Ellis’s Town House Pty Ltd v Botan Pty Ltd

1. [1]

   GLEESON JA: The applicant, Ellis’s Town House Pty Ltd (Ellis), was at all material times the owner of the Albury Town House, a motel in Albury. On 19 August 2008, the respondent, Botan Pty Ltd (Botan), took over the existing registered lease from the original lessee, Dark Australia Pty Ltd. The lease was for a term of five years expiring on 30 October 2012. On 16 May 2012, Botan exercised an option to renew the lease for a further five years. The new lease began on 31 October 2012 and will expire on 30 October 2017. There are three further options to renew, each for five years, and the maximum term is 25 years. The lease contained painting and repairing covenants by Ellis as lessor.

2. [2]

   Item 25 of Annexure A to the lease is as follows:

3. [3]

   Clause 7D of Annexure B to the lease is headed “Conditions and Repairs, Who is to repair the property”, and is as follows:

4. [4]

   There is no dispute between the parties that the painting and repairing covenants are enforceable by Botan, there being admissions on the pleadings that the transfer of the lease to Botan was registered and that Botan renewed the lease by exercise of the option.

5. [5]

   Botan brought proceedings in the District Court claiming damages from Ellis for breach of its covenants as lessor to paint the motel premises in the six calendar months prior to 30 October 2012, and to maintain the premises in a state of good condition and serviceable repair. After the commencement of the proceedings, Ellis carried out some painting and repair work. At the time of the hearing below, Botan had not incurred any expenditure in connection with the cost of painting or repairs of the motel premises.

6. [6]

   Strictly, with respect to the painting covenant, Botan sought damages for breach of the covenant contained in the original lease in its capacity as assignee of the original lessee, there being privity of estate between Ellis as lessor and Botan as assignee of the original lessee. It was not suggested that the painting covenant was unenforceable by Botan because it did not “touch and concern” the land. With respect to the repairing covenant, Botan sought damages for breach of the covenant in the renewed lease, there being both privity of estate and privity of contract in respect of the renewed lease between Ellis and Botan.

7. [7]

   The primary judge (Norton SC DCJ) held that there were breaches of the lessor’s painting and repairing covenants. Five of the breaches related to painting - the roof, the ground floor concrete, internal doors, gutters and downpipes and the underside of the bull-nosed verandah roofs; one breach related to the repair of the balustrade fixings; and the remaining five breaches related to the replacement of tiling on the ground floor verandah, rusted door jambs, steps to the spa, external doors to the first floor storeroom and plantroom and the roof flashing at the junction of the southern wall.

8. [8]

   There was a dispute at trial as to the correct method of assessment of damages. Reference was made to a number of authorities, including Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] Ch 592 (Granada Theatres); Calabar Properties Ltd v Stitcher [1984] 1 WLR 287 (Calabar Properties); and DH MB Pty Ltd v Manning Motel Pty Ltd [2014] NSWCA 396 (Manning Motel).

9. [9]

   Botan submitted that in the circumstances of the present case, the correct measure of damages was the cost of performing works not performed by Ellis and rectifying such of the work as had been performed by Ellis which did not meet a reasonable standard. Ellis submitted that Botan was not entitled to damages on the cost of cure basis because Botan had not incurred any such expenditure. Ellis pointed to the statement by Meagher JA (Barrett and Gleeson JJA agreeing) in Manning Motel (at [25]) that the ordinary measure of damages for breach of a covenant to repair is:

10. [10]

    The primary judge rejected the contention of Ellis that Botan could only recover damages calculated by reference to the costs of making good if that money had already been expended by Botan: at [27]. Her Honour concluded at [28]:

11. [11]

    Her Honour awarded damages of $54,952.09 plus pre-judgment interest: at [102].

12. [12]

    Ellis seeks leave to appeal from that judgment. Leave is required because the amount in issue is less than (and by a considerable degree) the monetary threshold of $100,000 for an appeal as of right from a judgment of the District Court: District Court Act 1973 (NSW), s 127(2)(c).

13. [13]

    Ellis does not challenge her Honour’s findings of breach or assessment of the cost of undertaking the painting and repair work. The short issue sought to be raised by ground 1 of the draft notice of appeal is whether her Honour applied the correct measure of damages for breach by Ellis as lessor of its painting and repairing covenants. That is, can a lessee recover damages on the “cost of cure” basis, even though it has not yet incurred such costs? This is the sole basis on which Ellis challenges the award of damages in the present case (ground 2).

