When a tenant breaches a term of their commercial lease, the landlord may terminate the lease early. If the landlord does terminate the lease, it is common for a claim for bargain damages to follow. These are the benefits that the landlord would have received if the tenant stayed in the lease until the end of the term. This article will outline what a bargain damage clause in a lease is, and will describe the potential consequences for the tenant who faces a claim for bargain damages.
What is a Bargain Damages Clause?
Many commercial leases contain a bargain clause that often works to the landlord’s advantage. A bargain damage clause is usually located in the “default” part of the lease. The wording varies between leasing contracts.
Generally, it would help if you looked out for a clause which refers to the landlord’s right to claim damages or compensation following a termination of the lease. More specifically the clause may refer to:
- loss of bargain damages;
- damages for loss of benefits beyond termination; or
- damages for money the landlord would have received from the tenant during the entire term.
Before you commit to a lease, it is essential to review your lease and identify this clause so that you understand your rights and obligations upon termination.
Who Can Claim Bargain Damages?
When one party breaches a lease and the other party suffers any loss or damage, the courts take the view that the party who has suffered should receive financial damages. Therefore, the purpose of the bargain damages clause is to place the landlord in the same position they would have been if the lease had reached its term.
Generally, a landlord can claim two types of losses:
- direct loss: this is a loss which can reasonably arise naturally. For example, the rent the landlord would have received from the date the lease was terminated until the date the claim was brought. This is usually quantified into a definite number, such as the time it took for the landlord to re-let the premises and the actual financial loss suffered during that time; or
- consequential loss: this is the loss which the parties may have reasonably contemplated when entering the agreement. This will be any future loss of rent from the date the landlord brings the claim until the end of the lease. These are forecasted fees that may or may not arise. It is also possible that the costs will be capped once the landlord re-lets the premises.
How Does a Landlord Claim Bargain Damages?
To claim loss of bargain damages, a landlord needs to show that the tenant’s breach is a breach of an “essential term” of the lease. Your lease will list all of the essential terms. These usually include:
- paying rent;
- maintaining the premises and insurance; and
- complying with assignment rules.
If a tenant breaches one of these clauses, it will usually result in a breach of the lease. Consequently, there will be a presumption that the landlord can recover loss of bargain damages. Further, if your commercial lease expressly states that the bargain damage clause is an essential term, the landlord can claim this amount up to the end of the lease.
Duty to Mitigate Loss
However, the landlord has a common law duty to mitigate their losses. Essentially, this means that the landlord has a positive obligation to:
- re-let the property; and
- obtain rent from a new source/ tenant.
As it is a positive obligation, they must take proactive steps to do this promptly. The courts will consider the landlord’s conduct in assessing bargain damages. For example, when the landlord is advertising the property, they must request rent that reflects the current market conditions. If they are attempting to re-let the property at a higher price than the contract price, they will not have mitigated their loss. This is because they may have been able to find a tenant sooner if they advertised the property at a reasonable price.
The landlord cannot claim more than the actual loss. The courts will not place a landlord in a better position than they would have been in if the tenant performed the lease in full. They will place the landlord in the same position that they would have been in if the tenant stayed for the full term of the lease.
Where a landlord terminates a lease due to a tenant’s breach of contract, the landlord may be entitled to claim bargain damages for loss of rent until the end of the term. The extent of these damages will depend on the landlord’s conduct. They are obliged to re-let the premises promptly and mitigate the loss.
It is essential to seek legal advice when entering into a commercial lease to ensure you understand your rights and responsibilities under this clause. If you have any questions, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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