December 21, 2010

Unauthorised alterations to leased premises: a costly exercise…

A recent High Court decision has made it clear that Lessee’s face potential liability in the event they alter leased premises without the Lessor’s consent.

In 1996, the applicant Tabcorp Holdings Ltd (“Tabcorp”) and the respondent Bowen Investments Pty Ltd (“Bowen”) entered into a ten year lease term with two five year options to renew.  Prior to entering into the lease, Bowen had taken considerable care and expense in the construction of the foyer to the leased premises, with the foyer containing specialised materials (such as San Francisco Green Granite).  In or around June 1997, Tabcorp approached Bowen regarding making alterations to the foyer area.  Bowen responded in turn saying that consent was not given.

Bowen subsequently attended the premises and discovered that the glass and stone partition, timber paneling and stone floor tiles had been removed and what remained of the floor work was in the process of being jack-hammered.  Despite protests on the part of Bowen, Tabcorp completed the alterations to the foyer area around August 1997.  The Lease between Bowen and Tabcorp contained the following lease provision by which the Tenant covenanted:

“Not without the written approval of the Landlord first obtained (which consent shall not be unreasonably withheld or delayed) to make or permit to be made any substantial alteration or addition to the Demised Premises”

The lease also contained covenants that the Tenant will:

  1. Keep the premises in repair;
  2. To yield up the premises on the determination of the lease in good repair; and
  3. To make good any breakage or damage.

These provisions are considered standard lease terms.

The Federal Court originally found in favour of Bowen and awarded damages in the amount of $34,820.00 (which represented the difference in the value of the property with the old foyer and the value with the new foyer.  Bowen appealed this decision.  On appeal from the Federal Court of Australia, the High Court awarded Bowen damages in the sum of $1.38 million which represented the cost of returning the foyer to its original state as at 2004/2006 (when the initial lease term expired).  Tabcorp proceeded to appeal this decision and sought orders from the High Court to re-instate the original damages award of $34,820.00.

The High Court dismissed the appeal by Tabcorp.  In determining this award, the Court made clear the following:

  1. The covenant in the lease meant that Bowen was contractually entitled to the preservation of the premises without unauthorised alterations.
  2. The contractual principle that the purpose of damages for breach of contract is to place the aggrieved party in the same position (as far as is possible via money) as if the contract had been performed.  The loss in this instance was the cost of restoring the premises to the condition it would have been in had the covenant not been breached.
  3. Should tenants elect to undertake works to the premises in breach of a lease covenant, they run the risk that damages from the Court will be on the basis of the cost the Landlord will incur in returning the premises to its pre-alteration state.

The High Court further considered that in future cases the following approaches may be applied to the assessment of damages for a similar case:

  1. Where the rectification of the damage would be taking place at a future date, an estimate of the amount of money required at the future date may be determined and then discounted down to a present value, which would require the investment of these damages for use at that future date.
  2. The assessment of the damages as at the date of the breach of the covenant, with the damages to carry interest from the date of the breach.

This case illustrates the need for Lessee’s to carefully consider their obligations under the Lease and to ensure that they obtain the Lessor’s written consent prior to undertaking any works on the leased premises.