particular event and that event has in fact happened, it is unnecessary to speculate as to whether or not this event might happen and, if so, when. In such a case prospective damage (or diminution of damage) has become actual.
Also see, to similar effect, the speech of Lord Macnaghten in The Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v The Pontypridd Waterworks Company [1903] AC 426 at 431, which was cited with approval in Nikolaou at 404. Willis involved a claim under fatal accidents legislation and Bwllfa & Merthyr was concerned with a claim for compensation for the diminished value of land as a result of the exercise of statutory powers. In my opinion, the statements of principle which I have mentioned, from those authorities, are applicable to the assessment of damages for breach of contract (including loss of bargain damages).
The doctrine of mitigation of damage is applicable to a lessor's claim for loss of the benefit of the lessee's covenant to pay future rent, outgoings and other amounts. See Vickers & Vickers v Stichtenoth Investments Pty Ltd (1989) 52 SASR 90 per Bollen J at 100; Young v Lamb (No 2) [2001] NSWSC 1014 per Austin J at [9]; Fresh Express Australia Pty Ltd v Larridren Pty Ltd [2002] FCA 1312 per Hill J at [124].
If a lessor fails to mitigate in that, acting reasonably, it should have, but did not, re‑let the premises, the lessor's damages for loss of future rent, outgoings and other amounts will be reduced by the amount it would have received if it had re‑let. See Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235 per Giles JA (with whom Handley and Stein JJA agreed) at 18,271 [187] ‑ [188].
In my opinion, the authorities to which I have referred indicate that the proper approach to the assessment of damages where a lessor sues the lessee for loss of bargain damages, consequent upon the lease agreement having been terminated for breach of an essential term or for repudiation, is, ordinarily, as follows.
Where the trial of the lessor's action against the lessee occurs before the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoing etc that would otherwise have been payable after the date of termination, less:
(a)any amount the lessor has obtained as profits from the use of the premises between the date of termination and the date of trial; and
(b)any amount the lessor is likely to obtain as profits from the use of the premises between the date of trial and the date on which the lease would otherwise have expired,
by re‑letting the whole or part of the premises or otherwise. If the lessor has failed to mitigate its damage between the date of termination and the date of trial, it will be necessary to make a further adjustment on that account. Interest will usually be awarded on any damages referable to the period between the date of termination and the date of trial. Also, a discount for acceleration must be applied in calculating any damages referable to the period between the date of trial and the date on which the lease would otherwise have expired. The doctrine of mitigation applies directly in respect of the period between the date of termination and the date of trial. The calculation of the damages in respect of the period between the date of trial and the date on which the lease would otherwise have expired is carried out on the basis that the lessor will act reasonably, throughout that period, to mitigate.
Where the trial of the lessor's action against the lessee occurs after the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoings etc that would otherwise have been payable after the date of termination, less any amount the lessor has obtained as profits from the use of the premises between the date of termination and the date on which the lease would otherwise have expired (by re‑letting the whole or part of the premises or otherwise). A further deduction will be required if the lessor has failed to mitigate its damage. It will usually be appropriate to order the payment of interest on the award of damages.
There is a clearly‑established conceptual difference between the measure of damages, on the one hand, and the doctrine of mitigation, on the other. The onus is on the lessor to prove, according to the applicable measure, that it has suffered damage. But the onus is on the lessee to prove that the lessor has failed to take reasonable steps to mitigate its damage, and to demonstrate the extent to which there has been a failure to mitigate. See Watts v Rake (1960) 108 CLR 158 per Dixon CJ at 159; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 per Murphy J (with whom Brooking and Nicholson JJ agreed) at 512 ‑ 513; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 per Hope JA (with whom Meagher JA agreed) at 158; Goldburg v Shell Oil Co of Australia Ltd (1990) 95 ALR 711 per Sweeney and Ryan JJ at 714.
As I have mentioned, Luxer relied on [23‑038] of McGregor on Damages, which I have set out at [25] above, for the proposition that the applicable measure of damages in the present case was 'the contractual rent reserved by the lease less the rental value of the premises at the time of breach' (emphasis added). The learned author cites Marshall v Mackintosh (1898) 78 LT 750 and Oldershaw v Holt (1840) 12 A & E 589; (1840) 113 ER 935 in support of that proposition.
In Marshall v Mackintosh, the defendant agreed with the plaintiff to demolish certain buildings on the plaintiff's land and build a new structure on the site in accordance with approved plans, drawings and specifications and to take a lease of the land and new buildings for a term of 80 years from 24 June 1896, at a peppercorn rent for the first year and thereafter at a yearly rent of ₤1,100. The defendant went into possession on 10 June 1896, but did not complete the demolition of the old buildings and, on 19 January 1897, the plaintiff re‑entered. The plaintiff, on re‑entry, could only re‑let from June 1899 at a rental of ₤900 per annum. A referee assessed damages by reference to the difference between the contractual rent and the new rent, and his assessment was approved by Kennedy J, who entered judgment for the plaintiff.
In Oldershaw v Holt, the plaintiff entered into an agreement with Frewin under which Frewin was to build houses on the plaintiff's land and lease the houses and land for a term of 98 years from Christmas 1835, at a peppercorn rent for 3 years, and then at ₤115 per annum. Frewin entered the land but did not build the houses. The plaintiff brought ejectment, and recovered possession on 12 June 1839. After re‑entry, the plaintiff agreed with a new tenant to let the premises to him for the residue of Frewin's term, at a peppercorn rent for the year ending midsummer 1840, ₤70 for the year ending midsummer 1841, and ₤140 per annum for the balance of the term. The plaintiff brought an action for damages against the defendants, who were Frewin's executors. On the trial of the action before Lord Denman CJ and a jury, the Lord Chief Justice left it to the jury to calculate what damage, if any, the plaintiff had sustained, above ₤2 paid into court, regard being had to the new and ultimately more advantageous agreement entered into by the plaintiff with the new tenant. The jury returned a verdict for the defendant. The Court of Queen's Bench dismissed the plaintiff's motion for a new trial. Lord Denman CJ said, at 937:
I told the jury, as to the rent, that I thought none could be recovered, as none was due at the time from which the plaintiff had become entitled to re‑enter: and, as to the damages, that it was a mere money question, which they had to decide as a matter of calculation and, on this latter point, they agreed with me that, upon the whole matter, no damage had been sustained by the plaintiff.
In Marshall v Mackintosh and Oldershaw v Holt, the lessor re‑let the premises after the lessee breached the agreement and abandoned the lease. The lessor's claim for damages against the lessee was assessed by comparing the contractual rent with the rent which the lessor obtained on re‑letting and, in Marshall v Mackintosh, on the basis of a finding that the lessor re‑let 'at the best rent he could'.
In my opinion, the reference in [23‑038] of McGregor on Damages to 'the rental value of the premises at the time of breach' should be understood as referring:
(a)where the lessor has terminated the lease agreement for breach of an essential term or for repudiation, to the date of termination; and
(b)to the amount which the lessor has derived, or is likely to derive, as profits from the use of the land between the date of termination and the date on which the lease would otherwise have expired (by re‑letting the whole or part of the premises or otherwise).
I note that [23‑038] of McGregor on Damages occurs in the context of a discussion as to the normal measure of a lessor's damages where the lessee has failed to accept, or delayed in accepting, a lease, and that in [23‑039] the learned author states that 'Beyond this there are no authorities'; in other words, the relevant authorities are confined to Marshall v Mackintosh and Oldershaw v Holt. No reference is made to any Australian authorities in relation to a lessor's entitlement to loss of bargain damages consequent upon termination of the lease agreement for repudiation or breach of an essential term, including the normal measure of damages. For example, the learned author does not refer, in this context or elsewhere in the text, to Progressive Mailing House, Buchanan, Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd (1906) 4 CLR 672 or Willis.
