Bowen Investments Pty Ltd v Tabcorp Holdings Ltd [2008] FCAFC 38 (13 March 2008)

LANDLORD AND TENANT – covenant not to alter demised premises – covenant to leave in repair or make good demised premises at end of term of lease

DAMAGES – lease – breach of covenant not to alter demised premises – measure of damages – no damage to reversion – whether cost of reinstatement recoverable – whether reinstatement is reasonable – meaning of reasonable – time at which claim is made by landlord – at or near end of lease – relevance of option to renew – relevance of whether option exercised – whether landlord must prove intention to use any damages awarded to restore premises – rule in Joyner v Weeks [1891] 2 QB 31

Abrahams v Shaw (1969) 72 SR (NSW) 225 cited
Anstruther-Gough-Calthorpe v McOscar [1924] 1 KB 716 cited
Atkins (GW) Ltd v Scott (1991) 7 Construction Law Journal 215 approved
Barton v Reilly (1878) 1 SCR (NS) NSW 125 cited
Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 discussed
Birch v Clifford (1891) 8 TLR 103 cited
Black Creek Deer Farm Pty Ltd v ANZ (1996) V ConvR |P54-549 referred to
British Westinghouse Electric & Manufacturing Company Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673 referred to
CDJ v VAJ (1998) 197 CLR 172 applied
Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 cited
Commonwealth v Antonio Giorgio Pty Ltd (1986) 12 FCR 51 cited
Conquest v Ebbetts [1896] AC 490 discussed
De Cesare v Deluxe Motors Pty Limited (1996) 67 SASR 28 cited
Director of War Service and Homes v Harris [1968] Qd R 275 referred to
Espir v Basil Street Hotel Ltd [1936] 3 All ER 91 cited
Evans v Balog [1976] 1 NSWLR 36 distinguished
Eyre v Rea [1947] KB 567 discussed
Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 cited
Gange v Lockwood (1860) 2 F & F 115 [175 ER 984] cited
Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 cited
Gates v City Mutual Life Assurance Society Ltd [1986] HCA 3; (1986) 160 CLR 1 cited
Gooderham and Worts Ltd v Canadian Broadcasting Corporation [1947] AC 66 cited
Graham v Markets Hotel Pty Ltd [1943] HCA 8; (1943) 67 CLR 567 followed
Hanson v Newman [1934] Ch 298 cited
Hill v Barclay [1810] EngR 149; (1810) 16 Ves Jun 402 [33 ER 1037] considered
Hyder Consulting (Australia) Pty Ltd v Wilh Wilhemsen Agency Pty Limited [2001] NSWCA 313 discussed
Jacob & Youngs Inc v Kent 230 NY 239; 129 NE 889 (1921) cited
James v Hutton and J Cook & Sons Ltd [1950] 1 KB 9 discussed
Joyner v Weeks [1891] 2 QB 31 followed
Lambert v F W Woolworth and Co Ltd [1938] Ch 883 discussed
Lurcott v Wakely & Wheeler [1911] 1 KB 905 cited
Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; (2001) 210 CLR 181 referred to
Maori Trustee v Rogross Farm Ltd [1994] 3 NZLR 410 referred to
Parramatta City Council v Lutz (1988) 12 NSWLR 293 referred to
Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 cited
Proudfoot v Hart (1890) 25 QBD 42 referred to
Radford v De Froberville [1977] 1 WLR 1262 approved
Rainbow Estates Ltd v Tokenhold Ltd [1999] Ch 64 discussed
Rawlings v Morgan [1865] EngR 418; (1865) 18 CB (NS) 776 cited
Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 at 293[2002] HCA 5; ; 76 ALJR 436 referred to
Ruxley Electronics and Construction Ltd v Forsyth [1995] UKHL 8; [1996] AC 344 applied
Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 cited
Scott Carver v SAS Trustee Corporation [2005] NSWCA 462 cited
Shiloh Spinners Ltd v Harding [1973] AC 691 cited
Terroni v Corsini [1931] 1 Ch 515 cited
Tito v Waddell (No 2) [1977] Ch 106 cited
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 cited
Turner v Lamb [1845] EngR 1065; (1845) 14 M & W 412 [153 ER 535] cited
UI International Pty Ltd v Interworks Architects Pty Ltd [2007] QCA 402 discussed
Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253 referred to
Whitham v Kershaw (1885) 16 QBD 613 discussed
Wincant Pty Limited v South Australia (1977) 69 SASR 126 cited
Woods v Pope [1835] EngR 386; (1835) 6 Car & P 782 [172 ER 1461] cited
Yates v Dunster [1855] EngR 393; (1855) 11 Exch 15 [156 ER 726] cited
Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530 cited

