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Damages, duty to mitigate and the new duty to negotiate

Damages, duty to mitigate and the new duty to negotiate

Published on May 23, 2011 by Matthew Rafferty

Your tenant has breached the lease and you have locked them out. You have done all the right things:

  • The lease was properly signed…
  • You successfully negotiated the minefield of traps and risks associated with a tenant’s breach and termination of a lease by lock-out – notices, reasonable times, offers of compromise etc…
  • You effected a successful lockout and recovered possession of the premises…
  • You are making arrangements for the tenant to remove its property from the premises…
  • And… the lease contains the appropriate clause permitting the landlord to recover damages.

Now you begin to consider what damages might be available and whether to accept (or offer) a settlement.

Damages
There are two kinds of damages potentially available for a landlord in this situation are of two kinds:

  1. those available because of money owing but unpaid prior to the date of termination – ie damages flowing directly from the breach; and
  2. those available because of money due to be paid from the date of termination up to the expiry of the lease – ie damages flowing from the termination.

(Damages can also be available for breach of other terms, eg failure to make good, however they all convert to money owed.)

Under the second category, usually called ‘loss of bargain damages’, the tenant remains liable to the landlord for the rent (and other money) owing up until the expiry date of the lease. If loss of bargain damages are available, the landlord must mitigate its loss AND the landlord must take genuine and reasonable steps to resolve the dispute by agreement.

Mitigating loss
Mitigating loss means making reasonable efforts to re-let the premises to a replacement tenant, potentially one who will reuse the fitout (hence, saving on the cost of making good) and doing so as quickly as possible for the best rent reasonably available.

Damages are reduced by what amount can (or should have been) recovered by mitigation.

flow chart

If the landlord fails to take steps that a court may consider reasonable to mitigate its loss, that landlord “will have his damages reduced to the extent to which, had he acted reasonably, his loss would have been less”. (Karacominakis v Big Country Developments Pty Ltd (2000) NSWCA 313).

Example
For example, in Blandino v Giardini [2008] NSWADTAP 55, after terminating for breach, the landlord advertised the premises for a period of two months at a rent almost 30% higher than the rent paid by the previous tenant. There was no interest. The rent was reduced and the advertising continued, but the rent asked was still approximately 25 % too high. One year later, a replacement tenant was found who paid an amount about equal to the amount the previous tenant was paying.
The tribunal found that if the advertising had been reasonable from the start, the replacement tenant would have been found in three months, and so damages were limited to three months rent, even though the premises was vacant for 15 months.

What else do courts and tribunals require?
A few recent cases in the Administrative Decisions Tribunal (Braun v Roach [2011] NSWADT 311; Mirvac Funds Limited and anor v Frost (No 2) [2010] NSWADT 41; Blandino v Giardini [2008] NSWADTAP 55) described what is expected of landlords and what is not enough. From these, we can surmise that a tribunal or court will require a landlord to:

  • use more than one agent to advertise the premises;
  • advertise the premises for all its possible uses rather than the landlord’s favoured use for that premises;
  • do more than simply place signs in the premises windows;
  • use all types of advertising techniques, including canvassing for possible tenants, handing out brochures, and cold calling;
  • adequately maintain the premises during the period it is unoccupied, including maintaining the garden;
  • advertise for a period of time taking into account the economic conditions of the area – if you advertise for too long, or spend too much money, you will not get these costs back; and
  • not seek too much rent from the replacement tenant.

Duty to take genuine reasonable steps
In addition to mitigation, the new part 2A of the Civil Procedure Act requires a person in a civil dispute to take reasonable steps, having regard to the situation and the nature of the dispute, to resolve the dispute or narrow the issues in dispute prior to commencing proceeding in a court or tribunal. If a person in a dispute fails to do so, a court or tribunal will take their actions into account when making any orders (including costs orders). This new part will apply to proceedings commencing after 1 October 2011.

Under these provisions, a landlord must take genuine and reasonable steps to resolve the dispute. These provisions require the landlord to:

  • let the other party know what issues are in dispute;
  • offer to discuss those issues with a view to resolving the dispute;
  • respond appropriately to the other person; and
  • provide relevant information and documents to enable the other person to understand the issues involved and how the dispute might be resolved.

If the dispute ends up in a court or tribunal, you are required under the new Division 2 in Part 2A to file a statement outlining the steps you took to try to resolve or narrow the issues in dispute.

A landlord could consider informing the Lessee:

  • The amount of rent, outgoings, marketing levy, gst etc owed up to the date of termination;
  • The amount of rent etc due from the date of termination up to the expiry date of the lease;
  • The amount of time the landlord believes it will take to find a replacement tenant;
  • The estimated cost of finding that replacement tenant, including agents fees, advertising costs and any incentives (ie – costs of mitigation);
  • The landlords estimate of its loss – considering income which will potentially be received from the replacement tenant.

The landlord can then clearly state that the dispute is limited to determining what amount should be paid by the Lessee so that the dispute can be settled quickly; and that the dispute can either be resolved by:

  • the lessee continuing to pay the rent etc until a replacement tenant is found – ie paying the actual loss; or
  • paying an amount so that the parties can ‘walk away’.

A good starting point for the ‘walk away’ amount may be the rent etc due up to the expiry date, less an amount expected to be paid by a replacement tenant, plus the costs of mitigation. The parties can then argue about when a replacement tenant can be expected to be found, and how much rent the lessor can expect in the current market.

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