Luxer also relied on Peet & Co Ltd v Rocci [1985] WAR 164, where the salient facts were these. The plaintiff, as lessor, entered into a lease agreement with the defendant, as lessee, in respect of premises in a shopping centre. The lease was for a term of 10 years commencing in November 1979. The defendant went into possession of the premises in November 1979, but vacated in September 1980. The plaintiff commenced proceedings against the defendant for specific performance of the lease agreement. However, at the commencement of the trial on 5 December 1983, that claim was abandoned, and the plaintiff said that it then accepted the defendant's repudiation of the agreement which, it maintained, was constituted by its unilateral abandonment of the premises. The plaintiff had sold the shopping centre in June 1983 at a substantial loss. Rowland J held that the plaintiff was entitled to damages for 'breach of the lease agreement', and calculated those damages, at 178 ‑ 179, as follows:
It seems to me that there are several ways one may assess damages for breach of a lease agreement and in the end the method adopted may have to depend upon the circumstances of the existing case and the attitude taken by the lessor. In my view in this case the true measure of damage is the difference between the value of the premises as a going concern with a tenant in possession pursuant to the contracted term and one without a tenant in possession the relevant time at which such valuations to be made being either the date of breach or date of acceptance by the lessor of that breach. In assessing the value of the premises without a tenant at the time account must be taken of the commercial prospects of obtaining a tenant for the balance of the term then left under the lease and no doubt the rent that could be commanded during that period.
It seems to me that that exercise has not been done.
It follows in my view that the plaintiff's entitlement is in this case most properly calculated by assessing the value of outstanding rent overdue and owing from the time that rent and other variable outgoings were due under the agreement namely 29 May 1980, until the plaintiff sold the premises on 23 June 1983 which is a total of 37 months. On that basis the amount of rental and outgoings that the plaintiff should have received during the whole of that period is thirty‑seven times the monthly rental and outgoings of $792.21 which totals $29,211.77. Giving credit for the sum of $625 [being a deposit paid by the defendant which the plaintiff conceded should be the subject of a credit] I assess that the amount of unpaid rental due up to the date of leaving possession and the rental or damages thereafter totals $28,586.77.
(emphasis added)
Peet & Co is distinguishable from the present case. In Peet & Co, the 'rental or damages' which the lessor recovered comprised the rental payable under the lease agreement between May 1980 (when the lessee defaulted) and June 1983 (when the lessor sold the shopping centre). As Rowland J noted, at 178, correctly in my respectful opinion, there are several ways in which a lessor's damages may be assessed for breach of a lease agreement and the method adopted may depend, in a particular case, upon the circumstances of that case and the action which the lessor has taken. His Honour's reference to the true measure of damages in Peet & Co as 'the difference between the value of the premises as a going concern with a tenant in possession pursuant to the contracted term and one without a tenant in possession' must be understood in the context of the facts of that case; in particular, the lessor's sale of the shopping centre (at a substantial loss) in June 1983 and its decision not to accept the lessee's repudiation until the commencement of the trial on 5 December 1983. There was no evidence, however, in Peet & Co as to the relevant difference in capital value and, as a result, the amount which the lessor recovered comprised arrears of rental for the period I have mentioned.
Luxer also relied on authorities which have determined the normal measure of damages where a party to a contract for the sale of land terminates the contract in consequence of the other party's breach, and then sues for loss of bargain damages. The normal measure, in those circumstances, is the difference (if any) between the contract price and the market value of the property in question. See Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648 per Mason P (with whom Beazley JA agreed) at 651 [11]. In other words, a comparison is made between the contract price and the market value of the relevant estate or interest (which the innocent vendor has retained or the innocent purchaser has lost, as the case may be, as a result of the termination for breach). It is unnecessary to refer to the authorities dealing with the date as at which the comparison should be made. The significant point, for present purposes, is that the nature of the assessment differs where a lessor terminates a lease agreement for repudiation or breach of an essential term, in that the focus is upon the lessor's loss of profits from the use of the premises over the balance of the agreed term.
Luxer's appeal: ground 1: the measure of damages: the relevant provisions of the 1995 Lease
As I have mentioned, Glentham served a default notice and, on 4 April 1996, re‑entered the leased premises pursuant to cl 5.3 of the 1995 Lease. By cl 5.3(a), Glentham and Luxer mutually covenanted and agreed, relevantly, that the covenant to pay rent was an essential term of the lease. Clause 5.3(b) provided, relevantly, that if the rent remained unpaid for 14 days after the date on which it ought to have been paid in accordance with the lease:
THEN … the Lessor or any person or persons duly authorised by the Lessor at any time or times thereafter may re‑enter into and upon the demised premises or any part thereof in the name of the whole and to have again, repossess and enjoy the same as if this Lease had not been made but without prejudice to the right of action or other remedy which the Lessor has in respect of any antecedent breach of the Lessee's covenants herein contained AND following such forfeiture the Lessor is entitled to recover from the Lessee damages for loss of the benefits which performance of the covenants of the Lease by the Lessee would have conferred on the Lessor between the date of forfeiture and the expiry of the Lease by the effluxion of time.
In Shevill, Gibbs CJ said, at 627:
It is clear that a covenant to pay rent in advance at specified times would not, without more, be a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease. However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement: see Wickman Tools v Schuler AG ([1974] AC 235) at p 251. In other words, a right to forfeit a lease might arise 'in the case of any breach of covenant however trifling, if the parties had agreed that a breach of that covenant should create a forfeiture': Campbell v Payne and Fitzgerald ((1953) 53 S.R. (N.S.W.) 537) at p. 539.
It is unnecessary, in this appeal, to consider whether the mere description in a lease agreement of any term as 'essential' is sufficient, of itself, to make the provision essential as a matter of law. See, in this regard, the observations of Barrett J in Liristis Holdings Pty Ltd v Wallville Pty Ltd (2001) 10 BPR 18,801 at 18,820 [111]. The payment of rent is of fundamental importance to a lessor, and the classification by the parties in the 1995 Lease of the rent covenant as 'essential' is sufficient for that covenant to be essential as a matter of law.
In my opinion, cl 5.3(b) of the 1995 Lease conferred on Glentham the contractual right to sue Luxer for damages for loss of the benefit of Luxer's covenant to pay future rent, outgoings and other amounts that would have been payable between the date on which Glentham forfeited the lease upon its re‑entry pursuant to the default notice and the date on which the lease would otherwise have expired. The conferral of the contractual right to sue for damages did not diminish or otherwise affect Glentham's obligation at law to bring to account, and give credit for, any amount it obtained as profits from the use of the leased premises between the date of forfeiture and the date on which the lease would otherwise have expired (by re‑letting the whole or part of the premises or otherwise). Similarly, the conferral of that contractual right did not diminish or otherwise affect the application of the doctrine of mitigation.
Luxer's appeal: ground 1: conclusion
In my opinion, the learned judge did not err in his approach to the assessment of Glentham's measure of damages. His Honour's approach was appropriate in circumstances where the trial of Glentham's claim for loss of bargain damages occurred after the date on which the 1995 Lease would otherwise have expired. His Honour's assessment was in accordance with the relevant provisions of the 1995 Lease (see [51] ‑ [53] above) and the applicable common law principles (see, in particular, [28] ‑ [41] above).
Ground 1 fails.
Luxer's appeal: ground 2: Luxer's submissions in relation to mitigation
Luxer's submissions in relation to ground 2 were, in essence, these:
(a)The learned judge should have held that Glentham acted unreasonably in failing to accept one or other of the two offers made by Michell Sillar McPhee and Mr McPhee; and
(b)His Honour should have held that Glentham failed to act reasonably in that it did not undertake sufficient advertising or marketing of the premises with a view to re‑letting them for the balance of the term.
Luxer's appeal: ground 2: the failure to accept either of Luxer's offers
By letter dated 1 December 1997 from Michell Sillar McPhee to Glentham's solicitors, an offer of settlement was made, relevantly, as follows:
(a)The balance of the amount owing under the deed of settlement in relation to the 1991 Lease, and the amount owing under the 1995 Lease in respect of the period between December 1995 and March 1996, be 'amortised' by payments from Michell Sillar McPhee to Glentham at the rate of $5,500 per month until extinguished.
(b) As to the 'contingent liability' claimed by Glentham, being any damages to which Glentham might be entitled as a result of having forfeited the 1995 Lease and terminated the 1995 Licence, consequent upon Luxer's default, Michell Sillar McPhee proposed:
(a)From the date of expiry of our current lease in West Perth (October 1998 or earlier if we can sublet our West Perth space) we move back into the building to lease 300 square metres at a rate to be fixed, with one car park. The term of our lease be until December 2000, or otherwise as may be agreed.
(b)These arrangements once agreed to be in full and final settlement of all claims, future or contingent.
Glentham did not accept or pursue that offer.