Submissions - leave to appeal

1. [14]

   While accepting that the monetary amount involved is relatively small, Ellis contended that the proposed appeal raises an issue of principle which is of significance to both landlords and tenants. Ellis also submitted that the decision below involves an injustice, because Botan has been compensated in damages when it did not demonstrate any actual loss.

2. [15]

   In oral argument Ellis submitted that damages on a ‘cost of cure’ basis, may only be awarded where the subject matter of the contract is other than a marketable commodity. Ellis characterised the motel business occupying the leased premises as a marketable commodity and submitted that the assessment of damages for breach of a promise in a lease, such as a lessor’s covenant to repair, is susceptible to a market value analysis. As Botan had not established any ‘difference in value’ damages, Ellis submitted that the primary judge erred in awarding other than nominal damages for the established breaches of the painting and repairing covenants.

3. [16]

   Ellis further submitted (in the alternative) that Granada Theatres, to which her Honour referred, was not authority for the award of damages on a ‘cost of cure’ basis in a case, such as the present, where the painting and repair work had not been done by Botan. In addition, Elllis pointed to the absence of evidence that Botan had any intention to do such work. This was relied upon for the contention that the work was not necessary and that Botan had not suffered any loss.

4. [17]

   Botan opposed the grant of leave to appeal, pointing to the relatively small claim involved, asserting that there was no error in the primary judge’s approach to the assessment of damages and arguing that no injustice arises because Botan has, in any event, been paying rent that includes a component (said to be $15,000 per annum excluding GST over the term of the new lease) referable to the anticipated cost of carrying out the painting work that Ellis originally denied liability for and has only partially performed.

5. [18]

   Ellis objected to Botan relying upon the matter last mentioned (the component of rent said to be attributable to the lessor’s painting covenant) on the ground that Botan was seeking to run a different case or seek different damages on appeal. As will appear, this objection misunderstood the purpose for which Botan referred to this evidence as a consideration against the grant of leave to appeal.

6. [19]

   The matter proceeded as a concurrent hearing of the application for leave to appeal, and the appeal itself, if leave were granted. For the reasons that follow, leave to appeal should be refused.

Principles relevant to leave applications

1. [20]

   The question of a grant of leave is discretionary and must be determined according to well-established principles.

2. [21]

   Ordinarily, leave to appeal is granted only when the matter involves an issue of principle or question of general public importance, or where it is reasonably clear that there has been an injustice which, in the circumstances, should be addressed. That may be the case if on an application for leave to appeal something more is shown than that the primary judge was arguably wrong: Jaycar Pty Ltd v Lombardo [2011] NSWCA 284 at [46]; Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 (Be Financial) at [32]-[39]; Polo Enterprises Australia Pty Ltd v Pinctada Hotels and Resorts Pty Ltd [2015] NSWCA 397 at [45]; Coffs Harbour City Council v McLeod [2016] NSWCA 94 at [55].

3. [22]

   There are additional considerations in respect of leave applications involving relatively small amounts. One is the appropriate allocation of court resources. Another is the disproportionate costs to the parties of appeals involving small amounts. The last matter is reflected in the terms of s 60 of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act) which provides that the practice and procedure of the Court should be implemented “with the object of resolving the issues between the parties in such a way that the cost to the parties is proportionate to the importance and complexity of the subject matter in dispute”.

Leave to appeal should be refused

1. [23]

   The present application for leave involves a challenge to the assessment of damages. As will appear, the matters relied upon by Ellis in favour of a grant of leave, do not show a reasonably arguable case of error in point of law in the primary judge’s approach to the assessment of damages. In addition there are other compelling factors weighing against a grant of leave to appeal.

2. [24]

   First, the amount in issue of $54,952.09 plus interest is well short of the statutory threshold required for an appeal without leave. Although the Court was not apprised of the costs of the trial below (which took three days), it may be readily inferred that those costs were disproportionate to the amount of damages awarded to Botan. Whilst the dictates of justice must be considered and “the degree of injustice that would be suffered by the parties as a consequence of any order or direction” is one of the factors relevant to a decision on a leave application under s 58 of the Civil Procedure Act (see s 58(2)(b)(vi)), the entitlement of the parties to justice is not unconditional: Be Financial at [37]. Here, the appropriate allocation of court resources and the incurring of additional costs by the parties are both factors weighing heavily against a grant of leave.

