Leases - Commercial & Retail

Lessee’s Liability for Unauthorised Alterations to Leased Premises


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Lessee’s Liability for Unauthorised Alterations to Leased Premises

The High Court decision of Tabcorp Holdings Ltd v Bowen Investments Pty Ltd has clarified that Lessee's will face liability for alterations to leased premises without the Lessor's consent

Facts

Tabcorp Holdings Ltd (Tabcorp) was the lessee in an office building owned and leased by Bowen Investments Pty Ltd (Bowen). In 1997, Tabcorp entered into a ten year lease term with two five year options to renew. There was a usual type clause in the lease providing the Tabcorp must not make any substantial alteration to the premises without Bowen’s written consent.

Bowen had used specialised materials and taken considerable care and expense in the construction of the foyer to the leased premises. Tabcorp made a request to Bowen to make alterations to the foyer area, however consent was not given.

Bowen later discovered that the glass and stone partition, timber panelling and stone floor tiles of the foyer had been removed and what remained of the floor work was in the process of being renovated. Despite the protests of Bowen, Tabcorp completed the alterations to the foyer area.

The Decision

The High Court held that Bowen was entitled to the cost of returning the foyer to its original state and costs for the loss of rent during the rectification period.

In determining the award of damages, the Court clarified the following points:

  1. Bowen was contractually entitled to the preservation of the premises without unauthorised alterations under the covenant in the lease.
  2. The contractual principle that the purpose of damages for breach of contract is to place the aggrieved party in the same position, as far as is financially possible, as if the contract had been performed. In this case, the loss was the cost of restoring the premises to the condition it would have been in had the covenant not been breached.
  3. If lessees elect to undertake alterations to the premises in breach of a lease covenant, they run the risk that damages from the Court will be on the basis of the cost the Landlord will incur in returning the premises to its pre-alteration state.

Further, the High Court considered the following approaches may be applied to the assessment of damages for a similar case in the future:

  1. If rectification of the breach is to place at a future date there may be an estimate of the amount of money required which would then be discounted down to a present value. Investment of these damages would be required for use at the future date.
  2. The assessment of the damages as at the date of the breach of the covenant, with interest from the date of the breach.

To avoid liability, Lessee's must carefully consider their obligations under the terms of the Lease and ensure that they obtain written consent of the Lessor prior to undertaking any alterations on the leased premises.

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