The learned judge made findings, at [68], in relation to the offer:
I find that [Glentham] did not act unreasonably in failing to accept or pursue [Luxer's and Mr McPhee's] offer. [Luxer and Mr McPhee] required that [Glentham] give up its legal entitlement to substantial damages. In return [Mr McPhee] and Michell Sillar McPhee offered only to take a new lease at an undetermined rent for about 33 per cent of the floor area the subject of the Lease for about 60 per cent of the term of the Lease. Furthermore, [Mr McPhee] and the partners of Michell Sillar McPhee had effectively defaulted in their obligations under two previous leases – the 1991 lease and the Lease. To grant a further lease to [Mr McPhee] and his associates was a risky venture.
By letter dated 8 October 1998 from Michell Sillar McPhee to Glentham's solicitors, an offer was made on behalf of Mr McPhee to lease the 15th floor of the BGC Centre. The terms of the offer were as follows:
(1)I or my nominee guaranteed by me, will re‑lease the whole of the 15th floor of the [BGC] Centre at the applicable rates contained for such period in the 1995 lease.
(2)The benefit of new leases negotiated over any portion since the termination of the 1995 lease, be assigned to me so as to help defray the cost.
(3)The term of the new lease, and of any assignment referred to in paragraph 2 be limited to the remaining term of the 1995 lease with any extended term to be subject to mutual agreement.
(4)The new lease commence at the date of expiry of my current lease in West Perth, namely 15 January 1999, or earlier if the same can be negotiated with my current landlord.
(5)This offer be accepted by no later than 10.00 am Wednesday 14 October 1998. The time cannot be extended beyond that time because failing agreement I will be required to renew my existing lease for a further term.
(6)Any negotiations that need to be had between today and 14 October 1998 be conducted without delay including, if necessary, over the weekend. My after hours number is … or mobile … and I will attend at any time with anyone and at any place to negotiate the matter to conclusion.
Glentham did not accept or pursue that offer.
The learned judge made findings, at [70], in relation to the offer:
I find that [Glentham's] failure to accept or pursue that offer was not unreasonable. At the time [Glentham] had leased 444.67 square metres of floor 15 to the Department of Resources Development. Further, the Department had agreed, subject to the approval of the Chief Executive of the Department, to lease a further 185 square metres of floor 15 from 1 October 1998. [Mr McPhee] required [Glentham] to assign those leases to him. That would be to the detriment of the Department. Furthermore, [Glentham] would obtain an unreliable tenant, that is one who had twice defaulted under previous leases, in place of a government department as tenant, albeit for part only of floor 15.
The standard to be observed by a plaintiff when acting to mitigate its damage, including where it is alleged the plaintiff should have entered into a new contract with the defendant, was referred to by Giles JA in Karacominakis. His Honour said, at 18,271 [187] ‑ [188]:
Since the defendant is a wrongdoer, in determining whether the plaintiff has acted unreasonably a high standard of conduct will not be required, and the plaintiff will not be held to have acted unreasonably simply because the defendant can suggest other and more beneficial conduct if it was reasonable for the plaintiff to do what he did (Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452; Pilkington v Wood [1953] Ch 770; Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5).
Whether the plaintiff acted unreasonably is a question of fact. It is possible that a plaintiff will be held to have acted unreasonably in failing to enter into a new contract with the defendant, following breach of contract by the defendant and termination of the contract (Brace v Calder [1895] 2 QB 253; Houndsditch Warehouse Co Ltd v Waltex Ltd [1944] KB 579). But the fact of the breach and its effect on the relationship between the parties may be material to reasonableness: for example, in Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038 an employee's rejection of an offer to re‑employ him was not unreasonable when the new employment would have involved him in being answerable to the persons with whom he had disagreed over his dismissal.
Where the assessment of damages relates to a commercial undertaking, an evaluation of whether the plaintiff has taken reasonable steps to mitigate its damage relates to what the plaintiff 'would do in the ordinary course of business': Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 9. Also see Wenkart v Pitman (1998) 46 NSWLR 502 at 523 ‑ 524; Young v Lamb (No 2) at [31].
The 1 December 1997 offer was uncertain in relation to the provisions of the proposed new lease. It was contemplated that the proposed new lease might not commence until October 1998 (some 10 months after the date of the offer). The offer to lease was expressed to be in 'full and final settlement' of all claims which Glentham had or may have against Luxer or Mr McPhee and, in consequence, the offer sought, amongst other things, a release of Glentham's claim for arrears of rent and outgoings under the 1995 Lease in respect of the period before the date of termination, and its claim for damages in respect of the period between the date of termination and the date on which the proposed new lease would commence. The 1 December 1997 offer did not make any provision for the cost of demolishing part of the then existing fit‑out on the 15th floor of the BGC Centre to create the accommodation sought by Michell Sillar McPhee.
When the 8 October 1998 offer was made, part of the 15th floor of the BGC Centre was leased by the Department of Resources and Development. Shortly before the offer was made, the Department had agreed, subject to the approval of its Chief Executive Officer, to lease additional accommodation on the 15th floor. Mr McPhee's offer to lease was unusual and convoluted. On the face of it, the offer required negotiations to be undertaken and an agreement made between Glentham, Mr McPhee and the Department for the Department to surrender its existing lease over part of the 15th floor, Glentham to grant Mr McPhee a new lease over the whole of the 15th floor, and Mr McPhee to grant the Department a sublease over part of the 15th floor. The commercial benefit for Mr McPhee from this arrangement was that he would pay rent to Glentham at the rate of $100 per square metre (being the rate that would then have been payable under the 1995 Lease) and the Department would pay Mr McPhee rent at the rate of $135 per square metre (being the rate then payable by the Department to Glentham). There was no evidence that the Department might have been persuaded to enter into such an arrangement or any other arrangement which was different in legal effect, but not in commercial outcome.
As to both offers, the history of relations between Glentham on the one hand, and Luxer and Mr McPhee on the other, included Luxer having breached an essential term of the 1991 Lease and an essential term of the 1995 Lease. Glentham would reasonably have entertained doubts as to the reliability of Michell Sillar McPhee and Mr McPhee as lessees and, in all the circumstances, Glentham was justified in refusing to accept the offers (which would not, in any event, have created binding legal relations), and was also justified in refusing to embark upon negotiations with a view to making a concluded agreement.
In my opinion, Luxer has not established that the learned judge made any material error in his analysis and conclusions concerning the offers.
Luxer's appeal: ground 2: Glentham's advertising or marketing of the premises with a view to re‑letting them
After Glentham terminated the 1995 Lease and the 1995 Licence, Ms Anne Tindale, a property manager employed by Esther Investments Pty Ltd, which provided property management services to Glentham, telephoned Mr Andrew Denny of CB Richard Ellis, the leasing agent responsible for leasing the BGC Centre. Ms Tindale instructed Mr Denny to market the 15 floor of the BGC Centre (and the 14th floor, which was also vacant) for the purpose of finding lessees.
Mr Denny gave evidence at the trial, and the learned judge summarised, at [51] ‑ [53], relevant features of his evidence:
Mr Denny gave evidence that after the lease with [Luxer] was terminated, Ms Tindale contacted him to commence the marketing of levels 14 and 15 of the building. Mr Denny said that he went about finding tenants for level 15 in the manner by which he usually tried to find tenants. That involved approaching prospective tenants and producing and distributing brochures, methods to which I have already referred. Mr Denny does not have a record of the persons to whom the brochures were sent but I am satisfied that they were sent to prospective tenants such as law firms, accounting firms, mining companies, engineering firms or State government departments.
In cross-examination it was put to Mr Denny that not much advertising to attract tenants had been undertaken. Mr Denny replied:
'That is a fair statement. In terms of newspaper advertising we only ran the one ad in the Australian Financial Review. We certainly don't recommend newspaper advertising as an effective means of getting tenant inquiry for office buildings. We don't use it for - virtually in any of our office buildings that we lease. We don't see much of it in the market and I think the reason for that is it's ineffective. There are better ways of attracting inquiry to lease office space.'
In cross-examination it was also put to Mr Denny that one of the best things that could have been done in 1996 was to get rid of the spa and sauna to make the property more attractive. Mr Denny did not agree. He considered that the best strategy was to leave the fit out in level 15 because a big part of the market wants existing partition [sic] space and he would be able to offer prospective tenants a fully partitioned floor. Mr Denny said that he could also say that the owner would gut level 15 if that is what the prospective tenant wanted or gut part of it.