3. [25]

   Secondly, the present case does not raise any issue of principle; what is in issue is the application of well-established principles. It is not in dispute that the ordinary principles of contract law, including those of damages for breach of contract, apply to a lease: Progressive Mailing House v Tabali (1985) 157 CLR 17 at 29; [1985] HCA 14. It is also common ground that the ‘ruling principle’ with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 at 365:

4. [26]

   The corollary of the principle in Robinson v Harman is that a plaintiff is not entitled, by an award of damages, for breach of contract, to be placed in a superior position to that which he or she would have been in had the contract been performed: The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 82; [1991] HCA 54; Tabcorp at [27] (Crennan and Bell JJ), [60] (Gageler J). However that does not mean, as Ellis seemed to suggest, that Botan had suffered no loss because it had not yet incurred any expenditure in connection with painting and repairing the leased premises.

5. [27]

   In Clark v Macourt, (at [61]), Gageler J described the “expectation interest” which is protected by an award of damages for breach of contract at common law as reflecting the ruling principle and its corollary, and continued by explaining that:

6. [28]

   The importance of the interest protected by the contractual promise was emphasised by the High Court in Tabcorp (at [13]) when observing that the entitlement of the innocent party to be placed in the same situation as if the contract had been performed does not mean “as good a financial position as if the contract had been performed”. In some cases, ‘difference in value’ damages will, in others it will not, adequately compensate the innocent party for the loss of the benefit of the bargain. The High Court highlighted the significance of the interest protected when drawing a distinction in Tabcorp (at [13]), between the measure of damages:

7. [29]

   Whilst some authorities such as Hewitt v Rowlands [1924] All ER Rep 344 describe the ordinary or prima facie measure of damages for breach of a repairing covenant as the ‘difference in value to the tenant’ between the premises in the condition in which they are in and the condition the premises would have been in if the landlord had observed the repairing covenant, what is meant by ‘difference in value to the tenant’ can have various meanings depending on the circumstances of the case, including whether the tenant remains in possession, has sub-let the property or is forced to sell his or her interest: Calabar Properties at 295C-F (Stephenson LJ) and 299C-F (Griffiths LJ).

8. [30]

   This explains why the cost of alternative accommodation is recoverable by the tenant for breach of a landlord’s repairing covenant where the premises are uninhabitable for a period until the required repairs are undertaken and the tenant later returns: see Calabar Properties and Manning Motel. That the application of the ruling principle governing the measure of damages takes account of the “expectation interest” to be protected is well explained by Griffiths LJ in Calabar Properties, at 297:

9. [31]

   Contrary to Ellis’ submission, damages for breach of the lessor’s painting and repairing covenants are not susceptible to a market value analysis in the present case. The interest to be protected by an award of damages was the lessee’s interest in the maintenance of the motel premises in a state of good condition and serviceable repair with repainting during each five-year term of the lease. The benefit of the bargain cannot be equated with a marketable commodity. Nor is it to the point, as Ellis submitted that Botan could seek to sell its leasehold interest in the motel premises. Botan has not done so.

10. [32]

    Fourthly and related to the last matter, the submissions by Ellis characterising the leased premises as a marketable commodity with the consequence that only ‘difference in value’ damages are available, misunderstands the High Court’s reasoning in Tabcorp at [13]. There, the High Court explained that the general nature of the contract, such as sale of a marketable commodity, may suggest a prima facie measure of damage. That however does not exclude, in an appropriate case, the award of damages on another basis.

11. [33]

    Fifthly, to the extent that the submissions of Ellis seem to rely upon the doctrine of efficient breach of contract that may be taken to have been rejected by the High Court in Tabcorp at [13]. There, the High Court referred with approval to the statement of Windeyer J in Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 503-504; [1967] HCA 3, rejecting the proposition that the law treats a promisor as having a right to elect either to perform his promise or to pay damages. Windeyer J referred, with approval, to a statement of Lord Erskine in Alley v Deschamps (1806) 13 Ves Jun 255; 33 ER 278 at 228 that the promisee has “a legal right to the performance of the contract”.

12. [34]

    Sixthly, the submission by Ellis that the primary judge erred in her application of the ruling principle governing the measure of damages for breach of contract at common law, overlooked relevant authority. In particular, the High Court explained in Tabcorp why damages for breach of an express negative covenant in a lease were properly awarded on a cost of cure basis.