Butt P, Land Law (5^th ed, Thomson, 2006)
Carter & Harland, Contract Law in Australia (4^th ed, Butterworths, 2002)
Dowding & Reynolds, Dilapidations: The Modern Law and Practice (2004, 3^rd ed)
Foa’s General Law of Landlord and Tenant (1957, 8^th ed)
Seddon & Ellinghaus, Cheshire & Fifoot’s Law of Contract (8^th Aust ed, LexisNexis, 2002)

BOWEN INVESTMENTS PTY LTD v TABCORP HOLDINGS LTD

VID 504 of 2007

FINKELSTEIN, RARES & GORDON JJ
13 MARCH 2008
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 504 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	BOWEN INVESTMENTS PTY LTD Appellant
AND:	TABCORP HOLDINGS LTD Respondent

JUDGES:	FINKELSTEIN, RARES & GORDON JJ
DATE OF ORDER:	13 MARCH 2008
WHERE MADE:	MELBOURNE

2. The orders made below be set aside and in lieu thereof it be ordered that the respondent pay to the appellant damages in the sum of $1,380,000.

3. Costs reserved.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 504 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	BOWEN INVESTMENTS PTY LTD Appellant
AND:	TABCORP HOLDINGS LTD Respondent

JUDGES:	FINKELSTEIN, RARES & GORDON JJ
DATE:	13 MARCH 2008
PLACE:	MELBOURNE

1 Many points have been argued on this appeal but they all come down to this: In an action for breach of a covenant in a lease not to alter the demised premises, can the plaintiff obtain an order that the premises be reinstated or that the defendant pay by way of damages what it would cost to reinstate the premises? The judge did not discuss whether a mandatory order could go, and on the issue of damages would not allow the cost of reinstatement except to the extent required to restore the premises to their original lettable area. He declined to award any substantial damages because there was no diminution in the value of the reversion. The issue is whether the judge was right in his approach.

2 The appellant company was established by Mr and Mrs Bergamin to purchase a development site in Bowen Crescent, Melbourne. In due course a multi-storey office building was constructed on the site. Mrs Bergamin was effectively in charge of the project. She was keen to have a first class ground level entrance and foyer as those areas "contribute the most to a good first impression". She retained an architect, Mr Henderson, to design the building. He was told the foyer should be of the highest quality material. He suggested that Canberra York Grey granite be used for the floor, the pillars be covered with marble and the walls have American cherrywood panels. The result was a fine looking foyer. The judge described it as having "a striking appearance". The architect said it had "a timeless quality".

3 By a lease dated 23 December 1996 the premises were demised to the respondent for a term of ten years commencing on 1 February 1997, with two options for further periods of five years each. The lease contained a covenant (cl 2.10) requiring the respondent "to maintain repair and keep the whole of the demised premises in good and substantial repair working order and condition", and a covenant (cl 2.11) that required the respondent to yield up the demised premises "in good and tenantable repair order and condition". There was also a covenant (cl 2.13) that the respondent would not without the approval of the appellant "make or permit to be made any substantial alteration or addition to the demised premises". When applying for approval the respondent was required to submit to the appellant plans, specifications and other details of the proposed alterations or additions.

4 Before the respondent could move into the premises it was necessary to fit out the building for use as an office. The appellant gave its consent to the fit out works in April 1997. The respondent also wanted to alter the foyer to a style that would suit its image as a "progressive, technologically advanced business". Mrs Bergamin was informed of the respondent’s wish to change the foyer, but was not given any details of the new design. She wrote to the project manager stating that she had no objection in principle to the foyer being altered but wanted to see the plans before granting approval. She advised the project manager that the respondent would have to "make good the premises at the end of the term" and that this would be problematic because Canberra York Grey granite was no longer available.

5 In the event, the respondent did not bother obtaining the appellant’s approval to begin the alteration works – it simply went ahead and demolished the foyer. When Mrs Bergamin discovered what had happened it was too late to stop the work or undo the damage. She stood by until the new foyer was completed. The result pleased neither Mrs Bergamin nor her architect. Both were critical of the quality of the work and finishes. As regards style, Mr Henderson described the new foyer as "very minimalist and very much early 1990s." We take this to be a criticism.

6 The appellant did not bring this action until 30 September 2005. The reasons for the delay (and there were several) are immaterial. The consequences, however, were anything but immaterial. Several causes of action were relied upon. There was a claim for breach of cl 2.13 which succeeded, but the damages awarded were quite small. There were claims for contraventions of ss 51AA and 51AC (unconscionable conduct) and ss 52 and 53(g) (false and misleading conduct) of the Trade Practices Act 1974 (Cth) and voluntary waste. The judge found those claims to be statute barred. We think he was correct in that finding.