Later in his reasons, the learned judge dealt with Luxer's and Mr McPhee's submissions concerning the advertising and marketing of the 15th floor. His Honour said, at [57] ‑ [59]:
[Luxer and Mr McPhee] say that [Glentham] failed to advertise the premises by displaying a sign on the building in a place that was advantageous to [Luxer] and/or reasonably necessary to properly and effectively advertise the availability of the premises for lease. [Glentham] did have a small sign placed on a stand in the foyer inviting prospective tenants to contact the leasing agent. It was suggested to Ms Tindale in cross-examination that the sign was inadequate. Ms Tindale responded that QV1 and other buildings do not put great big signs on the outside of their buildings. Further, Ms Tindale said it would be difficult to place a sign on the building because it is practically all glass. It would be difficult to secure such a sign and if [Glentham] put up a large board it would impinge on the other tenants' views. That included the ground floor because there is a tenant on the ground floor. Furthermore, Ms Tindale stated her belief that signs do not work anyway.
There is no evidence that it is the usual practice of owners of a building such as the BGC Centre, or their letting agents, to place large signs on the exterior of the building in an attempt to attract tenants. Nor is there any evidence that such a sign is likely to attract the sort of tenant who is likely to take a lease of the 15th floor of the building, or part of it. [Luxer and Mr McPhee] have not established that [Glentham] failed to take reasonable steps to mitigate its loss by putting a sign on the exterior of the building.
[Luxer and Mr McPhee] allege that [Glentham] failed to carry out any reasonable or adequate advertising campaign to find a replacement tenant for the premises. In cross-examination Mr Denny said that he undertook a number of strategies to try and find tenants and that there were no budgetary constraints imposed on him in endeavouring to do so. It was then put to him that there was not much marketing done in terms of advertising. I have set out above Mr Denny's response. In effect, he said that he ran only one newspaper advertisement – an advertisement in the Australian Financial Review. His company does not use newspaper advertisements to attract tenants to any of the office buildings that they lease. Newspaper advertisements are not used much in the market. Mr Denny believed that newspaper advertising is ineffective. He did not recommend newspaper advertising as a means of getting tenant enquiry for the 15th floor of the BGC building. There is no evidence to contradict the opinion of Mr Denny. [Luxer and Mr McPhee] have not made out a failure to mitigate by inadequate advertising.
Luxer and Mr McPhee did not adduce any evidence as to what advertising or marketing Glentham should have undertaken and which would have been likely to have mitigated Glentham's damage to a greater extent.
Mr Denny, in his witness statement (which constituted his examination‑in‑chief), described his practice at the material time in relation to finding lessees for the BGC Centre:
9.In order to find a tenant for building space, it has been my practice since our appointment as leasing agent for the Building in 1994 to do the following:
(a)Offer the space to prospective tenants. These may be tenants who have contacted CB Richard Ellis looking for space or other tenants in the Building itself. I may also telephone prospective tenants whose leases are due to expire in the near term, which information is kept by CB Richard Ellis on a lease expiry database. Quite often I arrange for letters to be sent to tenants of the Building advising them of available space. I also look in the West Australian newspaper, mainly the business section, and the Australian Financial Review. Some articles provide leads to locate prospective tenants. In offering the space to prospective tenants, I write to or telephone the tenants, and provide them with details of the available space;
(b)Advertise the available space through brochures or other publications. Using this method, I arrange for a colour brochure of the Building to be posted out to groups of prospective tenants. The groups may be compiled according to area, industry or may be individual tenants. I may also arrange for details of the available space to be advertised in newspapers.
10.There is also a leasing sign on the Building itself, located in the ground floor lobby by the main entrance doors, which states that any leasing inquiries ought to be directed to me. I get a reasonable amount of inquiries through the leasing sign.
Mr Denny stated, in cross‑examination, that:
(a)the advertising and marketing strategies used were as set out in his witness statement and he did not consider that additional funds were required from Glentham to 'do anything differently' (ts 224);
(b)newspaper advertising was not an effective means of obtaining lessees for office buildings (ts 224); and
(c)it was better to retain the then existing fit‑out in level 15 in case the fit‑out was attractive to a lessee and to remove all or part of it if that was a lessee's preference (ts 228).
Mr Denny's qualifications, experience and expertise as a leasing agent for commercial office buildings in Perth was not challenged at trial.
Ms Tindale gave evidence (which was not contradicted) that a large sign, advertising the availability of the 15th floor, was not displayed on the exterior of the building because it was not usual practice, it would be difficult to affix the sign because the exterior of the building was 'practically all glass' (ts 182), and the sign would have affected the views of other lessees. Ms Tindale also said that, in her opinion, such signs 'didn't work' (ts 183).
Finally, in this context, Luxer complained that Glentham acted unreasonably in leasing level 5 of the BGC Centre to a company called 'Marubeni' in about March 1998 instead of offering to lease level 15 to that company. In March 1998, representatives of Marubeni inspected levels 14 and 15, but eventually decided to lease level 5 because that level was available at a lower rent. The evidence does not disclose the amount of the lower rent. On the evidence, Glentham did not act unreasonably, for the purposes of the doctrine of mitigation, in failing to offer level 15 to Marubeni at the rent it was willing to accept for level 5.
In my opinion, Luxer has not established that the learned judge made any material error in his analysis and conclusions concerning the advertising and marketing of the premises with a view to re‑letting them.
Luxer's appeal: ground 2: conclusion
Luxer has not made out ground 2.
Mr McPhee's appeal
Mr McPhee contended, in essence, that he was not liable to Glentham under the guarantee in the 1995 Lease for these reasons:
(a)The guarantee did not secure amounts payable by Luxer to Glentham for damages (in particular, loss of bargain damages) in respect of the period after the termination of the 1995 Lease (grounds 1 and 3).
(b)The demand which Glentham served on Mr McPhee impermissibly combined rent and other amounts due under the 1995 Lease and, in consequence, was not a valid demand for rent under the guarantee (ground 2(a)).
(c)The demand by Glentham on Mr McPhee was not served until after the 1995 Lease had been terminated and, in consequence, was not a valid demand under the guarantee (grounds 2(b), 4 and 5).
(d)The demand which Glentham served on Mr McPhee did not specify any actual breach of any condition, covenant or stipulation in the 1995 Lease, did not request that the breach be remedied within a reasonable time, and did not request payment of any loss or damage suffered as a result of that breach, but instead referred to loss of bargain damages; further, the demand was not made within a reasonable time after the breach; and, in consequence, the demand was not a valid demand under the guarantee (ground 6).
Mr McPhee's appeal: grounds 1 and 3: the relevant terms of the guarantee and their proper construction
The guarantee is contained in cl 6 of the 1995 Lease and provides, relevantly, as follows:
In consideration of the Lessor having granted this Lease to the Lessee at the request of the Guarantor named and described in item 12 of the First Schedule (herein called 'the Guarantor') the Guarantor HEREBY GUARANTEES to the Lessor the due and punctual payment by the Lessee of the rent reserved by and the performance and observance by the Lessee of the covenants, conditions and stipulations contained or implied in this Lease during the term hereby granted and any extension or renewal thereof upon the following terms and conditions:
(a)if and whenever any instalment of the rent or any part thereof is in arrears or unpaid for the space of one (1) month after it has become due and payable the Guarantor will upon demand pay the same to the Lessor;
(b)if and whenever there is a breach by the Lessee of any of the covenants, conditions or stipulations herein contained the Guarantor will upon the written request of the Lessor cause the breach to be remedied within a reasonable time and pay to the Lessor all losses, damages, expenses and costs which the Lessor is entitled to recover by reason of the breach;
(c)the liability of the Guarantor hereunder is not impaired or discharged by reason of any time or other indulgence granted by or with the consent of the lessor;
(d)this guarantee is a continuing guarantee …
…
In Moschi, the appellant, Mr Moschi, gave a personal guarantee 'of the performance' by Rolloswin Investments Ltd 'of its obligation' to make certain periodical payments to the respondents. Lord Reid noted, at 344, that there are at least two possible forms of agreement in relation to making good to a creditor payments of instalments by the principal debtor. His Lordship said, at 344 ‑ 345:
A person might undertake no more than that if the principal debtor fails to pay any instalment he will pay it. That would be a conditional agreement. There would be no prestable obligation unless and until the debtor failed to pay. There would then on the debtor's failure arise an obligation to pay. If for any reason the debtor ceased to have any obligation to pay the instalment on the due date then he could not fail to pay it on that date. The condition attached to the undertaking would never be purified and the subsidiary obligation would never arise.
