The NSW Supreme Court recently provided a judgment and a hefty award of damages for a tenant in circumstances where the landlord breached the Lease by failing to carry out works to render the premises fit for use as a childcare centre. In 711 Hogben Pty Ltd v Anthony Tadross  NSW SC1259, the Court assessed the damages on the basis of the value of the commercial opportunity to trade, as the tenants had lost that opportunity as a consequence of the landlord’s breach.
The proceedings concerned a Deed of Agreement for Lease dated 11 April 2014 between 711 Hogben Pty Ltd (the Landlord) and Anthony and Sharon Tadross (the Tenants) in relation to rental premises at Kogarah. The Tenants intended to operate a childcare centre from the premises.
Breaches of the Lease
Under the Lease the Landlord was obliged to use its reasonable endeavours to complete certain building work. The Landlord was in continuous breach of the Lease from 2015 to 8 October 2020. The works were only completed in 8 October 2020 following orders made by the Supreme Court.
The Court considered the Tenants’ claim for damages for that breach.
Legal Principles which apply to the Tenants’ Claim for Damages
The Tenants had the onus (responsibility) of proving the extent of the loss or damage. The general principle is that when assessing damages for breach of contract, the aggrieved party is to be put in the position that he or she would have been in but for the breach, that is the position if the contract had been performed.
An opportunity may be lost because a party fails, in breach of its contractual obligations, to take steps which it is obliged to take. In such a case, in order to discharge its onus on the issue of causation, the aggrieved party must establish (on the balance of probabilities) that had there been no breach, the steps concerned would have been taken and that the opportunity to gain a financial benefit (or avoid a financial detriment) was therefore lost. The Courts approach the issue of whether breach caused loss in a practical and common-sense way.
The assessment of damages for a loss which depends on future chances or possibility of benefit may be fraught with difficulty and attended by uncertainty, that the mere fact that damages cannot be assessed without difficulty and uncertainty does not relieve a Court from the responsibility of attempting to assess them as best it can. A loss of commercial advantage or opportunity is a compensatable loss even where there is less than 50% likelihood that the commercial advantage will be realised. Damages are to be assessed by reference to the probabilities or possibilities of what would have happened.
Where future or hypothetical events must be taken account of in assessing damages and proof of them is necessarily unobtainable, the Court assesses the degree of probability that an event would have occurred, or might occur, and adjust its award of damages to reflect that degree of probability.
The Tenants’ Claim for Damages
The Tenants argued that had the Landlord completed the building work, they would have commenced trading from their childcare centre by July 2015. They claimed loss of profits for the entire period amounting to $2,368,514.00.
In response, the Landlord argued that the Tenants did not suffer loss by its breach because the Tenants did not prove that service approval would have been given to operate a childcare centre. The Supreme Court accepted that without service approval the Tenants could not lawfully trade. In this case, the Court confirmed that obtaining service approval was a step which the Tenants must show they would have taken to discharge the onus of proving loss.
The NSW Supreme Court found that it was more probable than not that the Tenants would have obtained service approval in 2015 and started trading in 2015 although later than July. The Court was assisted by expert evidence in relation to the issue of whether service approval would have been achieved in 2015.
The Court determined it was appropriate to discount the claim for loss of profit for a number of reasons. First was that daily fees may not be achieved and the occupancy rates may have been lower than the calculations. The Court received expert evidence in relation to fees charged and a number of care positions.
The Court determined it was appropriate to apply a 50% discount which reflected the view that the Tenants’ chances of making the profits they claim they have lost was about 50%. The Court assessed the commercial opportunity which the Tenants lost by reason of the Landlord’s breach at $1,080,000.00 and deducted $350,000.00 which was the figure agreed that the Tenants would be required to spend on the premises before a potential successful service approval application could be lodged.
The Supreme Court entered judgment and verdict for the Tenants against the Landlord for $730,000.00. There will be a future argument in relation to the legal costs of the proceedings, which are likely to be significant considering that the hearing took place over 4 days.
Kristy Nunn is a director of the Dispute Resolution & Litigation Group at Mullane & Lindsay. Mullane & Lindsay have extensive experience in commercial dispute resolution and commercial litigation. We can help you in relation to arguments over the terms of leases and contracts.
Liability limited by a scheme approved under Professional Standards Legislation