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? Below, we will discuss relevant case law on the issue of damages recoverable specifically for money owing under a lease.
Types of Damages
When a tenant abandons its premises and fails to pay rent within the stated timeframe, consequently terminating the lease, the landlord is entitled to recover damages representing:
- The rental arrears up until the date immediately before the date of termination of the lease (damages from breach of the lease covenant); and
- The 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 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, event if at the business’ expense.
It’s 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. This means the landlord has made reasonable efforts to advertise the premises to find a new tenant within a reasonable time frame and having regards to the current market rent (even though this may be by lower or the same as rent under the lease).
In the case of Blandino v Giardini  NSWADTAP 55, the landlord terminated the tenant’s lease and sought loss of bargain damages. The Tribunal found that the landlord failed to mitigate its loss by advertising the premises for rent that is 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 it dropped 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  NSWCA 287, 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, and 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. Even though the Landlord was entitled to mitigate its loss by running the hotel business, it was not entitled to recover damages because it had not attempted to rent the premises out and could not quantify the amount for bargain damage.
On appeal, the Tenant relied on the decision in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit market (Campbelltown) Pty Ltd  HCA 10. 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.
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. A landlord has a positive obligation to mitigate its loss by proactively reletting the premises in a timely manner and seeking rent that accurately reflects the current market condition.
If you would like assistance in reviewing your lease document or advice about your rights under a commercial lease, get in touch with our experienced leasing team on 1300 544 755.