7 There was also a claim to rectify the lease to add a provision that required the respondent "at the expiration of its occupancy ... to make good the premises". This claim was dismissed because the appellant failed to make out a case for either common or unilateral mistake. In reality the claim should have been dismissed on the basis that the covenant it wanted added was already an obligation imposed upon the respondent by cl 2.10, albeit in different words. It seems that this clause was overlooked both by the judge and the parties.

8 The principal issue we must resolve is whether the damages for breach of cl 2.13 – not to make any substantial alteration or addition to the premises – had been assessed on an erroneous principle. To answer this question it is best to begin with a summary of some general principles.

9 A repair covenant is breached not only if the premises fall into disrepair during the term of a lease but also if the tenant destroys or alters the premises: Gange v Lockwood (1860) 2 F & F 115, 117 [1860] EngR 76; [175 ER 984, 985]; Barton v Reilly (1878) 1 SCR (NS) NSW 125, 127; Graham v Markets Hotel Pty Ltd [1943] HCA 8; (1943) 67 CLR 567, 580-582, 585-586, 593-594. An action may be brought for breach of a repair covenant while the lessee is still in possession during the term of the lease. If brought while the tenancy continues the general rule is that the damages "represents the diminution in the value of [the] reversion owing to the breach of covenant" – an amount that will be determined by reference to the length of time the lease is still to run: Conquest v Ebbetts [1896] AC 490, 494; Gooderham and Worts Ltd v Canadian Broadcasting Corporation [1947] AC 66, 83. The reversion referred to is the reversion that falls in on the expiry of the lease: Terroni v Corsini [1931] 1 Ch 515, 519; Hanson v Newman [1934] Ch 298, 304. The diminution in value is preferred to the cost of putting the premises into repair because the landlord is not bound to expend any money recovered as damages in carrying out the repairs and whatever he recovers beyond his reversionary interest is regarded as excess compensation: Turner v Lamb (1845) 14 M & W 412, 412 [1845] EngR 1065; [153 ER 535, 535-536].

10 On the other hand, if the action is brought at or near the termination of the lease the rule, firmly established in Joyner v Weeks [1891] 2 QB 31, is that the landlord is entitled to recover the cost of repairs. Strictly speaking the cost of repairs includes any loss of rent during the repair period with some deduction, if appropriate, for betterment: Woods v Pope [1835] EngR 386; (1835) 6 Car & P 782 [172 ER 1461]; Birch v Clifford (1891) 8 TLR 103, 103; Yates v Dunster [1855] EngR 393; (1855) 11 Exch 15 [156 ER 726]. In Joyner v Weeks Lord Esher described (at 43) this measure of damages as "a rule of law" and later as the "ordinary rule" but, more accurately as Fry LJ put it (at 46 and 47), it is the "ordinary rule" or the "prima facie rule".

11 In Graham v Markets Hotel the High Court applied Joyner v Weeks. In that case a sub-lease of a hotel contained a repair covenant which also required the sub-tenant to yield up the hotel in repair. The sub-tenant decided to improve the hotel. An aspect of the works involved closing up an existing lavatory and installing another in adjoining premises. When the lease expired the demised premises could not be used as a hotel without a new toilet as the proprietor would otherwise have been in breach of liquor licensing laws. Latham CJ (with whom Rich J agreed) said (at 582): "The general rule for assessing damages for breach of a covenant by a lessee to deliver up the demised premises in repair was settled by Joyner v Weeks, where it was held that the damages were the cost of putting the premises into the state of repair required by the covenant." To like effect see Starke J at 586 (who said that the measure of damages "is authoritatively stated in Joyner v Weeks") and Williams J at 593 ("At common law the damages recoverable would be the sum required to restore the lavatory in the basement", citing, among other cases, Joyner v Weeks.)

12 The rule is the same in New Zealand. In Maori Trustee v Rogross Farm Ltd [1994] 3 NZLR 410 Tipping J, in delivering the judgment of the Court of Appeal, said (at 420) after a review of the authorities in several jurisdictions: "The rule in Joyner v Weeks is not an absolute rule. It is, however, the prima facie rule which will be applied unless the lessee can show by sufficiently cogent evidence that in both the short and the long term the lessor will definitely suffer no loss or will suffer a loss which can definitely be assessed at less than the prima facie measure."