On the other hand, the guarantor's obligation might be of a different kind He might undertake that the principal debtor will carry out his contract. Then if at any time and for any reason the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do.
In Sunbird Plaza, the respondents guaranteed 'the performance by' a purchaser under a contract for the sale of a home unit on the Gold Coast of 'all the terms and conditions of the contract including the payment of all moneys payable [under the contract]' by the purchaser. Mason CJ observed, at 256, that the fact that at common law a creditor sued the guarantor in special assumpsit provided some support for the view that the creditor's cause of action is for damages for breach of contract. His Honour added that the modern view that the guarantor promises to answer for the debtor's debt or default has led to the practice of the guarantor being sued for the money sum which the debtor has failed to pay. His Honour then set out, at 256, his own view:
My own view of the matter accords with that expressed by Lord Reid in Moschi ([1973] AC, at pp 344-345) where his Lordship rejected the notion that there was a common rule applicable to all guarantees and acknowledged that the parties are at liberty to make such agreement as they choose. There are, however, two common classes of guarantee of the payment of instalments by the principal debtor. The first is an undertaking by the guarantor that if the debtor fails to pay an instalment he will pay. This is a conditional agreement. The guarantor's obligation to pay arises on the debtor's failure to pay. The second is an undertaking by the guarantor that the debtor will carry out his contract. Then a failure by the debtor to perform his contract puts the guarantor in breach of his.
In the present case, Mr McPhee's guarantee, in cl 6 of the 1995 Lease, comprised two limbs:
(a)first, a guarantee of the 'payment' by Luxer of the rent; and
(b)secondly, a guarantee of the 'performance and observance' by Luxer of the covenants, conditions and stipulations contained or implied in the 1995 Lease.
By cl 5.3 of the 1995 Lease, Glentham and Luxer mutually covenanted and agreed, relevantly, that following forfeiture of the lease consequent upon Glentham's re‑entry, Glentham would be entitled to recover from Luxer 'damages for loss of the benefits which performance of the covenants of the [1995 Lease] by [Luxer] would have conferred on [Glentham] between the date of forfeiture and the expiry of the [1995 Lease] by the effluxion of time'. In my opinion, Luxer impliedly promised to pay Glentham those damages.
To the extent that the guarantee was of the 'payment' of the rent, Mr McPhee was required to pay the rent to Glentham if Luxer failed to pay it. The relevant provision of cl 6 is based on the assumption that Luxer is under a continuing obligation to pay the rent to Glentham. By reason of Glentham having re‑entered and forfeited the lease as a result of Luxer's breach of an essential term, the rent ceased to be payable in respect of the balance of the term after the date of termination. Compare Wharf St Pty Ltd v Amstar Learning Pty Ltd [2004] QCA 256 per McPherson JA (with whom Williams JA agreed, and Jerrard JA agreed subject to some additional comments) at [23] ‑ [26].
To the extent that the guarantee was of the 'performance and observance' of Luxer's covenants, conditions and stipulations contained or implied in the 1995 Lease, the guarantee was an undertaking by Mr McPhee that Luxer would carry out its obligations under the lease. Luxer's failure to perform and observe those obligations constituted a breach by Mr McPhee of his promise under the relevant provision of cl 6. Further, Mr McPhee's undertaking that Luxer would perform and observe its obligations under the lease extended to Luxer's implied promise to pay the damages which Glentham was entitled to recover pursuant to cl 5.3. Compare Wharf St at [23] ‑ [26].
In my opinion, the second limb of the guarantee secured amounts payable by Luxer to Glentham for damages (in particular, loss of bargain damages) in respect of the period after the termination of the 1995 Lease.
Grounds 1 and 3 fail.
Mr McPhee's appeal: ground 2(a): did the demand impermissibly combine rent and other amounts due under the 1995 Lease?
By letter dated 1 July 1996, Glentham's solicitors made demand on Mr McPhee, relevantly, in these terms:
We enclose a statement of arrears owing as at 4 April 1996, in the sum of $69,916.30, to which can be added a stamp assessment of $2,563.90, a copy of which is enclosed.
You will note that our client has not assessed interest on the arrears. We are instructed to demand payment of the sum of $72,480.20 within 21 days. If payment is made within that time, our client will forego interest claimable on that sum.
The letter was accompanied by a schedule which itemised various amounts and stated the basis upon which each amount was demanded.
In my opinion, the letter dated 1 July 1996 was a valid demand for rent, at least under the first limb of the guarantee, in that it demanded payment of the arrears of rent as at the date of termination of the 1995 Lease.
In my opinion, the letter dated 1 July 1996 was not an invalid demand, even if the schedule accompanying the letter included itemised amounts that were not properly payable under the guarantee. The letter would still be a valid demand, at least in relation to the arrears of rent itemised in the schedule. Compare Bunbury Foods Pty Ltd v National Bank of Australasia Limited (1984) 153 CLR 491 per Mason, Murphy, Wilson, Brennan and Dawson JJ at 503 ‑ 504.
There is authority for the proposition that a demand on a guarantor may be invalid if it is so misleading that the recipient could not identify the moneys he should probably pay. See Westpac Banking Corporation Ltd v Lim (Unreported, QSC, 15 August 1995, per Thomas J at 20). Mr McPhee has not established that the demand in question was misleading in any material respect.
Ground 2(a) fails.
Mr McPhee's appeal: grounds 2(b), 4 and 5: was the demand invalid in that it was not served until after the 1995 Lease had been terminated?
Ground 2(b) alleges that the learned judge erred in holding that Mr McPhee was liable in debt to Glentham in that the demand for rent (in the letter dated 1 July 1996) was made after the 1995 Lease had been terminated, and after any liability of Mr McPhee had been discharged as a result of such termination.
Mr McPhee asserts, in ground 4, that the learned judge erred in deciding that it was not an implied term of the 1995 Lease that written notice calling on Mr McPhee to remedy Luxer's default must be given before the expiry or termination of the lease.
According to ground 5, the learned judge erred in law in holding that Glentham's alleged demand or request made on Mr McPhee was a demand or request under the guarantee, in that the alleged demand or request was made some 3 years and 9 months after the 1995 Lease was terminated.
It was submitted, on behalf of Mr McPhee, that the guarantee (in particular, cl 6(b)), on its proper construction, required that Mr McPhee be given an opportunity to 'preserve the security of the lease', and to remedy any breach, before Glentham terminated it.
The learned judge held, at [107] ‑ [109]:
The guarantee clause is effective without implying a term that the written request must be given before the lessor terminates the Lease. The implied term that the notice, or written request, must be given before the Lease is terminated is not so obvious that it goes without saying. The general principle is that the creditor is under no obligation to notify the guarantor of the principal's default unless such notification is required by the terms of the guarantee. All the guarantee requires is that the creditor make a written request to the guarantor that the guarantor remedy the breach before the creditor can enforce the guarantee. It would be contrary to the general principle to which I have referred to imply a further term that the written notice or request must be given before the Lease has expired or has been terminated.
The same reasoning applies to the alleged implied term that any demand for rent payable by the guarantor was required to be made prior to the re-entry of the premises by [Glentham].
Furthermore, the alleged implied terms are inconsistent with the express terms of the Lease. Clause 5.3 of the Lease provides that if the rent or any other moneys payable by the lessee remain unpaid for 14 days then the lessor may re-enter the premises and following such forfeiture the lessor is entitled to recover from the lessee damages for loss of the benefits which performance of the covenants of the Lease by the lessee would have conferred on the lessor between the date of forfeiture and the expiry of the Lease by the effluxion of time. Clause 6.3(a) has the effect that the guarantor is not liable to pay outstanding rent until it has been in arrears for one month and the lessor has given notice of demand. The parties to the Lease could not sensibly have intended that the lessor may re-enter the premises and terminate the Lease when rent has been in arrears for 14 days but must wait until rent is one month in arrears before making demand upon the guarantor for payment and by that time the Lease is no longer on foot and the guarantor is not under any liability to pay.
I agree, with respect, with his Honour's observations and findings.
