Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Gigi Entertainment Pty Ltd v Schmidt [2013] NSWCA 287
• Hearing dates: 8 July 2013
• Decision date: 05 September 2013
• Before: Beazley P at [1]; Ward JA at [2]; Sackville AJA at [99]

Decision

1. Appeal dismissed with costs.

2. Order 1 of the orders made by the Registrar of the Court of Appeal on 16 May 2013 be vacated.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: LANDLORD AND TENANT - measure for calculation of loss of bargain damages on termination of lease for breach of an essential term - where owner takes possession and carries on business itself as entitled to do under the lease; EVIDENCE - whether expert evidence rejected by trial judge on the grounds of relevance should have been admitted as going to potential basis for calculation of loss of bargain damages
• Legislation Cited: Liquor Act 2007
• Cases Cited: Baker v The Queen [1975] 1 AC 774; Buchanan v Byrnes [1906] HCA 21; (1906) 3 CLR 704; Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 133; (2006) 65 NSWLR 648; Chief Executive Officer of Customs v Tony Longo Pty Limited [2001] NSWCA 147; (2001) 52 NSWLR 458; CSR Limited v Eddy [2005] HCA 64; (2005) 226 CLR 1; Eleftheriou v Water Board [1991] NSWCA 91; Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89; Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10, (2008) 234 CLR 237; Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351; Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd [1906] HCA 87; (1906) 4 CLR 672; Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209; (2007) 35 WAR 254; Markisic v Commonwealth of Australia [2007] NSWCA 92; (2007) 69 NSWLR 737; McGlone v Kalgold [2011] QCA 215; Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17; Suttor v Gundowda [1950] HCA 35; (1950) 81 CLR 418; Willis v Commonwealth [1946] HCA 22; (1946) 73 CLR 105
• Texts Cited: P Butt, The Standard Contract for Sale of Land in New South Wales (1985), at 665; McGregor on Damages 17th ed, 2003, Sweet & Maxwell, London
• Category: Principal judgment
• Parties: Gigi Entertainment Pty Ltd (Appellant); Michael Karl Schmidt (Respondent)
• Representation: Counsel: D Pritchard SC with J S Emmett (Appellant); S Robertson with Ms F Ashworth (Respondent); Solicitors: Holman Webb Lawyers (Appellant); McAuley Hawach Lawyers (Respondent)
• File Number(s): CA 13/124310

Decision under appeal

• Jurisdiction: 9111
• Citation: Gigi Entertainment Pty Ltd v Schmidt [2012] NSWSC 1423
• Date of Decision: 2012-11-23 00:00:00
• Before: Schmidt J
• File Number(s): SC 08/289478

Judgment

1 BEAZLEY P: I agree with the reasons of Ward JA and the Orders proposed by her Honour. I also agree with the additional observations of Sackville AJA.

2 WARD JA: This is an appeal from a decision by Schmidt J in proceedings brought by Gigi Entertainment Pty Ltd, the owner of a hotel in Lithgow, for damages for loss of bargain, and other moneys, following its termination of the lease then held by Mr Schmidt in respect of the premises. The lease was terminated on the basis of rental arrears. The rent had been in arrears for only a short time but it was conceded by Mr Schmidt that Gigi was contractually entitled in those circumstances to terminate the lease and retake possession of the premises, as it did by way of re-entry in February 2008. There was no application for relief against forfeiture of the lease, although there was a cross-claim by Mr Schmidt seeking, among other things, relief against forfeiture of a security deposit that had been retained by Gigi.

3 Following termination of the lease, Gigi carried on the hotel business from the premises. There is no evidence that it made any attempt, or had any intention, to re-lease the premises. At the highest, there was evidence of two conversations, around the time of termination of the lease, by one of Gigi's directors with property agents as to a then prospective purchaser of the leasehold interest.

4 Gigi's claim for loss of bargain damages was calculated by reference to the amount of rent and outgoings that, but for early termination of the lease, would have been payable under the lease for the balance of its term, i.e., to 3 July 2010, less an amount representing the profits made by Gigi from carrying on the hotel business in that period. Gigi also claimed other amounts by way of alleged breach of obligations in the lease in respect of the maintenance of the premises but no challenge to her Honour's findings in relation to those claims was pressed on the appeal.

5 The nub of the appeal lies in the rejection by her Honour of expert accounting evidence sought to be relied upon by Gigi at the hearing to establish the profits that had been made by Gigi during the balance of the original term of the lease. Her Honour rejected that evidence, namely the report of an accountant, Mr Robert Bell, at the outset of the hearing. Her Honour did so on the basis that Mr Bell's evidence had no relevance to the issues for determination at the hearing (at [63]). Her Honour on the same basis rejected leave to file an updating affidavit of Mr Bell, correcting his earlier arithmetical calculations to take into account the incorrect inclusion in his first report of some pre-February 2008 expenses and an arithmetical error (referred to at Blue 376 at [33]).

6 In concluding that Mr Bell's evidence was not relevant to any fact in issue, her Honour accepted the proposition put by Counsel for Mr Schmidt (Mr S Robertson) that the correct measure of loss of bargain damages was the rent and outgoings for the balance of the lease term, less such amount as was capable of being earnt by re-letting the premises (i.e., the market rental value for the premises at the time of termination of the lease) (at [57]).

7 Gigi contends that the expert accounting evidence should have been admitted, at the very least as being relevant to a potential basis on which damages might have been awarded, and seeks an order for the remission of the matter for re-hearing (Orange 256J).

Lease

8 Mr Schmidt became the lessee of the premises in January 2007 on the assignment to him of the registered lease by the then lessee (Blue 136). The lease had commenced on 4 July 2005 and was for an initial term of five years expiring on 3 July 2010, with three options for renewal (Blue 61). Gigi subsequently acquired the freehold reversion of the premises pursuant to a contract for sale entered into in November 2007 (Blue 152). It also acquired the hotel licence and certain gaming entitlements associated with the hotel premises (licence information search at Blue 302-319).

9 Incorporated into the registered lease, as amended in the Annexure to the lease, were the terms of a registered memorandum of lease (Blue 86), the relevant provisions of which are summarised below.

10 Clause 10(a) of the memorandum of lease, under the heading "DEFAULT, TERMINATION ETC" (Blue 101T), gave the lessor the right to re-enter and retake possession, without prior demand or notice, if the rent or any part of it was at any time unpaid after becoming owing (Blue 101T-102R). This sub-clause further provided that, upon the exercise of that right, the lease and the term created thereunder would cease and determine without releasing the lessee from the obligation to pay rent accrued up to that time and without prejudice to any right or action of the lessor in relation to any breach of the lease.

11 Pursuant to clause 10(d) of the memorandum of lease, the lessee expressly acknowledged that particular obligations were essential terms (Blue 103K) of the lease, failure to comply with which would constitute "a fundamental breach which, in addition to and without prejudice to all other rights and remedies of the Lessor hereunder, shall entitle the Lessor to determine this Lease and to sue for and recover damages from the Lessee" (Blue 103L-M). The stipulated fundamental terms included the obligations to pay rent and other moneys under clause 3(a) of the lease. Commonly referred to as an "anti-Shevill clause", clause 10(d) in its terms permitted the lessor, on termination of the lease for failure of the lessee punctually to pay the rent due under the lease, to claim damages at common law for a fundamental breach of the lease.

12 Clause 4(a) of the memorandum of lease (Blue 90K), under the heading "USE OF DEMISED PREMISES BY LESSEE" prohibited the use of the premises for "any purpose other than as a hotel duly licensed for the sale and consumption thereof of spirits and permitted liquors by retail and for the purpose of providing accommodation to the public".

13 Clause 13 of the memorandum of lease (Blue 105L-107V), as amended by clause 3(h) of the Annexure (Blue 68I), commenced by containing an acknowledgment by the lessee that the lessor was "the beneficial owner of the Hotelier's Licence, gaming entitlements (if any) and approved amusement devices upon the Licensed Premises" and, further, that the lessee had no entitlement to make any application to remove those from the licensed premises.