13 It will be noticed that the cases to which we have referred all concern a covenant to keep and leave premises in repair: a covenant such as cl 2.10. There can be no meaningful distinction between a full repair covenant and cl 2.13, at least as regards the extent to which the clause prohibits alterations or additions without approval. This is because relevantly the obligations are the same. Accordingly damages for breach of cl 2.13 are to be assessed on the same basis as for breach of a repair covenant. So, for example, in Eyre v Rea [1947] KB 567 the defendant breached a covenant not to alter the internal planning of the premises by converting a house into flats and was ordered to pay the cost of re-conversion, although the premises were more valuable as flats. See also Whitham v Kershaw (1885) 16 QBD 613, 616-617 where Lord Esher said: "[I]f there were a covenant to leave the premises in the same condition as when taken, the damages in an action which could only be brought after the termination of the lease would obviously be the cost of replacing the house by a house of equal value."

14 It is indeed fortuitous in this case that the damages recoverable under cl 2.13 are similar to those that could be awarded for a contravention of cl 2.10. It is fortuitious because the appellant did not initially sue for a breach of cl 2.10 and did not ask to add such a claim at trial or, if it could possibly be done, on appeal.

15 The cases do suggest that damages will be assessed on a different basis if the breach is of a covenant to reinstate premises at the end of the term. Here the court must determine: (a) what loss the landlord suffered and what damages are necessary to place the landlord in the same position as if the contract had been performed; and (b) where the cost of reinstatement is claimed, whether the insistence on reinstatement is reasonable: Dowding & Reynolds, Dilapidations: The Modern Law and Practice (2004, 3^rd ed) paras 31-09 to 31-12.

16 James v Hutton and J Cook & Sons Ltd [1950] 1 KB 9 is an example. An assignee of the tenant obtained permission from the landlord to construct a new shopfront in place of the existing one and covenanted that at the expiration of the lease he would reinstate the premises, if so required, to their original condition. The premises were requisitioned by the War Department and remained in the occupation of the government when the landlord started proceedings claiming damages for breach of the covenant to restore. According to the evidence the landlord had no intention of restoring the premises and there was not the slightest likelihood of the shopfront ever being replaced. The evidence also established that the premises were no less valuable by reason of the alterations. Only nominal damages were awarded. Lord Goddard CJ explained (at 16) that in such a case "the general rule as to damages for breach of contract ought to be applied, namely, to ascertain what is the amount of the damage actually suffered." In that case the plaintiff had not suffered any damage at all. To a like effect is Espir v Basil Street Hotel Ltd [1936] 3 All ER 91.

17 Regrettably the judge did not approach the assessment of damages in accordance with the foregoing principles. When dealing with damages he said there were two relevant principles. The first was that cost of repair damages is available "in a relatively narrow range of cases where a tenant has so damaged or modified premises that they are unlettable at the conclusion on the lease." Joyner v Weeks was the authority cited for that proposition. The second principle he relied upon was that "reinstatement costs will not be awarded unless there exists some special interest in reinstatement arising from a radical change to the usage to which the property can be put following renovations by the tenant." For this proposition he cited Evans v Balog [1976] 1 NSWLR 36.

18 The two cases do not support the propositions for which they were cited. We have already explained what was decided in Joyner v Weeks. As to Evans v Balog several observations can be made. The first is that it was not a lease case. The plaintiff’s action was based, among other grounds, on a claim for breach of a contract to repair damage caused by the defendant operating machinery near the plaintiff’s house. Being an ordinary breach of contract case the plaintiff was entitled to recover damages for the loss of his bargain. As Samuels JA said (at 41): "He [a plaintiff] is to be placed, so far as money can do it, in the same position as he would have been in had the contract been performed. Here the defendants promised to repair the plaintiffs’ home. So the plaintiffs are entitled to such a sum as would enable them to have those repairs carried out" [citations omitted]. The second observation is that even if Evans v Balog were a relevant authority (and we think it is not) it does not support the judge’s second principle.

19 The judge also said that the instant case "closely resembled" James v Hutton. However, as we have pointed out, that was a different kind of claim based on a different covenant that warranted a different approach to the assessment of damages.

20 We think, therefore, that the judge erred in his approach to the measure of damages. Ordinarily that would require us to remit the case to the judge to reconsider the damages. In this case, however, that is an unsatisfactory result. The claim is relatively small and the costs are already large, probably disproportionately so. It is in the interests of both parties for us to assess the damages, even if the result is less than ideal.

21 The starting point is to look at what the appellant seeks. First of all it wants an order requiring the respondent to restore the foyer when the premises are vacated. The plaintiff asked for that order at trial. On appeal counsel informed us that was still what the appellant was after, but there is nothing in the notice of appeal that deals with this particular claim. In the alternative, the appellant seeks damages of $1,380,000 for the breach of cl 2.13. This amount is comprised of repair costs ($580,000) and loss of rent ($800,000) while the repairs take place. The respondent has not challenged the accuracy of the assessment of the loss. Its answer to the damages claim is that the appellant has suffered no compensable loss from the breach (save the small sum awarded by the judge) because the value of the reversion has not been diminished.

