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The Facts
Tenant leases 100-year-old hotel
In January 2007, a tenant leased a 100-year-old hotel west of
the Blue Mountains in New South Wales.
The tenant paid a security deposit of $250,000 and the rent was
$220,000 per year.
In December 2007, a new owner purchased the hotel for $1.6
million.
The tenant's lease was due to expire on 3 July 2010.
Owner locks tenant out of hotel for failure to pay rent and
takes over operation of hotel
In January 2008, the tenant breached an essential term of the
lease by being two weeks in arrears on payment of the rent.
The owner gave the tenant notice of its intention to terminate
the lease, and on 19 February 2008 locked the tenant out of the
hotel and took possession.
The owner also acquired the hotel licence and certain gaming
entitlements associated with the hotel premises, stayed in
possession, and operated the hotel itself.
Owner sues tenant for loss of bargain damages
In September 2008, the owner commenced proceedings against the
tenant for damages, including loss of bargain damages (for the loss
of the benefit of the lease).
The Supreme Court of NSW denied the owner's claim for loss
of bargain damages, and the owner appealed to the NSW Court of
Appeal.
case a - The case for the tenant
case b - The case for the owner
As was the case here, where an owner remains in possession of a
property after terminating a lease, the law requires that the loss
of bargain damages be calculated as follows - the rent we would
have been liable to pay from the date of termination of the lease,
until the expiry date of the lease, had it not been terminated;
minus the value to the owner of its occupation of the property,
assessed by reference to rent that the owner could have earned by
re-letting the premises during that period.
In this case, the owner did not even try to re-let the
premises. Yet, in the prevailing market conditions at the time, the
owner could have achieved the same rent or more than we would have
been liable to pay, had the lease not been terminated.
Accordingly, the owner has not suffered any loss of bargain and
we are not liable for damages.
We accept that the ordinary starting position for the
calculation of loss of bargain damages is the difference between
the rent under the lease and the rent at market value at the time
of termination. However, there are special circumstances in this
case that require that the losses be measured by reference to the
profits we obtained by re-taking possession and operating the hotel
business, instead of by reference to the rent at market value.
The special circumstances include that we had to maintain the
hotel licence. In addition, the tenant accepted the risk that we
would choose not to re-lease the premises, as we were entitled to
decide to do under the lease, but instead take over the operation
of the hotel business on an early termination of the lease.
The loss of bargain damages should therefore be calculated as
follows - the rent the tenant would have been liable to pay from
the date of termination of the lease, until the expiry date of the
lease, had it not been terminated, minus the profits we earned from
the use of the premises during that period.
The rent payable by the tenant for the period from 19 February
2008 to 3 July 2010 would have been $571,590. Our profits derived
from operating the hotel during that period were $250,256.
Therefore, we are entitled to $321,334 in loss of bargain
damages.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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