14 Clause 13 went on to set out a number of covenants on the part of the lessee in relation to the maintenance of the liquor licence. Pursuant to clause 13(vii) (Blue 106M-O), the lessee covenanted, on the expiration or sooner determination of the lease, to procure its appointed manager and/or licensee to transfer and assign the licence of the leased premises to the lessor "or to such person as the Lessor might appoint for that purpose".

15 Clause 14(a)(i) of the memorandum of lease (Blue 108F) provided that, upon the expiration or sooner determination of the lease, the lessee was deemed to have "retransferred" to the lessor the business name and that thereafter the lessor would be entitled to conduct the hotel business under that name. The lessee was obliged in those circumstances to do all things necessary to notify and register the change in the ownership of the business name. Clause 14(a)(iii) (Blue 108M-O) provided, again upon the expiration or sooner determination of the lease, that the lessor would be entitled to conduct the hotel business and the whole of the right title and interest therein would be vested solely in the lessor.

Pleaded claim

16 The protracted procedural history of the proceedings was outlined by her Honour from [5]-[14] of her Honour's reasons. By the time of the hearing, Gig's claims were as pleaded in its Second Further Amended Statement of Claim (Red 1-13). Paragraphs [12B] and [12C] (Red 8S-9Q) of that pleading (as set out below without the underlining in the original) contained the claims for loss and damages consequent upon the termination of the lease. They were, relevantly, as follows:

12B. Further and in the alternative, the plaintiff has suffered loss and damage in consequence of the matters pleaded and particularised above and claims damages for:

(a) Rent and outgoings due to the plaintiff from the defendant under the terms of the Lease;

(b) The reasonable costs of the repair or replacement of plant and equipment;

(c) The reasonable costs for the repair, maintenance or replacement of the premises so as to place the premises in good and substantial order and condition;

(d) The reasonable costs of carrying out of repairs and maintenance of defects identified in the reports of Gillbanks Building dated 17 May 2005 and Wass Pest Control dated 17 May 2005.

...

12C. Further and in the alternative, as a consequence of the matters pleaded and particularised above, the Plaintiff has lost the benefit of the Lease as a consequence of a breach or breaches by the Defendant and has therefore suffered loss and damage.

Particulars

(a) Amount claimed by the plaintiff is $321,334 being rent from 19 February 2008 to 3 July 2010 of $20,166.66 (incl GST) per month being $571,590 less the profits from the use of the premises by the plaintiff between the date of termination and the date on which the lease would otherwise have expired calculated at $250,256 ...

17 Mr Schmidt admitted liability for certain of the claimed amounts but denied liability for the damages claimed in [12C] for loss of benefit of the lease. He denied that Gigi had lost the benefit of the lease as a consequence of any breach or breaches of the lease by him and denied that Gigi had suffered the loss or damage as claimed or otherwise. At [12C(d)] of the Third Further Amended Defence (Red 14-22), Mr Schmidt pleaded as follows (at Red 20C-T):

(d) without limiting subparagraphs (a) to (c) of this paragraph, [Mr Schmidt] says that, if (which is denied) the Lease was terminated in the manner alleged (if at all) and if (which is denied) the Plaintiff is prima facie entitled to damages for the "lost ... benefit of the Lease":

(i) the correct measure of damages for any "lost ... benefit of the Lease" is:

A. the rent that Defendant would have been liable to pay the Plaintiff had the Lease not been terminated; minus

B. the rent capable of being earned by a re-letting of the demised premises;

[see, eg, Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at [55]-[56]]

(ii) the rent capable of being earned by a re-letting of the demised premises was the same or more than the amount of rent that the Defendant would have been liable to pay the Plaintiff had the Lease not been terminated;

(iii) in the premises:

A. the Plaintiff has not suffered any loss or damage as a result of any "lost ... benefit of the Lease"; and

B. the Plaintiff is not entitled to the amount claimed or any amount on account of any "lost ... benefit of the Lease"; (emphasis as per original)

18 Mr Schmidt cross-claimed against Gigi, seeking, among other things, repayment of a security deposit of $250,000 (Red 23W) and damages (Red 24B-D) for breach of the lease or alternatively for trespass or conversion and damages for conversion of the business cash and stock in the premises at the time of re-entry by Gigi.

Expert accounting evidence

19 At the hearing, Gigi sought to rely upon two reports, dated 8 September 2011 (Blue 275-296) and 6 July 2012 (Blue 367-385) respectively, prepared by Mr Bell. The first had been served in accordance with directions given during the course of the proceedings and was the subject of an objection at the hearing on the basis of relevance (Black 90R). The second had been served late and was the subject of a leave application at the commencement of the hearing. Her Honour indicated that, had the first report been admitted, the lateness in service of the second report would not have led to its exclusion. Both reports were rejected on the ground of relevance.

20 It does not appear to be disputed that, in his reports, Mr Bell had done no more than to carry out an arithmetical exercise based on certain factual assumptions he was instructed to make. He calculated the rent and outgoings that would have become payable had the lease not been terminated, as to which there is no dispute. He also calculated the "profits" derived by Gigi from its operation of the hotel after 19 February 2008.

21 Gigi had in fact made trading losses over the period. The methodology by which Mr Bell calculated the "profits" to be deducted from the foregone rent and outgoings was to take the actual trading loss over the period (of $238,000) and to adjust that amount by adding back certain amounts that the landlord accepted were not properly attributable to the loss of bargain claim against the tenant (namely, bank fees and charges, hotel takeover costs, legal fees in relation to the conduct of the proceedings, interest, and an "internal business" rent charge referable to the interest payable on finance obtained by the landlord), as itemised at Blue 284. The internal rent charge between associated business companies appears in the calculations at Blue 296J. The adjusted profits were initially calculated by Mr Bell at $302,868 but were re-calculated in his later report at $250,256, thus increasing the loss of bargain damages claim by about $50,000.

22 Senior Counsel appearing for Gigi on the appeal, Mr Pritchard SC, accepted that Gigi's loss of bargain claim assumed a nil rental value for the property, in the sense that it assumed that the lessor had charged itself no rent (T 8.2, 7.13). On Mr Bell's calculations, the trading losses were notionally reduced by adding back the amount shown in Gigi's books as the internal "rent" charge for the premises. The trading losses were thus not increased by any component referable to rent for the premises.

23 At the hearing before the primary judge, Mr Robertson submitted that Mr Bell's evidence was not probative of the question of what loss, if any, was suffered by Gigi by reason of the termination of the lease because that evidence failed to take account of the whole of the benefits accruing to Gigi by reason of its decision to terminate the lease and re-enter the hotel (principally, the benefit of having a right to possession of the hotel) and was instead directed to the different question as to what accounting profit Gigi had made from operating the hotel business.

24 Her Honour also rejected (Black 90) lay evidence that Gigi sought leave to rely upon at the commencement of the hearing, namely two affidavits of Mr George Gerzilis, sworn on 20 June 2012 (Blue 297-325) and 28 June 2012 (Blue 326-366), respectively. Mr Gerzilis was one of the directors of Gigi. That evidence went to the factual basis for the assumptions on which Mr Bell's report was based. It is not contended on appeal that this evidence should have been admitted independently of Mr Bell's reports. Mr Gerzilis had, however, sworn other affidavits, the content of which was, in part, admitted in the proceedings.

Primary judge's decision

25 By the time of the hearing, the parties had agreed as to various of the amounts claimed in the respective Claim and Cross-Claim. What remained in dispute, relevantly, included the loss of bargain damages claim. At [83], her Honour held that this claim had not been established. Her Honour noted that there had been no hint or suggestion of any intention or attempt by Gigi to find another tenant for the premises ([82]) and refused to entertain a claim, advanced by Gigi for the first time in submissions in reply at the close of the hearing, for 3 months' rent by way of loss of bargain damages that had been put on the basis that it would be "almost impossible to find someone immediately [to re-lease the premises]".

26 Her Honour noted, at [81], that the loss of bargain claim had been resolved by her ruling (referred to at [63]) that the report of Gigi's accounting expert, Mr Bell, was inadmissible and the refusal of an adjournment application so that fresh evidence could be called from a real estate agent (Mr Wood) as to the value of Gigi's occupation of the property. Her Honour noted that those rulings had the effect that there was no evidence as to the loss, if any, that Gigi had suffered as a result of the early termination of the lease.

