What is the proper measure of damages payable by a tenant for breach of promise not to alter premises without landlord consent? A decision handed down by The High Court this month confirms that the appropriate measure of damages for breach of such promise is the cost to reinstate the building rather than the loss in value of the building caused by the alteration.
In the case, the landlord had constructed the foyer of a commercial building with particular care using high quality materials including special granites. It then leased the building and, six months later, the tenant partially demolished and reconstructed the foyer without the landlord's consent. Consent was sought but not given pending provision of details of the proposed works. The tenant proceeded to alter the foyer in breach of the alteration provision despite the landlord's protests. The tenant's conduct was described by the trial judge as being in "contumelious disregard" of the landlord's rights.
The trial judge found in favour of the landlord but determined that the appropriate measure of damages was the diminution in the value of the building due to the foyer alteration (approximately $34,000). Further, that damages should only be assessed on a reinstatement basis in limited cases where the tenant has so damaged the premises that they are unlettable at the conclusion of the lease.
On appeal, the approach preferred by the High Court was that a contracting party should receive what they contracted for or damages sufficient to put them in that position: not merely the difference in value due to the breach. The one exception to this rule was that a test of reasonableness should be applied to the application of the reinstatement measure. One formulation of that exception was that the party to be compensated must be seeking compensation for a genuine loss and not merely using a technical breach to secure an extra profit.
In the circumstances, the tenant was held liable to reinstatement damages in the sum of $1.38 million comprising $580,000 to reinstate the foyer and $800,000 for loss of rent during the period of reinstatement.
The tenant might have achieved a reduced award by putting argument at trial on the appropriate methodology to calculate the reinstatement damages amount. It appears that the tenant focused at the trial on diminution in value as the appropriate measure without arguing in the alternative as to the appropriate methodology to arrive at the reinstatement damages (should reinstatement damages be applied). In particular, the tenant could have sought a discount for betterment and also made submissions on the timing of the damages assessment having regard to the lease expiry (which could have involved an assessment of the reinstatement damages at the date of the breach, assessing damages at the date of the proceeding or arguing for an assessment of the damages at lease expiry together with interest or discount allowances to arrive at present value).
The decision is heartening for landlords, in that it confirms they may rely on the strength of covenants not to alter without consent. The lesson for tenants is either to ensure observance of alteration restrictions or, in the case of a breach, to take care in the argument of the damages claim in order to best minimise exposure.
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