HG Alert: Lessee to Pay for Breach of Covenant of Lease - Mar 2009

The High Court in Tabcorp Holdings Pty Ltd v Bowen Investments Pty Ltd, has upheld a decision of the Federal Court to order a tenant who breached a covenant of a lease to pay damages to the Landlord of $1.38 million.

Bowen Investments Pty Ltd (Bowen) leased to Tabcorp Holdings Pty Ltd (Tabcorp) office premises in Melbourne. The parties entered into a 10 year lease. The lease contained a covenant to the effect that Tabcorp were not to make or permit any substantial alteration or addition to the premises without the approval of Bowen. Tabcorp also covenanted to keep the premises in good repair to yield up the premises on the determination of the lease in good repair and, to make good any breakage or damage.

Before Tabcorp took possession of the property, it undertook a refurbishment of the building for which it obtained Bowen’s consent. Tabcorp did not however, obtain consent to refurbish the main foyer of the building despite knowing that it needed Bowen’s consent.

The trial judge described Tabcorp’s conduct as involving “contumelious disregard” for Bowen’s rights, however, only awarded nominal damages to Bowen for the amount of $34,820.00. This figure was made up of the difference between the value of the property with the old foyer and the value of the property with the new foyer constructed by Tabcorp.

On appeal to the Full Court of the Federal Court, it was held that the trial judge had not calculated the amount of damages correctly and, ordered Tabcorp to pay damages to the sum of $1.38 million for the breach of the repair covenant. This amount was to account for the repair costs, as well as the loss of rental while the repairs were undertaken.

The High Court decision

On appeal to the High Court, Tabcorp sought to restore the trial Judge’s original damages figure of $34,820.00. The High Court unanimously held that if the benefit of the covenant relating to substantial alteration or addition to the premises, was to be secured to Bowen, it was necessary that reinstatement damages be paid, and it was not unreasonable for Bowen to insist on that payment. The High Court reasoned that Bowen was entitled to the damages that would cover the cost of reinstating the foyer as it had been prior to the refurbishment, and the loss of work while that was being done, rather than to damages that would only cover the reduction in value of the premises arising out of the unauthorised work.

The High Court held that Tabcorp had breached its contractual obligations to Bowen, by failing to abide by the covenants in the lease. Tabcorp was therefore under obligation to restore the premises as it was before it took possession. The High Court dismissed the appeal and retained the order for damages at $1.38 million.

Key messages from this case

This case serves as a reminder to both landlords and tenants, to be acutely aware of all obligations contained under your lease. The key messages include:

  • From a lessor’s perspective, it is vitally important that your lease contains covenants to the effect that you are covered from activity such as that shown by the tenant in this case.
  • Lessees should clearly take note of any clauses in their lease that restrict them from doing works without the lessor’s prior consent.
  • Lessees should ensure that their leases expressly provide for what will happen if a covenant is breached and what compensation or damages they are likely to pay should a breach occur.

For more information regarding rights and obligations of lessors’ and lessees’, please contact HopgoodGanim’s Commercial and Retail Leasing team.