27 Earlier in the primary judge's reasons (at [56]), her Honour had noted that it was not in issue that Gigi had taken reasonable steps to mitigate its loss by occupying the premises in order that it could itself operate the hotel. At [57], her Honour went on to say:

After Gigi brought the lease to an end, by changing the locks, it obtained vacant possession. It then mitigated its damages, by itself occupying the property for the balance of the term of the terminated lease, operating the hotel itself, rather than seeking a new tenant. It was entitled so to mitigate its damages, but having done so, it was not also entitled to recover damages from Mr Schmidt, calculated without regard to what the property could have been rented for to another tenant, given the then state of the market.

28 Her Honour considered that some light was cast on the value of Gigi's occupation of the hotel by the rent that Mr Schmidt had agreed to pay under the lease but that this could also have been established by evidence as to the rent that someone else was prepared to pay ([58]). At [61] her Honour noted that on Gigi's approach its damages would increase the more unprofitable its operation of the hotel was. At [62], her Honour said:

Gigi's approach paid no regard to a relevant consideration to its claim for loss of bargain damages, namely the value of its occupation of the property, which must of necessity be assessed by reference to what the property could have been rented for in the marketplace. Instead it rested on an irrelevant consideration, namely its ability, or success, in operating the hotel business it chose to conduct there. That did not depend on what rent the property could have commanded in the marketplace at the time, but other matters, such as Gigi's business acumen and operational skills, or lack of them, as well as the impact of other extraneous matters, on the successful operation of the business.

29 Her Honour then explained her ruling as to the rejection of Mr Bell's reports, at [63], as follows:

In the result, it had to be accepted that Mr Bell's reports were inadmissible, being irrelevant to any fact in issue in the proceedings. Gigi made a commercial decision to occupy the property itself in order to operate the hotel, thereby satisfying its obligation to mitigate its damages. Its success in that operation during the period the lease would have run, had it not been terminated by the lockout, is not a basis upon which any damages flowing from its termination of Mr Schmidt's lease, when he fell two weeks in arrears in payment of his rent, could be assessed.

30 Judgment was given in favour of Mr Schmidt in a net amount of $164,239.90 (exclusive of GST) having regard to the amount awarded in his favour on the cross-claim and the amount awarded to Gigi on its claim, the latter not including any amount for loss of bargain damages. Execution of the judgment was stayed pending the appeal. Gigi provided security for the judgment sum.

Appeal

31 At the outset of the appeal, as had earlier been notified to Mr Schmidt, Gigi indicated that it did not press two of the grounds of the appeal (grounds 4 and 5) (AT 1.39). The grounds ultimately pressed in Gigi's notice of appeal filed on 22 April 2013 were thus limited to the following:

1. Her Honour erred by failing to find that the Plaintiff's loss of bargain damages was the difference between the profit made by the Plaintiff in the period 19 February 2008 and 3 July 2010 and the amount of net rent and outgoings payable by the Lessee during this period being a sum of $321,334.

2. Her Honour erred in finding that the relevant measure of loss of bargain damages was a comparison of the lease rent and the value of [sic] to the lessor of its occupation of the property assessed by reference to what the property could have been rented for in the marketplace (paragraph 62).

3. Her Honour erred in finding that the reports of Mr Bell dated 8 September 2011 and 6 July 2012 were not relevant to any fact in issue in the proceedings (paragraph 63).

...

6. Her Honour erred in failing to have regard to the evidence at paragraphs 48, 49 and 50 of the affidavit of George Gerzilis sworn 13 August 2011 in making findings that the loss of bargain damages were of necessity to be assessed by reference to the methodology in paragraph 62. [Those paragraphs deposed to a conversation by a director of Gigi, Mr Gerzilis, with a property agent as to the position of a potential purchaser of the property and as to Mr Gerzilis' lack of awareness of any other party interested in the lease or the hotel.]

32 Gigi maintains that her Honour erred in holding that loss of bargain damages were to be measured by reference to a comparison of the lease rent on the one hand and the value to Gigi of its occupation of the property, assessed by reference to what the property could have been rented for in the marketplace, on the other (Orange 16O-Q). Gigi submits that its damages should have been assessed as the difference between the (adjusted) profit it made in the period from 19 February 2008 to 3 July 2010 and the amount of net rent and outgoings that would have been payable by Mr Schmidt during this period (Orange 18H-J).

Notice of Contention

33 Leave was given during the hearing of the appeal for the filing by Mr Schmidt of a notice of contention, a draft of which had earlier been served on Gigi. The notice of contention in effect seeks to affirm her Honour's decision, if not on the grounds relied on by the primary judge, on the grounds contended for by Mr Schmidt at the hearing before her Honour, namely:

(a) in assessing loss of bargain damages associated with a breach and termination of a lease, a court must have regard to both the detriments and the benefits which accrue to the landlord on termination and re-entry;

(b) the benefits which accrue to a landlord on termination of a lease and re-entry include the right to vacant possession of the re-entered property;

(c) in the premises of subparagraphs (a) and (b) above, in order to prove that it relevantly suffered loss recoverable as loss of bargain damages, it was incumbent on the Appellant to demonstrate that it suffered loss net of the benefit of recovering vacant possession of the re-entered property (cf ground 2 of the notice of appeal herein);

(d) the evidence that the Appellant proposed to lead at trial with respect to loss of bargain damages (including the reports of Mr Bell dated 8 September 2011 and 6 July 2012 referred to in ground 3 of the notice of appeal herein) was not (whether considered alone or considered in conjunction with other evidence which was admitted or proposed to be admitted) probative of the question of whether the Appellant had suffered any loss net of the benefit of recovering vacant possession of the re-entered property;

(e) in the premises of subparagraphs (c) and (d) above, the evidence of Mr Bell was not relevant to any fact in issue in the proceedings and was therefore correctly held to be inadmissible (cf ground 3 of the notice of appeal) and was correctly not taken into account in determining the loss of bargain damages (if any) to which the Appellant was entitled (cf ground 1 of the notice of appeal herein).

Grounds 1 and 2 - proper measure of loss of bargain damages

34 Grounds 1 and 2 of the notice of appeal, and (a)-(c) of the notice of contention, turn on the proper measure of damages to be applied on Gigi's claim for loss of bargain damages.

35 It is accepted by both parties that, in accordance with the principles outlined in Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, ordinary contractual principles apply in the calculation of damages for breach of lease and that damages are ordinarily to be assessed at the date of termination of the lease, though evidence of subsequent events may be relevant to the value of the lost bargain or the question whether the lessor has mitigated its damages (Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351).

36 Both parties accept that, on termination of the lease, not only are the obligations under the lease discharged but also the landlord obtains the benefit of possession of the premises. The parties differ, however, on the question as to how that benefit is to be taken into account in assessing loss of bargain damages; i.e., as to what is the value to the landlord of the right to occupy or re-lease the premises on the early termination of the lease.

37 Mr Pritchard accepts that the ordinary starting position for the calculation of loss of bargain damages, where a lease has been terminated for repudiation or fundamental breach, is the difference between the rent under the lease and the rent at market value at the time of termination (T 10.5). However, he contends (and Gigi's appeal turns on this contention) that, where the lease expressly contemplates that the lessor will take over the business of the hotel on the termination of the lease, then the lessor's loss as a consequence of the early termination of the lease is appropriately measured by reference to foregone rent less the profits made by the lessor's use of the land during the balance of the term of the lease.

38 Thus, while Mr Pritchard accepts that, on termination of the lease, Gigi obtained the benefit of the right of occupation (T 12.17) he submits that where it acted foreseeably and reasonably, in accordance with the terms of the lease, in remaining in possession of the premises and conducting the hotel business, its damages are the difference between the rent and the profits it reasonably obtained by so doing (T 12.41). In that regard, reliance is placed by Mr Pritchard on the concession by the lessee that Gigi had not acted unreasonably in going into possession and operating the business rather than re-leasing the premises (T 12.48).

39 The position taken for the landlord in effect measures the value of immediate possession of the premises by the landlord's use of the premises; the position taken for the tenant is that the value is to be objectively assessed by reference to the market rent that the landlord could have obtained had it re-leased the premises.

