Do I have to mitigate loss if my lessee defaults and breaches? Case Study: Kiddle v Yajm [2022] QDC 82
This case study highlights the onus of landlords to mitigate loss and the courts. If a lessee acts improperly and breaches the lease, it is still the responsibility of the lessor to mitigate loss.
The case of KIDDLE INVESTMENTS PTY LTD V YAJM VEGAN PANTRY PTY LTD & ORS [2022] QDC 82 considered the actions of a landlord, following a lease dispute.
The court examined whether the lessor was obligated to mitigate loss prior to termination and the available damages. In this case, the court held that the landlord had appropriately mitigated their loss and awarded damages accordingly.
Facts
The lessee had entered a five (5) year lease with the lessor on 16 December 2016. As early as 16 May 2017, the lessor received the first of four (4) notices to remedy breach. Up until 1 December 2017, the lessor indicated an intention to fit out the premises, sublet the premises and settle the areas. The lessee had the keys to the premises and had left furniture, rubbish and damage to the premises upon vacating it. However, the lessee never traded on the premises or fitted out the premises.
No rent or outgoings were paid from 1 December 2017 up until the Lessor terminated the lease on 2 April 2018. Prior to 1 December 2017, the Lessee had made various part-payments pursuant to a payment plan, often drawing upon a bank guarantee. It was unclear which payments were made by the lessor or the bank guarantee. At all times, the Lessee was in breach of two essential terms of the lease; the requirement to pay rent and outgoings, and the requirement to trade during core hours.
The two issues in dispute concerned whether the lessor was under an obligation to mitigate their losses prior to the termination of the lease and what costs the lessor could claim under the lease.
Mitigating the Lessor’s Loss
Issue & Arguments
The question of concern was whether a reasonable person in the position of the lessor could have been aware the lessee was unable to perform its obligations under the lease, and thus obliged to mitigate their losses. It was agreed the lessor had complied with their obligation to mitigate their loss onwards from 3 April 2018. However, the lessee argued the lessor could not claim any loss of bargain damages on account of their failure to mitigate their loss prior to the termination of the lease, pursuant to observations in Vickers v Stichtenoth Investments Pty Ltd (1989) 52 SASR 90, 100.
Decision
Generally, where a claim is for damages, a plaintiff has to mitigate those losses. However, this obligation typically arises upon termination or repudiation of the lease or contract. DCJ Byrne argued that if the lessor is aware the lessee is unable to perform its responsibilities under the lease, the obligation to mitigate loss prior to termination is more likely to arise. However, since the Courts do not readily find that conduct amounts to repudiation, courts should not readily find the lessor aware the lessee is unable to perform its obligations. Further, his honour accepted that the duty in Vickers to mitigate the accrual of losses prior to the termination of the lease only applies where the lease has been abandoned in fact.
His honour held that the conduct of the Lessee was so ambiguous as to exclude a finding that a reasonable person in the lessor’s position was aware the lessee was unable to continue the lease. Relevantly, the lessee never accepted the option to terminate the lease upon receipt of any of the notices to remedy breach, instead, the lessee continued to convey an intention to keep the lease on foot. This conduct did not amount to abandonment or repudiation of the lease. Therefore, in conjunction with clause 9.3(2) of the lease which imposed a contractual obligation to mitigate loss following termination of the lease, the duty to mitigate arose only on and from the date of termination.
Costs Under the Lease
Issue & Arguments
There were two clauses under the lease that the lessor could rely upon when claiming legal costs. Clause 2.1(f) provided that the lessor could recover reasonable costs and expenses incurred in relation to proceedings brought to enforce the lessee’s obligations under the lease. Whereas clause 8.3 was an indemnity clause covering loss following the lessee’s default. The issue in dispute was whether the lessor could rely upon clause 8.3, permitting recovery of indemnity costs.
The lessor argued that the discretion to award costs will usually be exercised consistent with contractual agreements, thereby authorising a claim for costs as part of the judgement debt. The lessee argued that clause 8.3 could not be relied upon as it is a general indemnity clause which does not extend to legal costs. They further argued that though clause 2.1(f) would be preferrable, it also could not be relied upon. Although as it concerned the recovery of reasonable costs and expenses, it is up to the discretion of the Court how to award costs, particularly where the contractual provision is not plain and ambiguous.
Decision
DCJ Byrne held that the lessor was entitled to claim monies owing under the lease to and including 2 April 2018, pursuant to clause 8.3 of the lease, in addition to the loss of bargain damages thereafter. It is not relevant that there was another, less onerous provision that could have been relied upon to recover costs. His honour noted that a plain and unambiguous contractual provision for payment of costs on an indemnity basis is relevant but not binding on the court. Clause 8.3 was not intended to oust the jurisdiction of the Court and was voluntarily entered into by the parties to provide an indemnity for losses and costs arising from a breach of the lease. However, since clause 8.3 is sought to be applied as part of the judgment amount and not as a separate costs order, the principle does not apply. The claim need not be deferred to a costs order.
Key Take-Aways
The duty to mitigate loss arises upon termination, repudiation or abandonment of the lease. The duty to mitigate may only arise prior to termination if the lessee conveys a clear intention not to continue with the lease, however, this conduct would likely be construed as repudiation or abandonment of the lease anyway.
Costs claimed under an indemnity clause in the lease does not seek to oust the jurisdiction of the court and will be relevant to determining costs, especially where the clause is voluntarily entered into and plain and unambiguous in its interpretation. Further, costs claimed under an indemnity clause can be considered part of the judgment amount, not deferred as an issue for a costs order.
Related Articles
https://corneyandlind.com.au/business-law/covid-19-commercial-lease-regulations-qld/
https://corneyandlind.com.au/commercial-law/exit-lease-early/
https://corneyandlind.com.au/litigation/lease-dispute-rent-qcat/
This article was written by a Corney & Lind law clerk