Property law
Case note
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA
8 (12 February 2009).
March 2009
Summary
This newsletter considers a recent High Court
decision where the Court upheld a landlord’s
substantial damages claim against a tenant for
breach of the covenant not to make substantial
alterations to the leased premises without
consent.
The case serves to illustrate the obligations of
tenants under repair covenants in commercial
leases and reinforces a landlord’s rights under
repair and alteration covenants.
In this matter, the landlord had constructed a
new office building and installed an expensive
high quality foyer featuring a floor largely made
of rare granite, pillars covered by marble, and
“sequence-matched crown-cut American cherry
wood wall panelling”. The entire building was
leased to Tabcorp for 10 years.
The lease provided that the tenant should “not
without the written approval of the landlord first
obtained (which consent shall not be
unreasonably withheld or delayed) make or
permit to be made any substantial alteration to
the demised premises”.
Within six months of taking possession of the
new building, the tenant demolished the foyer.
Only days earlier the landlord had arranged for
the tenant to be told that no consent to any
alteration of the foyer would be granted. The
landlord had also written to the tenant saying
the landlord could not consent until the tenant’s
proposed alterations were examined at a site
meeting scheduled within days. The destruction
was in progress with jack hammers when the
landlord attended at the premises for the site
inspection.
The landlord sued the tenant in the Federal
Court for the full cost of restoring the
demolished foyer including loss of rent while the
works were carried out. The trial judge found
that the tenant acted well aware that written
consent from the landlord was needed, that the
consent did not exist, and that the tenant’s
conduct was in “contumelious disregard” for the
landlord’s rights.
Despite the Court’s findings in relation to the
tenant’s conduct, it disallowed a claim for
reinstatement of the landlord’s fitout on the basis
that there was no significant loss of value to the
building, and awarded the landlord damages of
$33,820, being the cost of reinstalling a wall
removed by the tenant reducing the lettable area
of the ground floor, plus $1,000 nominal damages
for the tenant’s failure to abide by its obligations
under the lease.
Page 2
On appeal to the Full Federal Court, the Court
unanimously allowed damages on the cost of
reinstatement and allowed $1.38 million,
including an allowance for a period of loss of
rent. The majority (Finkelstein and Gordon JJ)
held that there was no meaningful difference
between a full repair covenant and a covenant
not to alter premises and damages were to be
assessed on the same basis in either case. Rares J
held that breach of the covenant not to alter the
premises required the tenant to make good its
unuathorised changes and that the tenant did not
displace the prima facie rule that damages should
be assessed on a reinstatement basis.
On appeal to the High Court, the award of $1.38
million was upheld and the appeal dismissed on
relatively narrow grounds which focused upon
the nature of the covenant not to alter the
premises.
The High Court said that the covenant not to
substantially alter the premises without written
consent was an express negative covenant of
considerable practical utility in relation to the
landlord’s capacity to protect its interest in
preserving the physical character of the premises
leased.
The Court stated that at common law the ruling
principle for assessment of damages for breach of
contract was that the innocent party should, as
far as money can do, be put in the same situation
as if the contract had been performed.
The Court rejected the tenant’s submissions that
the landlord’s damages be restricted to an
assessment of whether unauthorised alterations
reduced the value of the landlord’s investment.
The Court recognised that damages equivalent to
restoration may be unreasonable in exceptional
cases, but only where such an award would be
unnecessary or unreasonable to achieve
conformity with the contract under
consideration in a given case.
The Court said if the benefit of the covenant is to
be secured to the landlord, it is necessary that
reinstatement damages be paid. It held the
landlord was not unreasonable to insist on them
being paid.
The decision is an important reinforcement of
the seriousness of obligations contained in repair
and alteration covenants entered into between
landlords and tenants. The decision is likewise a
significant reinforcement of landlords’ rights
under repair covenants in commercial leases.
For further information
The VGSO is the primary source of legal services
to the Victorian State Government and its
statutory authorities, providing strategic advice
and practical legal solutions.
For further information or legal advice on any
issues raised in this newsletter contact:
The Court held that diminution of value damages
would not restore the landlord to the same
situation as if the contract had been performed.
Such an approach would undermine the
fundamental requirement of the covenant that
substantial alterations should not be made
without consent.
Sue Nolen on 9947 1424
Assistant Victorian Government Solicitor
The Court held that the landlord was
contractually entitled to the preservation of the
premises without alterations not consented to.
The loss suffered was the cost of restoring the
premises to the condition they would have been
in if the obligation had not been breached.
Margaret Marotti on 9947 1425
Principal Solicitor
The Court held that the landlord was entitled to
the benefit of its bargain whether or not
objectively it was to its commercial advantage.
Rowan Ingpen on 9947 1424
Managing Principal Solicitor
Brendan McIntyre on 9947 1435
Principal Solicitor
Chitra Amaradasa on 9947 1428
Senior Solicitor
Terrie Benfield on 9947 1461
Senior Solicitor