40 Each of the parties placed weight on a particular authority or line of authority to support its position: in the case of Gigi, reliance was placed on the decision of the Court of Appeal of the Supreme Court in Western Australia in Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209, (2007) 35 WAR 254 and the line of authority substantially based on what was said by O'Connor J in Buchanan v Byrnes [1906] HCA 21; (1906) 3 CLR 704 at 723; in the case of Mr Schmidt, reliance was placed on the High Court decision in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10, (2008) 234 CLR 237.

Luxer Holdings

41 As noted above, the primary authority relied upon by Gigi was that of Luxer Holdings. There, the Court considered the measure of loss of bargain damages recoverable by a lessor of commercial office premises. The lessor had re-entered the premises and terminated the lease for failure of the lessee to comply with a notice requiring it to rectify defaults in relation to payment of rent. The guarantor of the lessee's obligations under the lease, on whom demand for payment of the arrears of rent and other moneys had been made, had made offers to lease part or the whole of the premises. Those offers were not accepted. There was a substantial delay in the re-leasing of the premises and, ultimately, the lessor was only successful in re-letting part of the premises for the balance of what would otherwise have been the term of the lease.

42 On appeal, it was contended, unsuccessfully, that the trial judge had erred in failing to hold that the applicable measure of damages was the difference between the contract value of the subject lease less the rental value of the property retained at the date of the breach, and in failing to hold that the lessor had failed to mitigate its damages.

43 Buss JA, with whom Wheeler JA agreed, considered the statement of principle as to the measure of damages payable by a lessee on repudiation of a lease as set out in McGregor on Damages (17th ed, 2003) at [23-038]), namely that:

Where the lessee refuses to proceed with the contract the lessor may claim specific performance, or treat the contract as discharged, or sue for damages. If he pursues his remedy in damages the normal measure is represented by the contractual rent reserved by the lease less the rental value of the premises at the time of breach. This was applied in Marshall v Mackintosh (1898) 78 LT 750, where the claimant had relet the premises at a lower rent, which was all they would now command, and damages were assessed on the basis of the difference between the contractual rent under the broken agreement and the new rent. If, however, the claimant has succeeded in re-letting at a higher rent than the contractual rent because of market improvements, then he will only be entitled to nominal damages: this was the position in Oldershaw v Holt (1840) 12 A & E 589.

44 His Honour considered that the expression "the rental value of the premises at the time of breach" in the above passage should be understood as referring, relevantly, to "the amount which the lessor has derived, or is likely to derive, as profits from the use of the land between the date of termination and the date on which the lease would otherwise have expired (by re-letting the whole or part of the premises or otherwise)". His Honour noted that the statement at [23-038] was in the context of a discussion as to the normal measure of a lessor's damages where the lessee had failed to accept, or delayed in accepting, a lease. His Honour further noted that no reference had been made by the author in that context to authorities such as Progressive Mailing House, Buchanan v Byrnes, Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd [1906] HCA 87; (1906) 4 CLR 672 or Willis v Commonwealth [1946] HCA 22; (1946) 73 CLR 105.

45 At [40], his Honour concluded that, where the trial of the lessor's action against the lessee, for loss of bargain damages consequent upon the termination of the lease for breach of an essential term or repudiation, occurs after the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoings that would otherwise have been payable after the date of termination, less any amount the lessor has obtained as profits from the use of the premises between the date of termination and the date on which the lease would otherwise have expired, whether by re-letting the whole or part of the premises or otherwise. His Honour noted that a further deduction would be required if the lessor has failed to mitigate its damage.

46 His Honour distinguished cases where it had been said that the normal measure of loss of bargain damages on termination of a contract for the sale of land, in consequence of the other party's breach, was the difference, if any, between the contract price and the market value of the property in question (such as Castle Constructions Pty Ltd v Fekala Pty Ltd 65 NSWLR 648). His Honour did so on the basis that there was a difference in the nature of the assessment of damages on termination of a lease agreement for repudiation or breach of an essential term, in that the focus was then upon the lessor's "loss of profits from the use of the premises over the balance of the agreed term".

47 EM Heenan AJA, concurring in the result, approached the issue somewhat differently. His Honour considered that whether loss of bargain damages should be assessed on the basis of the information available at the date of termination would depend upon the circumstances of the particular case ([164]). His Honour had accepted (at [146]) that the re-taking of possession of the premises by the lessor, on the early termination of the lease due to default, put the lessor in a position where it enjoyed vacant possession of the premises much sooner than if the lease had run its course, but went on to add that in the instant case there was no suggestion that the lessor's interest had been enhanced by having vacant possession.

48 His Honour expressly contemplated that, in a different case, the benefit obtained by having early vacant possession of the premises (and hence the capacity to use or re-let the premises immediately) might possibly be a factor in the assessment of compensation, giving as an example of such a case where the defaulting lessee had been the sole tenant of premises "for which there was a ready market demand, not just as leasehold but as freehold". His Honour went on to say that:

In a climate where demand for such leased premises were strong and higher rents than those fixed by the lease were obtainable, these would obviously be factors which could potentially have the effect of diminishing the damages to vanishing point. The point of this case, however, was that there was no evidence to suggest any such benefits, but, rather, there was little or no demand for the premises.

49 It is of relevance to note that in Luxer Holdings, unlike in the present case, the lessor had led evidence to the effect that, after the lessor had regained vacant possession of the premises, it had instructed its agent to obtain a substitute tenant or tenants and that steps were taken to that end but with little success. EM Heenan AJA said (at [158]):

Assuming, for the moment, that the efforts to obtain a substitute tenant were genuine and reasonable, the limited success which resulted is itself evidence of the slight rental value of the premises from the termination of the lease and for the following four and a half years. In the absence of evidence to the contrary, this justified a finding that the remaining rental value was no greater than the aggregate of the rent received from the new tenant for part of the demised premises for part of the remaining term. Had Luxer adduced evidence from a valuer, or other sources, that the remaining rental value of the premises was higher, then there would have been an issue of fact for the learned trial judge to resolve as to what the correct remaining rental value of the premises was. However, in the absence of that evidence, I see no error in the learned trial judge accepting, as a basis for his finding, the inference that the remaining rental value was no greater than the aggregate of the rents or the other moneys actually received. This does not amount to any reversal of the onus of proof in relation to damages, nor does it cast upon a defendant an obligation to supply an ingredient of proof missing from its opponent's case. It is no more than the recognition, in the present case, that the only evidence bearing on the value of the amount of the remaining rental value of the premises was the evidence from Glentham as to what was actually received. (my emphasis)

50 One of the authorities taken into account in Luxer Holdings was Buchanan v Byrnes. There a lessee had abandoned its lease of licensed hotel premises and the landlord, having gone into possession, recovered damages by reference to the difference between the lease rent and the profit made by it while in possession. Relevantly, the landlord had tried to re-let the premises for nearly 12 months. O'Connor J (at p 723) said that:

[the landlord's] damages would be any expense that he had been put to in having the place on his hands until let to another tenant. Those expenses would include his loss in carrying on the business during that period. If he made any profit in carrying on the business, it would have to come off his claim against the defendant. (my emphasis)

51 Griffith CJ (at p 715) said that:

[t]he natural damage is the loss likely to be sustained by the plaintiff during the period for which the covenant ought to be kept; just as in the case of a contract to engage a servant for a term of years, paying him monthly wages. If the contract is unequivocally broken by the employer, the servant can bring an action at once. He cannot, of course, recover anything in the form of wages; he recovers damages, which are assessed usually upon the basis of the wages that he would have received; but he must on the other hand give credit, and the jury must give the employer credit, for whatever the servant might reasonably be expected to have earned during the period for which the contract would have been in existence. Prima facie, the damages, therefore, would be the value of the term to the lessor, that is, the difference between the benefit which he would have derived from the premises being kept as a going hotel for 15 years at the agreed rent, being kept in repair, and so on, and the value of the premises as they were thrown on his hands. (my emphasis)

52 In Lamson Store Service v Russell Wilkins & Sons Ltd (at p 684), Griffith CJ returned to this issue and said:

In the ordinary case of a demise for a term of years with an express covenant to pay the rent, if the lessee unequivocally repudiates the lease and abandons the land, the lessor may at his option bring an immediate action for breach of covenant, in which he will be entitled to recover the full amount of the agreed rent for the whole term, less such sum as a jury may think he is likely to derive as profits from the use of the land during the residue of the term: Buchanan v. Byrnes. This is the ordinary rule of damages. (my emphasis)

Gumland Property Holdings

53 The primary authority relied upon by Mr Schmidt (to which express reference was made in his defence) was Gumland Property Holdings. In that case, the premises in question were warehouse premises that had been sub-leased with the consent of the head lessor. Following the expiry of the term of the initial sub-lease, the sub-lessee remained in possession of the premises. The head lease was amended to include a covenant in respect of the payment of rent by the sub-lessee. The head lessor terminated the head lease for non-payment of rent and sued the head lessee and its guarantors for, inter alia, loss of bargain damages for the remainder of the term of the head lease.