Clause 6 of the 1995 Lease does not specify a time by or within which a demand or request must be made upon Mr McPhee in relation to any failure by Luxer to pay rent or any breach by Luxer of any of the covenants, conditions or stipulations contained or implied in the lease. Clause 6(a) provides that if and whenever any instalment of the rent is in arrears or unpaid for one month after it has become due and payable, Mr McPhee will 'upon demand pay the same to [Glentham]'. Clause 6(b) provides that if and whenever there is a breach by Luxer of any of the covenants, conditions or stipulations, Mr McPhee will 'upon the written request of [Glentham] cause the breach to be remedied within a reasonable time and pay to [Glentham] all losses, damages, expenses and costs which [Glentham] is entitled to recover by reason of the breach'.
That part of the guarantee which refers to the 'due and punctual payment by [Luxer] of the rent … and the performance and observance by [Luxer] of the covenants, conditions and stipulations contained or implied in [the 1995 Lease] during the term hereby granted and any extension or renewal thereof', does not require that any demand on or request of Mr McPhee be made before the expiry or termination of the lease. In particular, the words 'during the term hereby granted and any extension or renewal thereof' ensure that Mr McPhee's obligations as guarantor apply not only to rent which is payable, and covenants, conditions and stipulations which must be performed or observed, by Luxer during the original term, but also during any extended or renewed term.
Clause 6 permits Glentham to make demand on or request of Mr McPhee after the expiry or termination of the 1995 Lease in respect of Luxer's failure to pay the rent, and Luxer's failure to perform any covenants, conditions or stipulations contained or implied in the lease (including a failure to pay damages for loss of the benefits referred to in cl 5.3).
Grounds 2(b), 4 and 5 fail.
Mr McPhee's appeal: ground 6: was the demand invalid in that it did not specify any actual breach, it did not request that the breach be remedied within a reasonable time, it did not request payment of any loss or damage suffered as a result of the breach but instead referred to loss of bargain damages, and it was not made within a reasonable time after the breach?
In modern times, damages of this type have often been termed 'loss of bargain' damages and, in accordance with the method of assessing damages generally, are to be calculated at the time when the breach giving rise to the entitlement to damages occurred: Wenham v Ella (1972) 127 CLR 454, 459, 463, 470; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 148 ‑ 149 (Gaudron J). That is, by a reference to the factors and probabilities which existed or were apparent at the date of the termination.
Choice of the proper time for the determination of damages in an action involving the negligence of a solicitor was extensively considered in Johnson v Perez (1988) 166 CLR 351. Although that was a case involving a claim for damages in tort, Mason CJ undertook (at 355 ‑ 360) a detailed examination of the principles relating to the choice of the time for the assessment of damages in actions in both contract and tort. In doing so, Mason CJ observed (at 355) that '[t]he practice of awarding fixed sums of money for damages worked well when money values and prices were stable', but in more modern times, with inflation, changing economic values and, I would add to those considerations, changes in the market rates for commercial rental premises, complications arise. His Honour went on:
There is a general rule that damages for torts or breach of contract are assessed as at the date of breach or when the cause of action arises. But this rule is not universal; it must give way in particular cases to solutions best adapted to give an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered (355 ‑ 356). (footnotes omitted)
And, further:
The general rule that damages are assessed as at the date of breach or when the cause of action arose has been applied more uniformly in contract than in tort and for good reason. But even in contract cases courts depart from the general rule whenever it is necessary to do so in the interests of justice (356).
One of the factors identified as leading a court to select another date for the assessment of damages, particularly in personal injury cases, is the effect of inflation. This is because it would be unjust to determine the compensation due to the injured party, years afterwards, according to the depreciated values of currency, earnings and expenses at the date of the injury, especially when these can be accurately measured in the currency of the day at the time of assessment. Mason CJ provides examples of assessments of damages where the appropriate course is to assess the damages as at the date of breach, such as where there has been a loss of a shipload of petroleum which was to be sold into the market on arrival at port (at 359). However, his Honour noted that in another case, one of statutory compensation for interference with the use of land, compensation due to the land owner took into account a substantial increase in the value of coal in the land owner's fields which had occurred shortly after the imposition of the restrictions upon land use: see The Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v The Pontypridd Waterworks Co [1903] AC 426. In that case, the object of determining compensation was not to fix the value of the coal or the coal field at the date of the imposition of the land use restriction, but to determine what the colliery company would have made out of the coal during the time that it would have taken to extract it.
Another factor is the potential significance of any opportunity to mitigate damages because, as Mason CJ said:
As the cases to which I have referred reveal, the principles governing the assessment of damages do not permit the application of rigid rules based on categories of actions. Instead, the injured party's intentions and the surrounding circumstances must be considered in the light of the underlying principles in order to do justice between the parties. Where mitigation is possible, an early date for assessment may be appropriate. Where mitigation concerns are not relevant and the circumstances indicate that the injured party would have maintained possession of the goods had the accident not occurred, the date of judgment is the most appropriate date for assessment. Where the circumstances indicate that the property or interest would in some other way have been converted into monetary terms between the time of injury and date of judgment, the date at which the injury is assessed should reflect the time of the intended conversion (360).
These principles were examined in some detail in Commonwealth v Amann Aviation Pty Ltd, where the principal difficulty confronting the court was to determine the damages due to a claimant who was unable to determine precisely what profit it might have achieved had its contract with the defendant not been wrongly and prematurely terminated and where it claimed damages referrable to its wasted expenditure (reliance damages). That issue does not arise in the present case, but Mason CJ and Dawson J affirmed the basic principle that:
The general rule at common law, as stated by Parke B in Robinson v Harman (1848) 1 Ex 850, at p 855 [154 ER 368, at p 365] is that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed (80).
In this sphere, as elsewhere in the assessment of damages designed to achieve compensation for the results of a breach of obligation, proper compensation is arrived at by taking account of the benefits, if any, as well as the disadvantages or losses, caused by a defendant's wrongful action: Haines v Bendall (1991) 172 CLR 60, 63; The National Insurance Co of New Zealand Ltd v Espagne (1961) 105 CLR 569, 572 ‑ 573 (Dixon CJ). Consequently, the determination of damages will involve credit being given for the pecuniary benefits, if any, arising from the breach: cf Public Trustee v Zoanetti (1945) 70 CLR 266, 276 ‑ 277 (Dixon J).
The foregoing is enough to identify the principal factors bearing on the correct assessment of the damages to which Glentham is entitled in this case.
One feature of this case is that, had Luxer duly observed and performed the covenants binding upon it under the lease, it would have progressively paid rent and variable outgoings monthly, in advance, during the five year term and also paid its proportion of rates, taxes and other expenses accruing under the lease from time to time as those fell due. The monetary benefits to be received by Glentham from due performance of the covenants of the lease would, therefore, have been received progressively over the five year term. Accordingly, at one early date of assessment of the damages, the court would need to take into account that some or all of Glentham's losses may have already occurred and that some, or all of them, might be prospective losses - if the assessment was being conducted prior to the expiration of the term. This accounts for the observation by Jackson J in Hughes v NLS Pty Ltd [1966] WAR 100, a case which involved a claim for damages by a lessor after termination of a lease following upon the lessee's wrongful repudiation, calculated at a time before the term fixed by the 10 year lease had fully passed. His Honour said:
Perhaps some confusion has arisen because the amount claimed as damages for loss of rent has been calculated arithmetically by deducting from the rent which would have been payable under the lease after 10 February 1964 [the date of termination] the amount of rent which the plaintiff is entitled to receive under the new lease. This takes no account of the fact that the damages are payable at once and if calculated as suggested would give the plaintiff compensation exceeding his probable loss. The amount of damages should be assessed by making an appropriate allowance by way of discount for the value of present payment for a future periodic loss (102).
Obviously, such a discount is unnecessary and inappropriate in the case of an assessment of damages conducted after the full term of the terminated lease has already expired. As was said by Austin J in Young v Lamb (No 2) [2001] NSWSC 1014:
In the normal course, where a component of damages for breach of contract is payment of a future economic loss, the ordinary rule is that the amount of the claim is discounted: see NLS Pty Ltd v Hughes (1966) 120 CLR 583. However, since by the time of the hearing of the assessment of damages the renewed lease would have expired, this is not a case of compensation for future economic loss. It would not be appropriate to apply any discount factor, because the discount is applied in order to identify the current value of a future revenue stream, a concept not appropriate here. It seems to me, therefore, that the plaintiff is entitled to the actual past loss of rent without any discount ... [11].