22 The judge’s finding on this claim was that at the end of the respondent’s lease, "whether that occurs in 2012 or 2017, there will be little, if any, diminution in value of the premises occasioned by [the respondent’s] renovation of the foyer." This was for the reason that the respondent’s works (again quoting the judge) "have not occasioned any significant loss of value to the building. Furthermore, extensive renovation of the foyer would, according to the evidence, be necessary in any event at the end of the lease."

23 The reference to the lease coming to an end "in 2012 or 2017" requires some explanation. The initial term of the lease was to expire on 31 January 2007. However, by an agreement made on 15 May 2006, the respondent accepted a fresh lease from the appellant. The term of the new lease is six years expiring on 31 January 2012, with an option to extend the term for a further period of five years. This is the reason the judge said that the lease would come to an end in either 2012 or 2017.

24 The 2006 agreement is important in several respects. First of all, whether the agreement operated as a lease (which is our view) or as an agreement to lease (a possibility raised during argument), the agreement effected a surrender of the initial lease: Foa’s General Law of Landlord and Tenant (1957, 8^th ed) at 629-630. Secondly, the agreement contained a special condition as follows: "Nothing in this agreement in relation to a varied lease and option shall be construed as affecting, limiting or compromising in any way whatsoever the litigation proceedings in respect to the foyer." This is an important condition. The Joyner v Weeks method of calculating loss, being only the prima facie method, may be displaced depending upon the circumstances. Here the new lease will keep the appellant out of possession for many years. Thus, no rectification works will be undertaken by the appellant until either 2012 or 2017 by which time, as the judge said, the foyer will in any event require refurbishment. Those facts, coupled with the evidence that the reversion had not been damaged at the expiry of the original term (the time at which damages are to be assessed and not in 2012 or 2017 as the judge would have it) would ordinarily be taken into account when deciding whether the Joyner v Weeks method should be displaced. But in this case the new lease and its consequences on possession must be left out of account because that is what the special condition requires. This means that damages must be assessed in an artificial environment – a notional world in which the lease expired by effluxion of time on 31 January 2007. That, however, is simply the bargain the parties struck.

25 There are two factors that bear upon the applicability of Joyner v Weeks. The first is that the reversion had not been damaged. The second is that, in any event, Mrs Bergamin is adamant that the foyer should be reinstated.

26 It is clear that a reinstatement order is not appropriate. Ever since Hill v Barclay [1810] EngR 149; (1810) 16 Ves Jun 402, 403-405 [33 ER 1037, 1037-1038] it has been thought that no order for specific performance would go in respect of a repair covenant. In Rainbow Estates Ltd v Tokenhold Ltd [1999] Ch 64, 72 it was said that specific performance might be available in special circumstances, but we have found no example of such an order having been made. Here it would not be appropriate. There is all manner of difficulty in making an order that will not come into effect for many years perhaps at a time when the person who controls the appellant may not want the order.

27 On the damages issue, we think that Mrs Bergamin’s wish to have the foyer restored is important. First of all her attitude has not been shown to be unreasonable. Indeed she presented herself for cross-examination and was not challenged on this issue. The apparent reasonableness of her position may have been a sufficient basis for withholding permission to the alterations to the foyer if permission had been sought. In Lambert v F W Woolworth and Co Ltd [1938] Ch 883, 907 the Court of Appeal said: "[M]any considerations, aesthetic, historic or even personal, may be relied upon as yielding reasonable grounds for refusing consent" for a tenant to make improvements.

28 We think the same or similar approach is appropriate in relation to a landlord who wishes to restore his premises. That intention is relevant to a claim for the cost of restoration is shown by Tito v Waddell (No 2) [1977] Ch 106 and Ruxley Electronics and Construction Ltd v Forsyth [1995] UKHL 8; [1996] AC 344. It is no answer to say that we are dealing with a commercial building. All over the world there are many beautiful commercial buildings. There are quite a few in Australia. From a businessperson’s perspective a new structure may be as good as an old. But the view of a businessperson is not the only view that is important. It is necessary for us to explain why this is so.

29 Speaking generally in cases of work done (or not done) or damage caused to property in breach of contract, the bases for assessing damages are: (a) the cost of reinstatement; or (b) the diminution in the value of the property due to the breach of contract. The correct measure is whatever is reasonable for the wronged party to recover. An assessment of what is reasonable in a particular case is not to be measured in purely economic terms: Ruxley at 353, 358-359, 360-361, 370-371. Personal preferences of a subjective nature are not irrelevant when choosing the appropriate measure of damage: Atkins (GW) Ltd v Scott (1991) 7 Construction Law Journal 215, 331; Radford v De Froberville [1977] 1 WLR 1262, 1270-1273. This is especially so if the plaintiff’s "predelictions" (the word used by Oliver J in Radford at 1271) are not excessive or extravagant: Parramatta City Council v Lutz (1988) 12 NSWLR 293, 312. See also Black Creek Deer Farm Pty Ltd v ANZ (1996) V ConvR |P54-549, 66,541-66,542.