13. [35]

    Tabcorp concerned a claim for damages by a landlord for breach of a covenant in the lease by the tenant carrying out work renovating the foyer of the premises without approval from the landlord. The trial judge held that there had been a breach of covenant. If damages were assessed on a ‘difference in value’ basis, the loss to the landlord was approximately $34,820. On the other hand, assessed on the basis of reinstating the foyer to its original condition, the landlord claimed the sum of $1,380,000 comprising $580,000 as the cost of restoring the foyer to its original condition and $800,000 for rent lost during the restoration period. Any reinstatement of the foyer by the landlord would not take place until either the end of the lease in 2012, or 2017, if the option was exercised. The trial judge in awarding damages of $34,820, accepted expert evidence to the effect that the tenant’s changes to the foyer would occasion very little diminution in the value of the building at the end of the term of the lease.

14. [36]

    On appeal, the Full Court of the Federal Court of Australia increased the award of damages to include the cost of restoring the foyer to its original condition: Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494; [2008] FCAFC 38. The majority of the Full Court (Finkelstein and Gordon JJ) held (at [13]) that the covenant in the lease that had been breached by the tenant (not to make substantial alterations to the premises without the prior written approval of the landlord) was equivalent to a repair covenant, and consequently it attracted the rule in Joyner v Weeks [1891] QB 31.

15. [37]

    The High Court decided the case on a different basis. Applying the ruling principle, the High Court held in Tabcorp (at [15]) that:

16. [38]

    The High Court’s reasoning in Tabcorp drew upon its earlier decision in Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36 (Bellgrove). As Keane J remarked in Clark v Macourt at [107], Bellgrove explained that the practical operation of the ruling principle may vary depending on the commercial context; but that the principle is always applied with the view to assuring the purchaser of the monetary value of faithful performance by the vendor of the bargain.

17. [39]

    In Bellgrove, a builder breached his contract because a house contained defective concrete and mortar. The builder contended that the measure of damages was limited to diminution in value and did not extend to costs of rectification. Rejecting that contention, Dixon CJ, Webb and Taylor JJ observed that the ordinary measure of damage is the cost of the building work which was required to achieve conformity with the building contract (at 617-618). That was subject to one ‘qualification’, namely:

18. [40]

    However, the plurality in Bellgrove did not have regard to the subjective intention of the plaintiff to use any award. The plurality said (at 620):

19. [41]

    The High Court explained in Tabcorp (at [17]) that the qualification of “unreasonableness” referred to in Bellgrove is only to apply in “fairly exceptional circumstances”, such as where the innocent party is “merely using a technical breach to secure an uncovenanted profit”, quoting from the decision of Oliver J in Radford v De Froberville [1977] 1 WLR 1262 at 1270; 1 All ER 33 at 44.

20. [42]

    It has been said that another example of unreasonableness is a situation where the cost of “proposed rectification is out of all proportion to the benefit to be obtained”: Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2006] NSWCA 361 at [82]-[89] citing South Parklands Hockey and Tennis Centre Inc v Brown Faulkiner Group Pty Ltd [2004] SASC 81 at [90]. See also Wheeler v Ecroplot [2010] NSWCA 61 (Macfarlan JA; Basten and McColl JJA agreeing) at [81].

21. [43]

    Counsel for Ellis properly acknowledged that no case relying on the qualification of “unreasonableness” had been advanced at trial. No cross-examination on this issue was directed to Botan’s witnesses and no findings were sought or obtained by Ellis that the painting and repair work was not a reasonable course for Botan as lessee to adopt. Further, it was not suggested by Ellis that Botan was using technical breaches of the lessor’s covenants to secure an uncovenanted profit. Nor was it suggested that the award of damages on a cost of cure basis was out of all proportion to the benefit to be obtained.

Conclusion

1. [44]

   Contrary to the submissions of Ellis, no issue of principle is raised by the proposed appeal. Nor does the decision below involve an injustice. Botan was contractually entitled to the maintenance of the motel premises in a state of good condition and serviceable repair with repainting during each five-year term of the lease. Application of the ‘ruling principle’ governing the measure of damages for breach of contract means that Botan is entitled to the amount of money required to put it in the position it would have been in had Ellis, as lessor, performed its painting and repair covenants under the lease. That Botan had not yet incurred this expense was no answer to its claim for damages.

2. [45]

   Although the primary judge’s attention was not drawn by the parties to either Tabcorp or Bellgrove, there was no error in her Honour’s approach to the award of damages for breach of the lessor’s painting and repairing covenants.