It follows from this reasoning and is consistent with this principle that if, in a case such as the present, it is right to conduct the assessment of damages with the knowledge that the original term of the lease has already expired by the time of the assessment and that events between the date of termination and the end of the demised term should be taken into account, then it also must follow that the lessor has been delayed in the recovery of the moneys which otherwise would have been received had the obligations under the lease been performed, and such delay must also be accounted for. Therefore, in addition to the loss suffered by the failure to observe those covenants, the lessor has been kept out of its money. Consequently, full compensation requires recompense for the delay in recovery which, in this case, is met by an entitlement to interest in addition to, or as a component of, the damages.
A second feature of the present case is that the retaking of possession of the premises by Glentham, on the early termination of the lease due to default, put it in a position where it enjoyed vacant possession of the premises much sooner than if the lease had run its course. It was never suggested that the capital value of the lessor's interest was enhanced by having vacant possession, at least in the sense that there was an enhancement in the value of the entire estate which could be sold at a profit in an available market. Indeed, the case has proceeded on the unstated, but one imagines the unquestionably correct, assumption that not only was there no such market, but that it would have been impossible to sell the premises which had been vacated by the defaulting lessee. In different cases that might, possibly, be a factor in the assessment of compensation if, for example, the defaulting lessee had been the sole tenant of premises for which there was a ready market demand, not just as leasehold but as freehold.
In the present case, the termination of the lease following Luxer's breach meant, among other things, that Glentham regained the capacity to use or re‑let the premises immediately, rather than being in the position under the lease where its right to possession was deferred until the expiration of the term (and even then potentially for a further period, had the lessee been able to exercise the option to renew). In a climate where demand for such leased premises were strong and higher rents than those fixed by the lease were obtainable, these would obviously be factors which could potentially have the effect of diminishing the damages to vanishing point. The point of this case, however, was that there was no evidence to suggest any such benefits, but, rather, there was little or no demand for the premises.
Thirdly, in the present case, the issue of Glentham's alleged failure to mitigate damages by re‑letting some or all of the vacated premises or in rejecting Luxer's proposals to re‑take possession of the premises at a lower rent for the balance of the original term, can be examined with the benefit of the knowledge of events which actually happened between April 1996 and December 2000. The availability of a ready market for goods or services which have become available by reason of a defendant's repudiatory breach is of significance not only in addressing allegations of failure to mitigate but also, on an appropriate occasion, in determining the date for assessment. In cases where there is a ready market for the goods or services on offer, there is little, if any, reason to defer the date of assessment beyond the date of breach. Further, the existence of such a ready market will also largely resolve issues of alleged failure to mitigate. However, where there is no such ready market, or the market is patchy, or the particular goods and services are special in nature or character, an attempt at assessment of damages at the date of breach may involve a requirement to make a quantification in the face of many uncertainties or imponderables.
In the present case, an assessment of damages for loss of bargain conducted on or soon after 4 April 1996 (had that been possible) would have needed to take into account the probabilities of re‑letting all, or some, of the vacated premises over the 4 1/2 years balance of the term, against a background that, other than Luxer's, there had been no expressions of interest displayed in taking the premises. It may well be the case that, in circumstances of what appears to have been a flat market for commercial premises of this kind at that time, a finding would have been made that the probabilities of re‑letting some or all of the premises were small. Having regard to the factors which have been described, that would have been an exercise in estimation against a backdrop of uncertainty. In contrast, a retrospective assessment of damages conducted years later, and in the knowledge of what actually happened, allows findings to be made with greater confidence. It seems to me that in these circumstances the particular features of the market and the advantages of knowledge gained subsequently about the fate of these premises provides a far more reliable, and therefore preferable, basis for conducting an assessment of the damages.
The learned trial judge assessed the damages for loss of benefits of performance by Luxer of its covenants under the lease by taking the aggregate rentals which would have been payable under this lease from 4 April 1996 until 30 November 2000, together with the aggregate of variable outgoings and other moneys which were payable, such as rates and taxes. From this total his Honour then deducted the actual rents, variable outgoings and other financial contributions paid by another tenant who had taken a portion of the demised premises for part of the remaining term. The result of that calculation, plus interest, led to the damages actually awarded. The appellants submit that this is an erroneous and excessive quantification of the damages payable.
Luxer submits that the only applicable test for quantifying the damages for loss of bargain following on the acceptance of the repudiation is to determine the difference between the contract value of the subject lease and the rental value of the property retained at the date of the breach. In support of that, it relies on the following passage from McGregor on Damages (17th ed, 2003) [23‑038]:
Where the lessee refuses to proceed with the contract the lessor may claim specific performance, or treat the contract as discharged, or sue for damages. If he pursues his remedy in damages the normal measure is represented by the contractual rent reserved by the lease less the rental value of the premises at the time of breach. This was applied in Marshall v Mackintosh where the claimant had relet the premises at a lower rent, which was all they would now command, and damages were assessed on the basis of the difference between the contractual rent under the broken agreement and the new rent. If, however, the claimant has succeeded in reletting at a higher rent than the contractual rent because of market improvements, then he will only be entitled to nominal damages: this was the position in Oldershaw v Holt. (footnotes omitted)
However, as Buss JA has demonstrated in his reasons for decision, the actual basis for the calculation of the damages awarded or refused in Marshall v Mackintosh (1898) 78 LT 750 and Oldershaw v Holt (1840) 12 A & E 589; (1840) 113 ER 935, respectively, was a comparison between the contractual rent due for the remaining period, had the lease run its course, and the value of the rent or rents recoverable by the lessor for that same period. This accords with the methods by which damages were actually assessed in the comparable cases of Buchanan v Byrnes; Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd (1906) 4 CLR 672; and Hughes v NSL Pty Ltd.
In the unlikely event that the actual assessment of damages were undertaken at the date of the termination of the contract because of the repudiatory breach, or shortly afterwards before the duration of the terminated lease would have expired, it would, of course, be necessary to determine, as part of the assessment, the rental value of the premises at the time of the breach. Clearly, that would be a question of fact to be decided by the tribunal of fact on the basis of the evidence of the market rent and the demand for tenancies of this nature at the time, or foreseeable in the immediate future, and would involve a degree of estimation. It would be, as Griffiths CJ stated in Lamson Store Service Co Ltd:
... less such sums as a jury may think [the lessor] is likely to derive as profits from the use of the land during the residue of the term (684). (footnotes omitted)
And, as Jackson J observed in Hughes v NSL Pty Ltd, the assessment may also require a degree of discounting because of the value of the acceleration in receipt of the benefit, which would otherwise have been received progressively over the full term of the lease which had been terminated.
However, once allowances are made for the passage of time, as will be necessary in cases where the assessment of damages is being carried out after the lease, had it run its full term, would have expired, regardless of whether or not the assessment is to be conducted notionally according to the circumstances prevailing at the date of termination, there is no real difference between the method of assessment described and that adopted in Marshall v Mackintosh. The aggregate value of the benefit received by the lessor had the lease been performed is calculated by determining the aggregate amount payable according to the covenants of the lease. In such a situation, there will be no occasion to discount this value because of a benefit for accelerated receipt - if anything, the aggregate should be increased by a component of interest to compensate for delayed receipt of benefit. Subject to issues of mitigation, if any, the actual value derived by the landlord from the use of the vacated premises in the interim can be ascertained as an historical fact and the difference will represent the damage suffered.
Luxer seeks to counter this approach, however, by submitting that to ascertain, as an historical fact, the profits, if any, derived by Glentham from the use of the premises during the balance of the original term, constitutes an erroneous and impermissible blurring or conflation of the onus upon a plaintiff to prove the existence of damages actually suffered, and the different onus upon a defendant to prove a failure to mitigate damages by the plaintiff if that is alleged. Put another way, Luxer contends that this approach fails to direct attention to the obligation of Glentham to establish, objectively, what the rental value of the premises was at the date of termination and, instead, allows that component of proof to be discharged by an historical inquiry into what was actually received.
Perhaps the point of Luxer's submission can better be appreciated if one assumes that, at the date of the termination of the lease, the market rental rates for the newly vacated premises were below the rents agreed upon in the lease and that the economic conditions at the time involved a steady and foreseeable decline in market rents for such premises over the balance of the term. In such a situation a defendant, opposing a claim for damages, might well argue that the lessor had an opportunity to re‑let the premises at a lower rent, immediately or shortly after the termination, and, had the lessor done so, the damages would be the difference in value between the two rates of rent over the remaining period of the old lease. The next step in such an argument would be that if the lessor declined to take advantage of a reasonable opportunity to re‑let the premises, admittedly at a lower rent, shortly after the termination and instead let a year or so pass before the premises were re‑let at an even lower rent, the lessor should not be permitted to recover damages equal to the difference between the rent payable under the lease and the rent actually received. This is, so the argument goes, because the true measure of the damages is the difference in value between the benefits of the original lease and the rents receivable had the opportunity to re‑let soon after the termination been taken.