30 Put another way, we reject the view that objective reasonableness is to be determined solely from the viewpoint of an hypothetical rational economic actor. Such an approach would have the effect of subsuming the "cost of reinstatement" measure of damages within the "damage to the reversion" measure. That is to say, costs of reinstatement would generally be given only if there were a roughly equivalent diminution in value of the property caused by the wrongful conduct.

31 In our opinion the respondent did not discharge the onus of displacing the prima facie method of calculating damages in this case. We would, therefore, allow the appeal with costs, set aside the orders made below and in lieu thereof enter judgment for the appellant for damages in the sum of $1,380,000 with costs. This amount includes the consequential loss of $800,000 for loss of rent during the repairs, a sum which would not ordinarily be recoverable unless the expense is, or is to be, incurred. It is recoverable here only because of the special condition in the 2006 agreement. Finally we note that it is unnecessary to discount to its present day value either component of the loss.

I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Finkelstein & Gordon.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 504 OF 2007

BETWEEN:	BOWEN INVESTMENTS PTY LTD ACN 004 993 579 Appellant
AND:	TABCORP HOLDINGS LTD ACN 063 780 709 Respondent

JUDGES:	FINKELSTEIN, RARES & GORDON JJ
DATE:	13 MARCH 2008
PLACE:	MELBOURNE

32 In late 1996 Bowen Investments Pty Ltd, a company controlled by the Bergamin family, negotiated a heads of agreement with Tabcorp Holdings Ltd for the lease of an office building. Bowen Investments was in the course of finishing the construction of a new building it had developed at 5 Bowen Crescent, Melbourne. Tabcorp expressed a willingness to take a lease over the whole of the premises for 10 years with two five year options. A lease was entered into between Bowen Investments and Tabcorp, commencing on 1 February 1997. This appeal concerns the question whether Bowen Investments is entitled to require Tabcorp to pay for making good the foyer of the building following the expiry of the initial term of the lease.

33 The primary judge found that Mr and Mrs Bergamin delighted in designing and constructing fine buildings. They had taken particular care in designing the foyer of the building. The foyer was constructed of high quality materials. When completed, the foyer had a floor largely made of Canberra York Grey granite. There were some carpet inlays on parts of the floor. Some of the walls were adorned by American Cherrywood panels. Pillars were covered by marble. However, in July 1997, the foyer was completely destroyed by Tabcorp, in breach of the lease, in the course of its renovation to adapt the foyer to its own purposes.

34 What should have been a relatively straightforward case of construing the lease in accordance with ordinary principles, including of the law of landlord and tenant, regrettably became beset with confusion. At the trial, and until the Court raised the issue during argument of the appeal, neither of the parties had attempted to put forward a construction of the lease read as a whole. The course of the proceedings has been most unfortunate. It seems to have got off to a bad start because Bowen Investments asserted that it believed that the lease contained a ‘make good’ requirement, but on its, or more probably its lawyers’, reading of the lease they were unable to identify such a requirement. In that state of belief, Bowen Investments commenced the proceedings seeking relief. After an initial amendment, its pleaded claims were:

35 The primary judge awarded Bowen Investments $33,820 as damages (for breach by Tabcorp of cl 2.13) to enable it to effect building work necessary to restore the foyer to its original proportions. This would increase the net lettable area on the ground floor, in the event that multiple tenants were sought upon Tabcorp’s vacation of the premises. He also awarded Bowen Investments $1,000 as nominal damages for the breach of cl 2.13 in demolishing the foyer and failing to seek Bowen Investments’ consent to the structural alterations.

36 However, his Honour rejected Bowen Investments’ claim based upon the principle in Joyner v Weeks [1891] 2 QB 31. That principle is that the damages payable by a tenant in breach of a covenant to repair at the conclusion of the lease are the cost of repair, irrespective of whether the landlord ever does the repairs. The principle is based upon the common law view that at the expiry of a lease the landlord’s cause of action for damages for the tenant’s failure to perform an obligation to make good should be certain and complete: see e.g. Rawlings v Morgan [1865] EngR 418; (1865) 18 CBNS 776 at 782 per Erle CJ, 783 per Byles J, 784 per Keating and Montague Smith JJ. The promise of the tenant to leave the premises in good repair, after the expiry of the lease, is thus able to be quantified with a sum certain, namely the costs of doing repairs or making good.

