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When a tenant breaches a lease by either abandonment or default on their rent payment, what is the scope of damages that a landlord may recover? This article will discuss relevant case law on the issue of damages recoverable, specifically for money owing under a lease when a tenant defaults. 

Types of Damages

Sometimes, a tenant may abandon its premises and fail to pay rent within the stated time frame, consequently terminating the lease. In these circumstances, the landlord can recover damages representing the:

  1. rental arrears up until the date immediately before the date of termination of the lease (damages from breach of the lease covenant); and
  2. rent that would have been payable from the date of termination to the expiry date of the lease (loss of bargain damages).

Loss of Bargain Damages

Loss of bargain damages refers to the rent that the landlord would have been entitled to under the lease had the tenant continued with its lease until the expiry date. It represents what the parties have agreed to from the beginning. This is regardless of any change in the value of the premises since the commencement date. If the rent was fixed to a percentage increase, the tenant is still required to pay rent increases, even if at the business’ expense.

It is not uncommon that some tenants seek to abandon their lease. The court or tribunal will usually uphold the lease term regarding bargain damages as the starting point for calculating loss. From there, the court or tribunal will offset the damages against the amount the landlord can or should have recovered by mitigating its loss.

The Onus on the Landlord to Mitigate its Loss

A landlord seeking bargain damages must prove to the court or tribunal that it has done everything expected to mitigate its loss. The landlord must have made reasonable efforts to advertise the premises to find a new tenant within a reasonable time frame. This includes having regards to the current market rent (which may be lower or the same as rent under the lease).

In the case of Blandino v Giardini, the landlord terminated the tenant’s lease and sought loss of bargain damages. The tribunal found that the landlord failed to mitigate its loss. This was because they advertised the premises for rent that was almost 30% higher than the rent paid by the tenant under its lease. The landlord did not find a replacement tenant until one year later after dropping the rent amount equal to the rent payable under the previous tenant’s lease. The tribunal held that the landlord would have found a tenant sooner had they advertised reasonable rent from the outset. Consequently, the tribunal limited bargain damages to three months’ rent despite the premises being vacant for fifteen months.

Proving Loss of Bargain Rent

In the case of Gigi Entertainment Pty Ltd v Schmidt, the landlord could not prove that it had suffered the loss of bargain damages. Gigi Entertainment Pty Ltd (the landlord) owned and leased a hotel to the tenant, Mr Schmidt. The tenant fell into rental arrears. Therefore, the landlord exercised its right to terminate the lease and took possession of the premises. When the landlord took back the premises, it also resumed running the hotel until it commenced proceedings against the tenant for loss of bargain damages.

The evidence the landlord tendered before the Court of Appeal in calculating bargain damages included:

  • rent and outgoings payable under the lease; and
  • profits derived from operating the hotel since taking possession, even though the landlord operated the hotel at a loss.

The trial judge rejected the landlord’s claim for bargain damages. The landlord was entitled to mitigate its loss by running the hotel business. However, it could not recover damages because it had not attempted to rent the premises out. Therefore, they could not quantify the amount for bargain damage.

Appeal Decision

On appeal, the tenant relied on the decision in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit market (Campbelltown) Pty Ltd. In that case, the court held that if a landlord obtained possession because of the tenant’s default, the landlord could only recover loss of bargain damages if it had tried, unsuccessfully, to obtain a new tenant at the rent stated in the terminated lease. Further, the need for a landlord to recover loss of bargain damages from a tenant only arises when the market is falling.

The Court of Appeal upheld the trial judge’s finding. In short, a prudent landlord must first try to relet the premises after the tenant’s termination of the lease to claim for loss of bargain damages.

Key Takeaways

When a tenant defaults under its lease and the landlord terminates the lease, the scope of damages the landlord can claim depends on their conduct after the date of termination. The landlord can claim rental arrears covering the rent due up until the date immediately before the breach of the lease and the rent that would have been payable from the date of termination to the expiry date of the lease. Additionally, a landlord has a positive obligation to mitigate its loss. They can do this by proactively reletting the premises and seeking rent that accurately reflects the current market condition. For assistance in reviewing your lease document or advice about your rights under a commercial lease, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

Can the landlord claim the rent that was supposed to be paid inclusive of rent increases?

Yes, if the original lease stipulated that the rent was to be increased by a fixed percentage, the tenant is still required to pay rent increases when paying for the landlord’s damages in lost rent. 

What does the landlord need to prove when seeking damages for lost rent?

The landlord needs to prove that they tried to mitigate their loss by taking reasonable steps to find another tenant as soon as possible under reasonable rent. Doing so will also help the landlord quantify the amount of bargain damages to be claimed. 

What should I do if my tenant has walked out on their lease early without my consent?

You may be able to seek damages for the lost rent. In order to establish the quantity of damages, it is prudent to seek to relet the premises as soon as you can.

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