54 A number of issues were raised in the proceedings, including as to the proper construction of the head lease. It was contended that the failure to pay rent was not necessarily repudiatory so as to justify the recovery of loss of bargain damages (notwithstanding express terms of the lease to that effect). In particular, it was contended that, whatever the express terms of the lease said, they must be ignored or read down to preclude recovery of loss of bargain damages for breach of a term that was not in truth essential, unless the breach amounted to repudiation or fundamental breach (see [49] of the reasons). It was further put that the landlord could not both regain possession and recover damages for unpaid future rent which would only have been received if possession had not been regained (the double recovery argument).

55 The High Court (Gleeson CJ, Kirby, Heydon, Crennan and Kiefel JJ), having rejected the lessee's argument when considered as a causation argument, went on to consider the double recovery argument and said (at [55]-[56]):

But why not? It is not the case that the appellant in this case by its conduct in terminating and suing for loss of bargain damages put itself in a position better than it could have been in if it had kept the Lease on foot and sued from time to time for arrears of rent as they piled up. The appellant could not unjustly advantage itself in that way. Clause 7.8 echoed the general law in obliging the Lessor to take reasonable steps to mitigate loss. The Lessor could not have got both damages (namely, the present value of the unpaid rent from the time of termination until the expiry of the Lease) and in addition any rent capable of being earned by a re-letting of the Demised Premises. The Lessor was only entitled to obtain, as damages, the present value of any difference between the rent not paid by the Lessee and the rent received or to be received on re-letting. That is all that the trial judge allowed.

To some extent the Lessee's argument rested on an idea of repugnancy - that there was a repugnancy between landlords having possession of property, but also being given a monetary equivalent for the rent they would have got had they not taken possession of the property and instead continued to allow it to be leased. But there is no true repugnancy. There can be no double recovery by landlords. If landlords obtain possession, they can only recover loss of bargain damages if they have tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease. The monetary equivalent of what they would have got if they had not taken possession of the property reflects the fact that they cannot obtain tenants, or cannot obtain tenants who promise to pay as much as the defaulting tenants promised. (my emphasis)

56 At [64], their Honours, having said that the difficulty in the lessee's submissions was that they entailed "a sharp distinction between actions for damages on termination for breach of an express term and actions for damages on termination for repudiation", stated:

The need for a landlord to recover loss of bargain damages from a tenant only arises when the market is falling, for if the market is static or rising, the landlord can re-enter against the defaulting tenant, recover arrears of rent, and promptly install a new tenant at the same or a higher rent. The consequence of the Lessee's submission is that landlords are unable to protect themselves as satisfactorily in a falling market as distinct from one which is static or rising. It is difficult to see why landlords should bear the risks of a falling market rather than their defaulting tenants, particularly where, as the Lessor and the Lessee did in the Lease, the parties explicitly, in many places and in an integrated way, placed that risk on the tenant. It is also difficult to see why the law - whether the relevant rule which the Lessee was urging be a rule of construction or some rule of substantive law - should have the result of placing the risks of a falling market on landlords, and of depriving them of the opportunity by agreement to allocate the risk otherwise. The effect of the Lessee's submission is to cut down on party autonomy, to increase the chance of disputes and to reduce certainty. If the Lessee is wrong, it is open to parties to agree that a particular term is essential, and to agree on the consequences of breach. That avoids arguments about whether the term in question is or is not essential independently of the parties' agreement that it is, and what the consequences of breach of it are. If the Lessee is correct, these dangers increase.

57 At [72], the High Court said, relevantly, that while in some circumstances it may be more difficult to assess loss of bargain damages where no privity of contract governs an entitlement to relief:

...there is no such difficulty in the case of loss of bargain damages after termination for breach of an essential term in the form of a covenant to pay rent: the court simply compares the rent payable under the lease with that recovered or to be recovered from any new lease, discounting to obtain present value.

Reasons

58 The question for determination in respect of grounds 1 and 2 of the notice of appeal (and the corresponding paragraphs of the notice of contention) is whether her Honour erred in the determination as to how loss of bargain damages should be calculated in circumstances where the lessor (Gigi) had re-entered the property and had continued operating a business from that property rather than re-leasing the property. Mr Pritchard relies on Buss JA's statement of the test in Luxer Holdings (at [40]), as being the relevant test in the present case.

59 Gigi's position, in essence, is that, while it accepts that the starting point, for, or ordinary measure of, loss of bargain damages for repudiation or breach of an essential term of a lease involves consideration of the market value of the lease at the time of its termination (T 10.5), there are special circumstances in the present case which have the result that its losses should be measured by reference to the profits it obtained by re-taking possession and operating the hotel business from the property not by reference to its then rental value. Those special circumstances are, as I understand Gigi's argument, to be found in its need to maintain the hotel licence (by reference to which it may be presumed the value in the hotel lease lay) and the acceptance by the tenant of the "risk" that the landlord would, as it was entitled under the lease to do, choose not to re-lease the premises but to take over the operation of the hotel business itself on an early termination of the lease for breach of an essential term.

60 In effect, Gigi's position is that it is not required to take into account the value to it of the early termination of the lease otherwise than by reference to the profits made by it from operating the business, and that it is able to seek damages on the test articulated by Buss JA, with whom Wheeler JA agreed, in Luxer Holdings without adducing any evidence as to what the market rent for the premises was at the time of termination of the lease and without making any attempt to find an alternative tenant (and licensee) for the premises.

61 It is submitted by Mr Pritchard that the approach adopted by the primary judge would have the effect of requiring the lessor, in order to be entitled to damages, to do something which was not contemplated by the lease, namely to seek to re-let the hotel to a third party or, if not so minded, to obtain evidence of the market rent even though the lessor in occupation was not obliged and may have had no intention to re-let the premises; and that Gigi's damages would on that approach be limited to any amount that could be shown to be referable to a decrease in the market rent.

62 In summary, Mr Pritchard submits that, in circumstances where the hearing took place after what would otherwise have been the expiry of the term of the lease on 3 July 2010; where the lease provided that the ownership of the business conducted from the demised premises was vested in Gigi once it re-took possession of the premises; and where there was evidence from Mr Gerzilis of the lack of an alternate lessee, the appropriate measure of damages was that articulated by Buss JA in Luxer Holdings at [40]. As noted earlier, Mr Pritchard also points to the absence of any allegation by Mr Schmidt that Gigi had failed to mitigate its loss.

63 It is certainly the case that the claim for loss of bargain damages in the present case came to be determined after the expiry of what would, but for its earlier termination, have been the initial term of the lease. Hence, the case falls within the second of the scenarios considered by Buss JA in Luxer Holdings. However, the other factual propositions on which Mr Pritchard relies for the adoption of the Luxer Holdings measure of damages are not uncontentious.

64 Much weight was placed by Mr Pritchard on the provisions of the lease relating to the hotel licence, gaming entitlements and business name associated with the hotel premises, which I have set out above. As well as the fact that the lease contemplated that on termination of the leasehold interest the lessor would be entitled to carry on the operation of the hotel premises itself, reference was made to the requirements of ss 61 and 141 of the Liquor Act 2007 (NSW). Those statutory provisions made it necessary for the hotel business to continue in operation from the premises, and for a licensee to be appointed under the Act, on the taking of possession of the hotel by Gigi, if the benefit of the hotel licence was to be maintained.