37 To ameliorate the harshness of this principle on tenants, some legislatures, but not Victoria’s, have enacted provisions such as s 18 of the Law of Property Act 1925 (UK) and s 133A of the Conveyancing Act 1919 (NSW) so as to provide that the measure for damages cannot exceed the value of the damage to the reversion at the expiry of the lease. These provisions adapt a different common law principle applicable where a landlord sues a tenant for a failure to effect repairs during the currency of the lease. It is that the Court ordinarily will apply a measure of damages based on the diminution in value of the reversion. This is because it is not certain that, at the end of the lease, the premises will be worth less to the landlord. The lease may have many years to run before the reversion falls in, yet the common law requires damages to be assessed once and for all. The latter principle is explained by Lord Herschell LC in Conquest & Booth v Ebbetts [1896] AC 490; see too P Butt, Land Law (5^th ed, Thomson, 2006) at [15105]-[15106].

38 The primary judge was referred to a decision of the New South Wales Court of Appeal: Evans v Balog [1976] 1 NSWLR 36. That case held that, in an action in tort, reinstatement costs would not be awarded to a landlord unless there existed some special interest in reinstatement arising from a radical change to the usage to which the property could be put following renovations by the tenant. However, that case did not concern the entitlement of a landlord to sue a tenant for breach of covenant in a lease.

39 Significantly, the primary judge was not referred to the decision of the High Court applying and approving Joyner [1891] 2 QB 31, Graham v Markets Hotel Pty Ltd [1943] HCA 8; (1943) 67 CLR 567, or to the subsequent decision of the New Zealand Court of Appeal in Maori Trustee v Rogross Farms Ltd [1994] 3 NZLR 410. Rather, he was referred to James v Hutton & J Cook & Sons Ltd [1950] 1 KB 9; [1949] 2 All ER 243. There Lord Goddard CJ, Tucker and Singleton LJJ said that the rule in Joyner [1891] 2 QB 31 would be displaced because the landlord had granted a licence to the tenant to demolish a heritage shop front and install a modern one, on the condition that at the end of the term the tenant would reimburse the landlord for the cost of reinstatement and making good (including the cost of removing the additions and alterations made by the renovation and of restoring the premises to their previous state). The English Court of Appeal took the view that they should not assume the plaintiff had suffered any damage at all by the tenant failing to carry out its bargain: James [1950] 1 KB at 17. I am of opinion that their reasons are not convincing. They relied on the official referee’s findings that not only did the landlord not intend to do any restoration work, it would be a sheer waste of money were it done and there was no evidence that she had suffered any damage. These findings did not explain how the promise was valueless. Had the tenant instead promised to pay [sterling]1,000 at the end of the lease as a condition for approval to do its renovation work, the landlord would have been able to enforce the promise.

40 In the present case the evidence was that Bowen Investments was unhappy with Tabcorp’s renovations, standard of work and finish carried out in breach of the lease. Not only do I not find the reasoning in James [1950] 1 KB 9 persuasive, the Court is bound to follow the decision in Joyner [1891] 2 QB 31, approved as it was in Graham [1943] HCA 8; 67 CLR 567. Joyner [1891] 2 QB 31 sets out the general rule, as Latham CJ recognised: Graham 67 CLR at 582; see also Maori Trustee [1994] 3 NZLR at 417-420 per Cooke P, Casey and Tipping JJ. The New Zealand Court of Appeal said that the rule in Joyner [1891] 2 QB 31 was a prima facie rule which should be applied unless the lessee could show, by sufficiently cogent evidence, that both in the short and longer term, the lessor will definitely suffer no loss or will suffer a loss which can be definitely assessed at less than the prima facie measure: Maori Trustee [1994] 3 NZLR at 420.

41 On 30 October 1996, the parties entered into heads of agreement. They contained what the heads said was a ‘make good provision’ in the following terms:

‘It is acknowledged that TABCORP will, at the expiration of its occupancy, be required to hand over the premises in good and tenantable repair at the time and to make good the premises subject at all times to the normal provisions of fair wear and tear and insured risks that may, in the event of dispute, be determined by President of the Royal Australian Institute of Architects or its successor if and when necessary.’

42 Although it was common ground that a clause in those precise terms was not incorporated into the executed lease, the parties appear to have treated its omission, in that precise form, as somehow governing the whole of the construction of the lease. Their arguments ignored construing the lease having regard to its actual terms as a whole. And, they beguiled his Honour into considering the case on the false premise that there was an absence of a ‘general’ make good clause.

