Which case won?

casea
The case for the tenant
  • 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.
caseb
The case for the owner
  • 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.

So, which case won?

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Case A won. You were right!

How people voted
a74%
b26%

Expert commentary on the court's decision

“This case shows that much time and money can be wasted preparing a claim, where that time and cost may outweigh the ultimate outcome of the proceedings.

In this case Gigi’s claim started out very high, but ultimately after a protracted procedural history, agreements made between the parties and the final judgment, Gigi found itself in a much less favourable position.”
Court rules in favour of tenant

In Gigi Entertainment Pty Ltd v Schmidt [2013] NSWCA 287, the NSW Court of Appeal dismissed the appeal of the owner, Gigi Entertainment Pty Ltd.  

The court ruled in favour of the tenant, Michael Schmidt, concluding that Gigi was not entitled to loss of bargain damages. 

Special circumstances can result in departure from ordinary basis for assessing damages

The court accepted that there might be times when special circumstances call for a departure from the ordinary basis on which damages for loss of bargain are assessed. The court said: 

I accept that if the landlord were, for commercial reasons, required to carry on the hotel business itself in order to maintain its hotel licence, pending attempts to re-lease the premises, then it might have a claim for those costs. However, that would depend on whether there was an alternative tenant able to be found within the time required to maintain the licence. Similarly, if the lessor were to be unable to re-lease the premises at the lease rental or an acceptable rental then it might have a claim for the whole or part of the rent foregone, against which it might be required to offset any benefits it obtained by way of trading profits in that period. 

Gigi did not prove existence of special circumstances

The court was not satisfied that Gigi had established the existence of any special circumstances.  

Gigi had not presented evidence that it had no option but to assume responsibility for operating the hotel business.  

Nor was there any evidence of any attempts by Gigi to ascertain the existence of an alternative lessee or to market the premises.  

The court observed that “in the absence of evidence as to any difficulties the landlord may have had in re-leasing the premises to an appropriate licensee, it is simply not known whether the landlord has suffered any loss at all as a result of the tenant’s breach of an essential term of the lease, as opposed to loss as a consequence of its own decision to retake possession and carry on the hotel business itself”. 

Additional claims made at trial

Gigi’s original claim was for $1.46 million dollars in damages.  

In addition to loss of bargain damages of $321,334, this amount included outstanding rent, costs of repair or replacement of plant and equipment, and repair and maintenance of the hotel itself. 

Mr Schmidt cross claimed, seeking repayment of the security deposit, as well damages for loss of cash, stock, and other property of his that Gigi had retained when it took possession of the hotel. 

After what the court referred to as the “protracted procedural history of the proceedings”, the parties came to an agreement in relation to some points as follows: 

Gigi was entitled to: 

   1.$23, 470.11 on account of accrued rent and outgoings,  

   2.$70,708 on account of painting items.  

Mr Schmidt was entitled to: 

   1.$250,000 security deposit,  

   2.$7,707.25 in cash, 

   3.$7,931.55 in stock.  

Time and cost may outweigh outcome of proceedings

This case shows that much time and money can be wasted preparing a claim, where that time and cost may outweigh the ultimate outcome of the proceedings. 

In this case, Gigi’s claim started out very high, but ultimately after a protracted procedural history, agreements made between the parties and the final judgment, it found itself in a much less favourable position.

Importance of paying rent on time

Mr Schmidt accepted that the terms of the lease entitled Gigi to terminate the lease, to take possession of the property, and to sue for damages due to his failure to pay the rent on time. 

This case highlights that it is important to be aware of the terms of a lease and to ensure that rent is paid on time in a commercial relationship.

NOTICE: This article is accurate as at the time of publication and does not constitute legal advice. Please see our legal notices page for more information. Information related to coronavirus can be outdated very quickly.
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