65 However, Gigi was not obliged, on the termination of the lease (whether that be by effluxion of time or otherwise), itself to assume the conduct of the hotel business. Clause 13 expressly contemplated that the lessor might appoint another licensee of the hotel premises in those circumstances. The deemed vesting in the lessor on the termination of the lease of the business name associated with the hotel and the provisions that operated to ensure its ability to operate the hotel business (without dispute by the lessee as to any entitlement to the business name or other rights associated with the operation of the hotel business), are consistent with the lessor being placed in a position either to take up the operation of the business itself or to re-lease the premises to another licensee to do so. In either event, what the lease provisions ensured was that on termination of the lease the lessee had no ongoing rights in relation to the hotel licence, business name or associated entitlements and hence the lessor was free to operate (or to license someone else to operate) the hotel business unimpeded.

66 Although the provisions of the Liquor Act no doubt cast a commercial imperative on the lessor to ensure continuation of use of the hotel licence by an appropriate licensee, there was no evidence in the present case that Gigi had no option but to do so itself. There is, for example, nothing to suggest that, in order to maintain the benefit of the hotel licence, Gigi needed to do more than to appoint a temporary licensee, or temporarily to operate the business itself, pending a decision as to the appointment of a permanent licensee.

67 As to the submission that there was no alternative tenant for the premises, not only was there no more than a statement by Mr Gerzilis that he was unaware of an alternate tenant, Mr Robertson points to the submissions put before her Honour to note that it was not the case put before the primary judge that Gigi had been forced, as a matter of commercial reality, to assume the responsibility for operating the hotel business; rather its case was that it was entitled to do so (as indeed it was).

68 Mr Gerzilis' evidence does not in my view support the conclusion that there was no replacement tenant for the premises. Mr Gerzilis gave evidence in general terms as to conversations that had taken place in relation to the potential sale of the leasehold interest to a Mr Brian Bonus and as to his lack of awareness of any other interested purchasers.

69 In his affidavit of 25 August 2009 (Blue 218), Mr Gerzilis deposed to a conversation in relation to negotiations that Mr Gerzilis understood had been taking place between Mr Bonus and Mr Schmidt as to the purchase by Mr Bonus of the latter's interest in the lease (Blue 220F). In a subsequent affidavit of 13 August 2011 (at Blue 232), Mr Gerzilis referred to a conversation "[i]n or about start of February 2008", i.e., before the termination of the lease, with a property agent, Mr Parsons, who he said had telephoned him "to try to sell [Mr Schmidt's] interest in the Lease", in which Mr Gerzilis said he had queried Mr Parson's involvement as there was another agent selling it ([47]). Mr Gerzilis went on at [48] to depose to a conversation with another property agent, Mr Gilchrist, "regarding the sale of [Mr Schmidt's] interest in the Lease", in which Mr Gerzilis says he was told that the agent did not know what was happening with a proposed purchaser and it looked like "they don't have the money".

70 At [49] of his affidavit, Mr Gerzilis deposed that the "only prospective buyer identified to [him] in respect of [the hotel] was Mr Bonus". At [50], Mr Gerzilis said that, other than Mr Bonus, Mr Gerzilis was not aware of any other party who was interested in buying Mr Schmidt 's interest in the lease of the hotel; entering into a new lease in respect of the hotel; or purchasing the freehold of the hotel.

71 The last three of the above-mentioned paragraphs of Mr Gerzilis' affidavit are those to which it is contended her Honour failed to have regard in making her findings on the loss of bargain damages (appeal ground 6). In those paragraphs, Mr Gerzilis says nothing as to any enquiries he or anyone else on behalf of Gigi had made in relation to the re-letting of the premises after the termination of the lease. He gives no evidence as to any attempts made to do so. At its highest, this evidence goes no further than to show that Mr Gerzilis was aware, prior to the termination of the lease, that an agent was seeking a buyer for the leasehold interest; and, after the termination of the lease, that the prospective purchaser that had been identified might not have the money to proceed.

72 Mr Gerzilis' evidence does not disclose any attempt by him to ascertain the existence of any alternative lessee: no marketing of the premises; no instructions to agents as to the re-leasing of the premises or the like. This may be contrasted with what had apparently occurred in the Luxer Holdings case and in Buchanan v Byrnes. Nor was there any expert opinion from a real estate agent as to the market value of the lease or the likely time that might be required in order to find an alternative tenant for the premises.

73 As to the reliance placed by Mr Pritchard on the lack of any allegation of failure to mitigate, before any question of mitigation can arise the landlord must establish a prima facie loss. Mr Robertson submits, and I agree, that there was no evidence to establish such a loss, there being nothing to suggest that the landlord did not obtain a benefit from the early termination by then being in a position to re-lease the premises at the same or a higher rent.

74 Gigi's position in this regard may be tested by reference to what would be the position if there were to be recovery on the Luxer Holdings basis but the market rental value of the premises were in fact shown to be greater than the rent payable under the lease at the time of termination of the lease. In those circumstances it is contended by Mr Pritchard that the onus would be on the tenant to adduce evidence of rental value in order to prove a failure to mitigate, namely to establish that the landlord was unreasonable in not seeking to re-lease the premises and hence that in conducting the hotel business itself the landlord's conduct was unreasonable.

75 That, however, appears to be to the contrary of what was contemplated by EM Heenan AJA in Luxer Holdings in the passage cited earlier. His Honour there considered that the inference as to the rental value of the premises was available to be drawn in light of the evidence that was adduced as to attempts to re-let the premises. Here, there was no such evidence. Mr Robertson submitted that in such a scenario the lessor would have failed to demonstrate loss, as was the case here, and hence no issue as to a failure to mitigate would arise.

76 Mr Schmidt's position was that it could not be said that the landlord had acted unreasonably in deciding to occupy the property, in lieu of re-letting it, since that was an option which was reasonably open to the landlord after re-entry, but that before any issue of mitigation arose it had to be shown that there was a loss.

77 Insofar as Mr Pritchard seeks to rely on Buss JA's formulation in Luxer Holdings, Mr Robertson submits that the reference to "profits" in that formulation should be seen as an adoption of O'Connor J's use of that term in Buchanan v Byrnes, as subsequently repeated by Griffith CJ in Lamson and Brennan J in Progressive Mailing House; in effect as being a reference to the value of the premises as they were "thrown on" the landlord's hands - in effect, the benefit of being able to take early possession (or the remaining rental value). It is submitted by Mr Robertson that it remains necessary to ascertain the value (if any) of the right to possession that a landlord obtains by re-entering the premises and re-taking possession. I agree. In Buchanan v Byrnes the reference by O'Conner J to expense incurred in having "the place on his hands until let to another tenant" does not suggest that it would have been open to the landlord to take no steps to re-lease the premises, but simply to carry on the business and then claim the foregone rent as the expense of "having the place on his hands" for the balance of the term of the lease.

78 As to the reliance placed by Mr Schmidt on Gumland Property Holdings, Mr Pritchard submits that it is distinguishable on the basis that the premises in the present case were not, as was the case in Gumland Property Holdings, "multiple use" premises (T 11.10) and because in Gumland Property Holdings the proceedings did not relate to a landlord taking possession of premises and operating a business from the premises. Mr Pritchard submits that in Gumland Property Holdings what was considered was an "orthodox" claim for damages arising out of the re-letting of the premises by the landlord at a lower rent, albeit complicated by the fact that the premises had changed in configuration when re-leased (T 28.35ff), as distinct from the present claim where the lease itself contemplated the re-taking of possession by the landlord.

79 Mr Pritchard submits that the High Court cannot, in the passages relied upon by Mr Schmidt, be taken to be saying that the only measure of damages available to a landlord on termination of a lease for repudiation or breach of an essential term is the difference between the rent payable under the lease for the balance of the term less the market rent at time of termination, as this would, by a "side wind", effect a change in the law. He submits that all that was said by the High Court in that regard was that, in the particular factual circumstances there under consideration, the premises having there been re-let, that was all that was recoverable. Pausing there, even if Mr Pritchard's submission is correct, what Gumland Property Holdings nevertheless does is to cast doubt on the proposition (at [40]) in Luxer Holdings that the "normal" measure of damages for breach of an essential term or repudiation is that for which Gigi now contends, at least without any evidence of the market value of the lease or attempts to re-lease the premises from which an inference as to the market value of the lease might be able to be drawn.

