The Facts
Tenant leases 100-year-old hotel
In January 2007, a tenant leased a 100-year-old hotel west of the Blue Mountains in New South Wales.
The tenant paid a security deposit of $250,000 and the rent was $220,000 per year.
In December 2007, a new owner purchased the hotel for $1.6 million.
The tenant’s lease was due to expire on 3 July 2010.
Owner locks tenant out of hotel for failure to pay rent and takes over operation of hotel
In January 2008, the tenant breached an essential term of the lease by being two weeks in arrears on payment of the rent.
The owner gave the tenant notice of its intention to terminate the lease, and on 19 February 2008 locked the tenant out of the hotel and took possession.
The owner also acquired the hotel licence and certain gaming entitlements associated with the hotel premises, stayed in possession, and operated the hotel itself.
Owner sues tenant for loss of bargain damages
In September 2008, the owner commenced proceedings against the tenant for damages, including loss of bargain damages (for the loss of the benefit of the lease).
The Supreme Court of NSW denied the owner’s claim for loss of bargain damages, and the owner appealed to the NSW Court of Appeal.
Expert commentary on the court's decision
In this case Gigi’s claim started out very high, but ultimately after a protracted procedural history, agreements made between the parties and the final judgment, Gigi found itself in a much less favourable position.”
Court rules in favour of tenant
In Gigi Entertainment Pty Ltd v Schmidt [2013] NSWCA 287, the NSW Court of Appeal dismissed the appeal of the owner, Gigi Entertainment Pty Ltd.
The court ruled in favour of the tenant, Michael Schmidt, concluding that Gigi was not entitled to loss of bargain damages.
Special circumstances can result in departure from ordinary basis for assessing damages
The court accepted that there might be times when special circumstances call for a departure from the ordinary basis on which damages for loss of bargain are assessed. The court said:
Gigi did not prove existence of special circumstances
The court was not satisfied that Gigi had established the existence of any special circumstances.
Gigi had not presented evidence that it had no option but to assume responsibility for operating the hotel business.
Nor was there any evidence of any attempts by Gigi to ascertain the existence of an alternative lessee or to market the premises.
The court observed that “in the absence of evidence as to any difficulties the landlord may have had in re-leasing the premises to an appropriate licensee, it is simply not known whether the landlord has suffered any loss at all as a result of the tenant’s breach of an essential term of the lease, as opposed to loss as a consequence of its own decision to retake possession and carry on the hotel business itself”.
Additional claims made at trial
Gigi’s original claim was for $1.46 million dollars in damages.
In addition to loss of bargain damages of $321,334, this amount included outstanding rent, costs of repair or replacement of plant and equipment, and repair and maintenance of the hotel itself.
Mr Schmidt cross claimed, seeking repayment of the security deposit, as well damages for loss of cash, stock, and other property of his that Gigi had retained when it took possession of the hotel.
After what the court referred to as the “protracted procedural history of the proceedings”, the parties came to an agreement in relation to some points as follows:
Gigi was entitled to:
1.$23, 470.11 on account of accrued rent and outgoings,
2.$70,708 on account of painting items.
Mr Schmidt was entitled to:
1.$250,000 security deposit,
2.$7,707.25 in cash,
3.$7,931.55 in stock.
Time and cost may outweigh outcome of proceedings
This case shows that much time and money can be wasted preparing a claim, where that time and cost may outweigh the ultimate outcome of the proceedings.
In this case, Gigi’s claim started out very high, but ultimately after a protracted procedural history, agreements made between the parties and the final judgment, it found itself in a much less favourable position.
Importance of paying rent on time
Mr Schmidt accepted that the terms of the lease entitled Gigi to terminate the lease, to take possession of the property, and to sue for damages due to his failure to pay the rent on time.
This case highlights that it is important to be aware of the terms of a lease and to ensure that rent is paid on time in a commercial relationship.