3. [46]

   Leave to appeal should be refused. There is no reason why costs should not follow the event. I propose the following order:

   1. (1)

      Summons seeking leave to appeal dismissed with costs.

4. [47]

   LEEMING JA: I agree with Gleeson JA that leave to appeal should be refused, and for the reasons which he gives. Without detracting from any aspect of his Honour’s reasons, I add the following, in light of the nature of some of the lessor’s submissions at trial and in this Court.

5. [48]

   It was common ground at trial and on appeal that the lessor Ellis was in breach of covenants to paint and maintain the demised premises, and that the lessee Botan had not itself incurred costs in performing the work. The quantum of those costs was determined at trial and was not disputed on appeal. The original lessee had assigned its leasehold interest to Botan by registered transfer, Botan had validly exercised an option, and it was common ground that Botan could enforce the covenants.

6. [49]

   The sole issue is one of principle. Ellis submitted that Botan was entitled only to nominal damages, rather than damages measured by the cost of performing the work promised to be undertaken by Ellis, which Botan had not incurred and might never incur. At trial, it submitted that the cost of repairs was not a recoverable loss because “the plaintiff has not suffered that loss”. In this Court, Ellis submitted that:

7. [50]

   The first reason why this submission cannot be accepted is that it reflects a theory of “efficient breach”. As Gleeson JA points out, that is not the law in Australia.

8. [51]

   The incorrectness of this theory came to a head during the hearing in Zhu v Treasurer of the State of New South Wales [2004] HCATrans 200 (15 June 2004), in the following exchange:

9. [52]

   Hence the consideration given in the judgment in Zhu v Treasurer of New South Wales (2004) 218 CLR 530; [2004] HCA 56. Paragraph [128] in the unanimous judgment of Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ reproduces the famous exchanges, some 120 years ago, between Pollock and Holmes on the latter’s view that the law of contract ultimately gave a promisor a choice: to perform the promise or else to pay damages. The joint judgment quoted with approval Windeyer J’s observation in Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 503 that:

10. [53]

    Five years later, in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13] the High Court reiterated, once again unanimously, that the efficient breach theory took no account of the existence of equitable remedies, such as specific performance and injunction, which ensure or encourage the performance of contracts rather than the payment of damages for breach.

11. [54]

    Thus, Holmes’ view of the nature of a contractual promise is incorrect as a matter of Australian law. Sometimes a party is held to a promise. Indeed, the fact that the promisee has suffered no loss may be regarded, in an otherwise appropriate case, as a proper basis for ordering specific performance (one example is a contract to pay money or transfer property to a third person: see Coulls v Bagot’s Executor & Trustee Co Ltd at 503).

12. [55]

    That is only the first reason why Ellis’ submissions cannot be accepted. There are others. Ellis sought to rely on statements of principle to the effect that damages were to be calculated by the diminution in value, rather than the “cost of cure”, because Botan’s business was a “marketable commodity”:

13. [56]

    Ellis’ submission misunderstands the role of “marketable commodity” in this area of the law, and in at least three ways. Where the contract which has been breached is a contract for sale of a marketable commodity, then the market may readily enable the calculation of the difference in market value, which may be used as the prima facie measure of damages. Even then, the flexibility of the common law was confirmed in Bellgrove v Eldridge (1954) 90 CLR 613 at 617:

14. [57]

    There may be reason in a particular case to depart from the prima facie measure of damages. This was the point made by Walsh J in Wenham v Ella (1972) 127 CLR 454 at 466:

15. [58]

    Secondly, Ellis’ covenant to paint and repair the premises was not a contract of sale, to which the prima facie measure of damages in sale of goods cases is directed.

16. [59]

    Thirdly, “a motel business that is being run on leased premises” is not a “marketable commodity” in the presently relevant sense. The question is not whether there might exist a willing but not anxious purchaser for the business. The question is whether one could go into the market and obtain a materially exact substitute for the performance which the promisor’s breach has deprived the promisee. The rationale was stated in Bellgrove in the balance of the passage reproduced above:

17. [60]

    Finally, although the issues arising in this Court are pure questions of principle, they were not raised before the primary judge. No case of injustice having been made out (in particular, it has not been contended that the proposed cost of cure was unreasonable or disproportionate), the appropriate order is that leave be refused.

18. [61]

    SIMPSON JA: I agree with Gleeson JA.