80 As to whether Gumland Property Holdings should be read as setting out the only basis on which damages may be assessed where a lessor retakes possession on termination of a lease for repudiation or for breach of an essential term, so as to preclude a lessor in any circumstances from obtaining loss of bargain damages by reference to the profits it has made on re-taking possession, I accept the force of Mr Pritchard's submission that what their Honours were there considering were circumstances different from those in the present case and hence the particular issue arising in this case was not that considered in Gumland Property Holdings.

81 In Baker v The Queen [1975] 1 AC 774, later applied by the High Court in CSR Limited v Eddy [2005] HCA 64; (2005) 226 CLR 1 at 11 [13], Lord Diplock, delivering the judgment of the majority of the Privy Council, said (at 785):

[I]n its opinions delivered on an appeal the Board may have assumed, without itself deciding, that a proposition of law which was not disputed by the parties in the court from which the appeal is brought is correct. The proposition of law so assumed to be correct may be incorporated, whether expressly or by implication, in the ratio decidendi of the particular appeal; but because it does not bear the authority of an opinion reached by the Board itself it does not create a precedent for use in the decision of other cases.

82 See also Chief Executive Officer of Customs v Tony Longo Pty Limited (2001) 52 NSWLR 458 at 474 per Heydon JA, as his Honour then was; Markisic v Commonwealth of Australia [2007] NSWCA 92; (2007) 69 NSWLR 737 at 748 [56] per Campbell JA, with whom Handley AJA and Bell J agreed; and Eleftheriou v Water Board [1991] NSWCA 91 per Clarke and Handley JJA.

83 However, whether or not the statements on which Mr Robertson relies in Gumland Property Holdings amounted to seriously considered dicta, in the sense considered in Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89, is an issue that does not here need to be determined because I am not satisfied that Gigi has established that there are special circumstances to depart from what it accepts to be the ordinary basis on which damages for loss of bargain are assessed by reference to the market value of the leasehold interest.

84 Mr Pritchard submits that the fact that the lease contemplated that the lessor would (or, in my view more accurately, might) choose to carry on business in its own right following the expiration or sooner determination of the lease amounts to special circumstances warranting a departure from the general rule that loss of bargain damages be assessed by reference to the market value of the premises from a rental perspective. 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. However, that does not in my opinion mean that the assessment of loss of bargain damages in this case required any departure from what Gigi accepts is the ordinary starting point for the assessment of such damages.

85 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.

86 Grounds 1 and 2 of the notice of appeal have not in my opinion been made out. I add that, since preparing these reasons I have had the benefit of reading Sackville AJA's additional observations, with which I agree.

Ground 3 - evidentiary ruling as to expert evidence

87 This ground of appeal (as do paragraphs (d) and (e) of the notice of contention) relates to her Honour's rejection of Mr Bell's evidence as irrelevant to any fact in issue in the proceedings (Black 90.35; [73] of her Honour's reasons).

88 It is submitted by Mr Pritchard that the evidence before her Honour made good a prima facie case that the value of the benefit on termination of the lease represented by gaining the right of immediate possession was the sum claimed as loss of bargain damages. In that regard, he pointed to the evidence of Mr Gerzilis was not aware of any person interested in taking the lease and to the fact that it was no part of Mr Schmidt's case that Gigi failed to mitigate its loss by not taking further steps to look for a tenant.

89 This evidence was relevant to the issue as to the existence and extent of the claimed loss, only if the extent of the (adjusted) trading profits was relevant to those matters. In the absence of special circumstances to warrant a departure from the ordinary basis of assessment for loss of bargain damages, the evidence could not have had probative value.

90 While I accept that it might have been said, as at the time the evidence was rejected, that Mr Gerzilis' evidence as to alternate lessees, in the context of the necessity to maintain the validity of the relevant hotelier's licence, could potentially amount to special circumstances so as to make Mr Bell's expert evidence of potential relevance, there are two points to note. First, her Honour was not taken to Mr Gerzilis' evidence in support of the contention that Mr Bell's report satisfied the test of relevance. Second, in circumstances where the evidence was not in my opinion sufficient to warrant departure from the ordinary test for assessment of loss of bargain damages, her Honour cannot be said to have erred in not admitting the evidence of Mr Bell.

91 Mr Pritchard submits that there was an inference available that the value of the right of possession was lower than the profits derived by Gigi, on the basis that the final profit figure calculated by Mr Bell did not include an expense for rent (Blue 284Q-R). It is submitted that the value that the market would place on the right to run a hotel business in the property would be lower than the profits expected to be derived from the business (not including an expense for rent), because a tenant would expect to make profits in addition to having to pay rent and hence, absent any suggestion that the hotel business was not run competently or reasonably, the profit actually derived is prima facie evidence of what would have been expected to be derived as profit by a potential lessee (which it is submitted would be greater than the market value of the lease). Mr Robertson points out, however, that the inference said to have thus been open was not the subject of argument before her Honour.

92 Although I accept that exhaustive evidence of attempts to locate other tenants would not have been necessary in order to raise a prima facie case of loss, so as to support the potential relevance of Mr Bell's evidence, here there was a paucity of evidence of that kind. Insofar as reliance was placed by Mr Pritchard on the decision of the Queensland Court of Appeal in McGlone v Kalgold [2011] QCA 215, where a landlord terminated a lease, took possession of the premises and operated the coffee shop business itself, it appears that there was in that case some evidence of attempts to let the premises ([3]-[4] per McMurdo J, [18] and [22] per Dalton J), so as to make good the landlord's claim to have suffered loss as a consequence of the termination of the lease, the onus then falling on the defendant to prove failure to mitigate ([5] per McMurdo J, [21], [24]-[25] per Dalton J). That is not the case here.

93 Mr Pritchard submits that this Court need not conclude on a final basis that the proposed measure of damages for which Gigi contends was the proper measure of damages (that being a matter for assessment following all the evidence) but simply that it was a measure of damages reasonably available, such that the evidence should have been accepted on that basis. However, in circumstances where the rejected evidence did not go to the basis on which special circumstances for departure from the ordinary case might be shown, no prejudice has in my opinion been shown to flow from the rejection of the evidence. This is not a case in which any error in the rejection of that evidence gives rise to a substantial injustice so as to result in a remittal of the proceedings for re-hearing.

Ground 6 - alleged failure to have regard to evidence of Mr Gerzilis

94 I have in effect addressed this ground in the discussion above. Mr Robertson points out that no submission was made to the trial judge that regard should be had to paragraphs [48]-[50] of Mr Gerzilis' affidavit (the content of which I have described earlier).

95 This evidence does not support a conclusion that Gigi was unable to re-let the premises. Mr Robertson submits that, and I agree, at its highest this evidence could have arguably supported a finding that Mr Gerzilis did not know of, and did not look for, a new tenant for the hotel. Mr Robertson submits that it is not open to this Court to make a finding that Gigi was unable to re-let the hotel, referring to the principles in Suttor v Gundowda [1950] HCA 35; (1950) 81 CLR 418 and related cases, because this was not argued before her Honour and was a matter in relation to which evidence could have been given had it been so raised.

96 Mr Robertson further points out that Mr Schmidt had served affidavits from Mr Bonus (the prospective purchaser to whom reference was made in Mr Gerzilis' affidavits), Mr Murray Gilchrist (the business broker who, on Mr Gerzilis' evidence, spoke to Mr Gerzilis about Mr Bonus' interest); and, although directed to other issues, from Mr Dugald Parsons (the hotel broker referred to in para [47] of Mr Gerzilis' affidavit). In that regard, I note that Mr Pritchard accepted that the defendant below had indicated an intention to adduce evidence from Mr Bonus as to his ability to pay the rent specified in the lease. Mr Robertson says that this evidence was not ultimately read having regard, among other things, to the manner in which the trial proceeded, and that Mr Gerzilis and/or Ms Gerzilis (Mr Gerzilis' sister and the other director of Gigi) could have been (but were not) cross-examined on the contention that the company was unable to re-let the hotel had this been raised below.