In this regard, counsel for Luxer cites Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 137; (2006) 65 NSWLR 648 and Goldburg v Shell Oil Co of Australia Ltd (1990) 95 ALR 711, 714 for the proposition that there is a clear conceptual difference between proving the proper measure of damages and determining an issue of alleged failure to mitigate damages. There is no doubt that the onus rests upon a plaintiff to establish both that it has suffered a loss and to prove the facts upon which proper assessment of that loss may be determined - for an example of a failure to prove subsidiary facts supporting the extent of the loss claimed by a plaintiff see Kargotich v Mustica [1973] WAR 167. But I am not satisfied that there was any omission in the present case by Glentham to discharge this onus.
The evidence led by Glentham, and accepted by the learned trial judge, was to the effect that, after Glentham had regained vacant possession of the premises, it instructed its agent to obtain a substitute tenant or tenants and that steps were taken to this end, but with little success. Assuming, for the moment, that the efforts to obtain a substitute tenant were genuine and reasonable, the limited success which resulted is itself evidence of the slight rental value of the premises from the termination of the lease and for the following 4 1/2 years. In the absence of evidence to the contrary, this justified a finding that the remaining rental value was no greater than the aggregate of the rent received from the new tenant for part of the demised premises for part of the remaining term. Had Luxer adduced evidence from a valuer, or other sources, that the remaining rental value of the premises was higher, then there would have been an issue of fact for the learned trial judge to resolve as to what the correct remaining rental value of the premises was. However, in the absence of that evidence, I see no error in the learned trial judge accepting, as a basis for his finding, the inference that the remaining rental value was no greater than the aggregate of the rents or the other moneys actually received. This does not amount to any reversal of the onus of proof in relation to damages, nor does it cast upon a defendant an obligation to supply an ingredient of proof missing from its opponent's case. It is no more than the recognition, in the present case, that the only evidence bearing on the value of the amount of the remaining rental value of the premises was the evidence from Glentham as to what was actually received.
The distinct and separate questions involving the obligation of a plaintiff to show that damage was caused by the alleged breach of contract and then to adduce evidence upon which the damages can be assessed, on the one hand, and the onus upon a defendant alleging a failure to mitigate damages and to establish that failure in quantifiable terms, on the other, were also addressed by Mason P in Castle Constructions Pty Ltd v Fekala Pty Ltd. In that case, Mason P examined (at [19] ‑ [22]) the interrelationship of issues of causation of damage, for which the plaintiff bore the onus, and mitigation, where the defendant bore the onus, in terms which showed that there may often be an interplay between them. In that regard, his Honour referred to the decision of Goff J in Koch Marine Inc v D'Amica Societa di Navigazione ARL (The Elena d'Amico) [1980] 1 Lloyd's Rep 75, and the example of a breach by a seller to deliver goods on a due date when there was an available market from which to obtain substitute goods but where the purchaser failed to avail itself of the opportunity to purchase in that market. As Mason P explained, this approach to the assessment of damages based on the availability of an alternative market for the supply of the commodity, and the allegation of a failure to mitigate by neglecting to take that opportunity, depends almost entirely upon the existence of such an available alternative market. In the present case, one can substitute, in this analogy, the absence of demand for premises such as Glentham's in mid‑1996, with the contrasting availability of a market or a demand for the supply of goods widely available. If there is no market, then there is no opportunity for the innocent party to find a ready substitute for the performance of the obligation which, in this case, Luxer repudiated. In addition, there is no basis for assessing the damages by attempting to calculate the value of the contract on the basis that the lessee's covenants would be performed and the value of the contract on the basis that alternative tenants could be found.
The inapplicability of such an approach to damages does not absolve the court from the obligation to determine damages appropriately in this case, any more than it means that the innocent lessor is without loss. In such circumstances, it is both necessary and proper that the damages should be assessed on the footing of a comparison between the rental which would have been achieved had the covenants in the lease been observed, and the pecuniary benefits, if any, actually received in circumstances where Luxer failed to show that Glentham did not act reasonably when faced with the dilemma produced by Luxer's repudiatory breach of contract.
Luxer sought to establish that Glentham had failed to mitigate its damages in several respects, which have been fully recounted by Buss JA. However, on this issue, Luxer did not adduce any evidence from a valuer, or elsewhere, as to what was an available market rent for such premises, or a portion of them, during the relevant period. It confined itself to submitting that inadequate attempts were made by Glentham to advertise or re‑let the premises and to contending that Glentham had acted unreasonably in declining to re‑lease the premises to Luxer at a lower rent.
I agree, with respect, with the reasons given by Buss JA for concluding that Luxer has failed to show that there was any error by the learned trial judge in rejecting its partial defence of failure to mitigate damages. Had Luxer attempted a different method of proving the alleged failure to mitigate, in particular by leading evidence to show that there was an available market for premises of this kind at the relevant time at or about a particular designated rent (even if less than the rent reserved by the lease), then such evidence might have achieved the dual purpose of showing:
(a)that there had been an unreasonable failure to mitigate; and
(b)the true extent of the damages suffered by Glentham, had it acted reasonably in re‑letting part of the premises in the face of the available demand.
That it did not follow this course, and that that result was not achieved, is no reason for concluding that an erroneous measure of damages was adopted in this case, or that there was any misplacement of the onus of proof - requiring Glentham to establish the existence and extent of its damages on the one hand, and, on the other hand, for Luxer to establish, if it could, a failure to mitigate loss for which the claim was advanced.
The method of assessing damages against a lessee following termination of the lease due to its repudiatory breach, by taking the difference between the rent payable under the lease and the rent received from other sources after the termination until the end of the term, was the methodology approved in Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105, 139 (Priestley JA), 147 ‑ 149 (McHugh JA) and in Peet & Co Ltd v Rocci [1985] WAR 164, 178 ‑ 179 (Rowland J) in the circumstances of those cases. This is so, notwithstanding that Rowland J, in the latter case, formulated the conceptual test for the quantification of damages in terms which appear to be indistinguishable from the principle for which Marshall v Mackintosh is cited. This is not surprising. After all, what is the present value to a lessor of an opportunity to let premises for a fixed term, if not the present value of the net cash flow which would be received over that term together with an estimate of the present value of any other material future prospects which might, if they exist, enhance that value.
At this point I return to my discussion of the observations of Mason CJ in Johnson v Perez about the principles relating to the date at which damages should be assessed for a breach of contract. I do not consider that there is any invariable rule relating to the proper time for the assessment of damages for a lessor's loss of bargain following the termination of a lease on account of a repudiation by the lessee. The conventional time for the assessment of such damages is on the basis of the information available at the date of termination. However, whether this is a practicable or appropriate choice will depend greatly upon the circumstances of the particular case. These circumstances include, especially, whether or not there is available evidence as to the market value and demand for such premises and, if so, the market rate and, also, the correlative but distinct question of whether or not issues of alleged failure to mitigate can be better assessed, prospectively or retrospectively, having regard to the time which has elapsed. In the present case, the method of assessment was to take the conventional measure of damages, but in the light of the knowledge which experience had revealed about the lack of demand for these premises in the market prevailing at the material time.
I see no error or disadvantage in that course and, having regard to the findings of the learned trial judge, no error in his Honour's calculation of the damages awarded. Perhaps it is necessary to say that, in the present case, apart from the determination of the rent actually recovered from the third party, who took a portion of the demised premises after the termination of the lease, and issues about the alleged failure to mitigate, there was no suggestion that there were any other collateral benefits received by Glentham, as a result of the termination of the lease, which should have been brought to credit in the assessment of damages. It is, accordingly, unnecessary and inappropriate to attend to any other potential consequences for Glentham resulting from the early determination of this lease.
On the issues concerning the liability of Mr McPhee under the guarantee of this lease, I respectfully agree with and adopt the reasons for decision given by Buss JA for concluding that Mr McPhee is liable for the amount found due by the learned trial judge, pursuant to his obligations under that guarantee. I also agree that it is unnecessary to address Glentham's notice of contention.
For these reasons, I agree that the appeal should be dismissed.
64
24
1