In Gigi Entertainment Pty Ltd v Schmidt  NSWCA 287 the lessee leased hotel premises situated in Lithgow, New South Wales.
The lease provided that, on the expiration or sooner determination of the lease, the lessor was entitled to take over the conduct of the hotel business from the lessee. To that end, title to the business and the right to use the hotel’s business name would vest in the lessor. The lessor was already the beneficial owner of the hotel licence.
In February 2008, with about two years and five months still to run on the lease, the lessor lawfully terminated the lease and re-entered the premises. It elected to exercise its right under the lease to conduct the hotel business on its own account. It chose not to seek a new tenant for the premises. Nor did it seek to ascertain the market rental value of the premises as at the date of termination.
After July 2010 — when, but for the termination, the lease would have expired — the lessor commenced proceedings against the lessee in the New South Wales Supreme Court for damages resulting from the early determination of the lease. The lessor claimed loss-of-bargain damages consisting of the rent it would have received from the lessee from the date of termination to the expiry date of the lease, less the profits it made from its operation of the hotel during the damages period. As it transpired, the lessor traded at a loss over the damages period.
The lessor was unsuccessful both before the trial judge and on appeal.
When a lease is terminated early, the lessor loses the benefit of the rent the lessee would have paid from the date of termination to the date the lease was due to expire. However, the lessor also gains the benefit of vacant possession of the premises and can then put the premises to some other profitable use. Mostly, this takes the form of re-leasing the premises to another tenant. If, since the start of the now-terminated lease, the market has risen, the lessor may well profit from the termination. On the other hand, if the market has fallen, the lessor will likely suffer loss.
Provided one of the preconditions to the recovery of loss-of-bargain damages set out in Shevill v The Builders Licensing Board (1982) 149 CLR 620; (1982) ANZ ConvR ¶589 exists, the lessor has a prima facie entitlement to damages resulting from the termination. And, in general, those damages consist of the difference between the unpaid rent from the date of termination to the date the lease was due to expire, less the rent the lessor has received, or could receive, following a re-letting of the premises to another tenant.
This decision affirms and applies that general rule. In particular, it rejects the lessor’s attempt to recover damages based, not on the rental value of the premises, but on its operation of the hotel business following termination. Without wanting to go so far as to say that a lessor’s damages could never be assessed on that basis, the Court of Appeal made the obvious point that, if damages were so assessed, the amount of damages the lessee would have to pay would depend on the lessor’s business skills. If the lessor ran the business well, the damages would be small or even non-existent. But if the lessor ran the business badly and made losses, the lessee would have to pay more damages. As Sackville AJA indicated, that would be an incongruous result. If what the lessor has lost is the benefit of the lessee’s promise to pay rent, then compensation for the loss should probably be conceived and calculated in terms of rent and not according to some different notion, such as the profitability or otherwise of the lessor’s conduct of the business.
This case has been reported in full in CCH’s Lang’s Commercial Leasing.