97 Even if the evidence of Mr Gerzilis is taken into account, this does not demonstrate error on the part of her Honour in rejecting the evidence of Mr Bell or in assessing the claim for loss of bargain damages. Ground 6 is not made out.

Orders

98 For the above reasons, in my opinion the following orders should be made:

1. Appeal dismissed with costs.

2. Order 1 of the orders made by the Registrar of the Court of Appeal on 16 May 2013 be vacated.

99 SACKVILLE AJA: I agree with the orders proposed by Ward JA and with her Honour's reasons, subject to the following observations.

100 There was no dispute in this Court that, as the primary Judge found (at [34]-[35]), the respondent ("Tenant") breached a fundamental term of the lease by failing to pay rent on time and that the appellant ("Landlord") accepted that breach as terminating the lease. The Landlord was therefore entitled to recover damages for loss of bargain from the Tenant, including damages for the loss of the benefit of the Tenant's covenant to pay rent and other moneys during the term of the lease (cl 3): Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10; 234 CLR 237, at [52]-[56], per curiam.

101 Mr Pritchard, who appeared for the Landlord, did not dispute that the Landlord bore the onus of proving that it had suffered some damage by reason of the loss of its bargain. He also did not dispute that the usual measure of damages for the loss of a lessee's promise to pay rent for the term of the lease is the difference between the rental that the lessee was obliged to pay had the lease continued for its full term and the rental that the lessor actually received or could have received for the balance of the term had it attempted to re-let the premises.

102 The Landlord's claim for damages faced fundamental difficulties. On the primary Judge's findings, the Landlord made no attempt to re-let the premises after taking possession in consequence of the Tenant's default. Nor did it adduce any evidence of the rental value of the premises at the date it terminated the lease or indeed of the rental value at any time between that date and the scheduled expiration of the lease. The Landlord's belated attempt to claim damages equivalent to the rent for a period of three months after termination of the lease, on the ground that it would have taken that long to secure a tenant, was rejected by the primary Judge for both procedural and evidentiary reasons (at [82]).

103 Mr Pritchard recognised these difficulties. He attempted to overcome them by relying on authorities which on one reading seem to suggest that a lessor can prove that it has sustained losses by proving that the unpaid rent for the full term is greater that the "profits" derived by the lessor in respect of the relevant period.

104 Mr Pritchard relied on the statement of principle by Griffith CJ in Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd [1906] HCA 87; 4 CLR 672, at 684:

In the ordinary case of a demise for a term of years with an express covenant to pay the rent, if the lessee unequivocally repudiates the lease and abandons the land, the lessor may at his option bring an immediate action for breach of covenant, in which he will be entitled to recover the full amount of the agreed rent for the whole term, less such sum as a jury may think he is likely to derive as profits from the use of the land during the residue of the term: Buchanan v. Byrnes [(1906) 3 CLR 704]. This is the ordinary rule of damages.

(This passage was quoted with approval by Brennan J in Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; 157 CLR 17, at 47.)

105 Mr Pritchard also cited the observations of Buss JA (with whom Wheeler JA agreed) in Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209; 35 WAR 254, as follows:

39 Where the trial of the lessor's action against the lessee occurs before the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoing etc that would otherwise have been payable after the date of termination, less:

(a) any amount the lessor has obtained as profits from the use of the premises between the date of termination and the date of trial; and

(b) any amount the lessor is likely to obtain as profits from the use of the premises between the date of trial and the date on which the lease would otherwise have expired,

by re-letting the whole or part of the premises or otherwise. If the lessor has failed to mitigate its damage between the date of termination and the date of trial, it will be necessary to make a further adjustment on that account. Interest will usually be awarded on any damages referable to the period between the date of termination and the date of trial. Also, a discount for acceleration must be applied in calculating any damages referable to the period between the date of trial and the date on which the lease would otherwise have expired. The doctrine of mitigation applies directly in respect of the period between the date of termination and the date of trial. The calculation of the damages in respect of the period between the date of trial and the date on which the lease would otherwise have expired is carried out on the basis that the lessor will act reasonably, throughout that period, to mitigate.

40 Where the trial of the lessor's action against the lessee occurs after the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoings etc that would otherwise have been payable after the date of termination, less any amount the lessor has obtained as profits from the use of the premises between the date of termination and the date on which the lease would otherwise have expired (by re-letting the whole or part of the premises or otherwise). A further deduction will be required if the lessor has failed to mitigate its damage. It will usually be appropriate to order the payment of interest on the award of damages.

41 There is a clearly-established conceptual difference between the measure of damages, on the one hand, and the doctrine of mitigation, on the other. The onus is on the lessor to prove, according to the applicable measure, that it has suffered damage. But the onus is on the lessee to prove that the lessor has failed to take reasonable steps to mitigate its damage, and to demonstrate the extent to which there has been a failure to mitigate.

106 Some care needs to be taken in interpreting each of these passages, especially the use of the word "profits". The word can of course refer to the excess of income over outgoings or expenses from a business or undertaking. However, the word when used in relation to land usually carries a different connotation. In a conveyancing context, for example, the expression "rents and profits" has been described as "a generic term denoting generally all income from and the produce of the property the subject of the sale": P Butt, The Standard Contract for Sale of Land in New South Wales (1985), at 665. This description reflects ancient usage. Thus Coke stated that:

If a man seised of lands in fee, by his deed granteth to another the 'profit' of those lands, to have and to hold to him and his heires, and maketh livery secundum formam chartæ, the whole land itselfe doth passe; for what is the land but the profits thereof; for thereby vesture, herbage, trees, mines, and all whatsoever parcell of that land doth passe (Co Litt 4 b).

107 Neither of the passages cited by Mr Pritchard should be read as suggesting that a lessor's damages for loss of bargain are ordinarily to be assessed by reference to the profits (or losses) derived by the lessor from a business it chooses to conduct on the leasehold premises following termination of the lease, as distinct from income derived or capable of being derived from exploitation of the land itself, such as rent or income from agricultural produce. This understanding is consistent with the language used by Buss JA (at [40]), where his Honour spoke of "profits from the use of the premises ... by re-letting the whole or part of the premises or otherwise". It must be remembered that, in the absence of a contrary provision in the lease, the lessor's entitlement is to performance of the lessee's promise to pay rent (or other amounts), not to the conduct of a business at a pre-determined level of profitability.

108 It is pertinent to note that Luxer was not a case of a lessor retaking possession of leasehold premises but making no attempt to re-let at a market rental. On the contrary, the lessor in that case did attempt to re-let, but succeeded only in securing a tenant for part of the premises. The Court of Appeal upheld an award of damages in favour of the lessor, calculated by subtracting from the rent and other amounts payable by the lessee during the balance of the term (had the lease not been terminated), the amounts actually recovered by the lessor from re-letting part of the premises for the relevant period (at [24]). The case was not concerned with circumstances such as those in the present case, where the Landlord terminated the lease and retook possession but made no attempt to re-let the premises and adduced no evidence as to their rental value.

109 There may be circumstances in which a lessor can recover loss of bargain damages that include losses sustained in carrying on a business on the leasehold premises following termination of the lease, at least for a confined period. An example is where a lessor must ensure continuity in the business conducted on the premises in order to preserve a licence and to maintain the rental value of the premises. Buchanan v Byrnes [1906] HCA 21; 3 CLR 704, was a case of this kind. I do not think that Gumland holds that the measure of damages, regardless of the circumstances, is always limited to the difference between the rental payable by the lessee under the lease and the rental value of the premises at the date of termination or at some time thereafter.

110 Mr Pritchard submitted that the provisions of the lease in this case justified awarding the Landlord damages calculated by reference to the difference between the rental payable by the Tenant for the balance of the term and the "profits" derived by the Landlord from conducting the business on the premises after termination of the lease. I agree with the reasons given by Ward JA for rejecting this submission. It is one thing to point out that the lease required the Tenant to execute all documents necessary to enable the Landlord to conduct the hotel business on the premises should it elect to do so (cl 14(a)(iii)). It is quite another to conclude that the value of the Tenant's contractual promise to pay rent is to be measured by the Landlord's success or otherwise in conducting the hotel business, without any reference to the rental value of the premises. The former has no necessary connection to the latter.

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Decision last updated: 05 September 2013