43 The parties later negotiated the terms of the lease. As might be expected, as executed the lease covered over 40 pages, instead of the pithier nine pages comprising the heads of agreement. The lease was executed on 23 December 1996 for a term of 10 years commencing on 1 February 1997. The demised premises were described in cl 1 as being the whole of the land ‘and all improvements thereon’, including the building at 5 Bowen Crescent together with the furnitures, fixtures and other chattels described in the schedule. The net lettable area of the office component of the demised premises was delineated on a plan attached to the lease. The plan showed that the net lettable area of the ground floor, on which the foyer was located, was 397 square metres out of a total of 8,521 square metres (cl 1.2). Clause 2 of the lease set out the tenant’s covenants, relevantly as follows:

At all times during the term without affecting the generality of the preceding two sub-clauses of this clause at its expense:

44 The scheme of these clauses is plain. Commencing with cl 2.13, the tenant is prohibited from making any substantial alteration or addition to the demised premises without the prior written approval of the landlord. The landlord cannot unreasonably refuse to withhold its consent. But the primary judge found that Bowen Investments’ consent was never sought or obtained. In so finding, his Honour rejected Tabcorp’s defence that it acted with consent. No occasion arises for considering whether Bowen Investments unreasonably withheld or delayed its consent, because it never had the opportunity to consider granting it or to determine upon what, if any conditions, it might consent to the unmade request for consent. Moreover, his Honour found that Bowen Investments had been given no opportunity properly to consider any plans. This is not a case where a request to make an alteration had been made and the landlord had unreasonably withheld its consent so that the alteration could have been made by the tenant without any further application to the landlord: cp: Commissioner for Railway v Avrom Investments Pty Ltd (1959) 59 SR (NSW) 63; [1959] 1 WLR 389 at 403 per Lord Somervell of Harrow.

45 The primary judge found that by the early part of 1997 the foyer area of the building had been completed and had a striking appearance. He said that the materials used were of high quality and that the overall effect of the foyer was regarded by the Bergamins as having a timeless quality. The upper office floors had been carpeted but not fitted out pending a determination of the tenant’s requirements. During February and March 1997 there were discussions concerning issues to do with partitioning and the carpeting of office floors. In early April 1997 Lend Lease Interiors, the project managers for Tabcorp’s fit out of the building, informed Bowen Investments that it was proposed to do works on the ground floor, but that the plans had not yet been formulated.

46 Early in the morning of 11 July 1997 Lend Lease’s Mr Phelan telephoned Mrs Bergamin to discuss the proposed commencement of works in the foyer. His Honour was unable to make a finding as to the precise terms of the conversation. After it, Mrs Bergamin wrote to Mr Phelan informing him that there was no objection in principle to the removal of the existing foyer services, provided that Bowen Investments were afforded the opportunity to consider plans and the impact on the building’s integrity and structural implications. She offered co-operation to provided a speedy and appropriate means for progressing with the work. The letter said, however, that one matter which did concern Bowen Investments was the proposed replacement of the granite in the foyer, because Lend Lease was unable to obtain any more of the Canberra York Grey granite. She said:

‘ We acknowledge that you have a requirement to install more granite and that you wish to therefore completely replace the existing granite with a different granite, but remind you of the obligations of the tenant under the lease to make good the premises at the end of the term. This of course would require the "Canberra York Grey" to be reinstated.’

The primary judge preferred the account of the conversation in Mrs Bergamin’s letter to that of Mr Phelan.

47 A meeting was arranged on site for the following Monday, 14 July. At sometime between 11 July and the morning meeting scheduled on 14 July, the existing glass, stone partition, timber panelling and stone floor tiles in the foyer were removed. When Mrs Bergamin and her son arrived shortly before the meeting on 14 July 1997 they were shocked and dismayed to see what remained of the floor stonework being jack-hammered and pieces thrown into the bins. It was evident, as Tabcorp’s Mr Gullquist’s contemporaneous notes made clear, that the Bergamins were unhappy with what had happened in the absence of any prior consultation. But, by then, the need to do something to repair or reinstate or replace the foyer was a fait accompli.

48 The demolition of a newly constructed foyer and the construction of its replacement could not be described as a repair, act of maintenance or of ‘keeping’ the demised premises in repair under cl 2.10.

49 Cases on the construction of particular covenants or clauses in contracts are not, of course, binding authorities on different words used in other leases or contracts. Nonetheless, a body of law, spanning centuries, has developed in respect of the relationship of landlord and tenant. Authorities dealing with terms of leases or covenants providing for commonly encountered situations offer guides as to how the Court will approach the construction of particular language used on particular occasions.

50 The ordinary rules for the construction of contracts apply to leases: Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 at 29 per Mason J with whom Wilson J at 38, Deane J at 51 and Dawson J at 56 agreed. It has long been trite law that an instrument must be construed as a whole. And, among other things, such an approach enables the Court to reconcile inconsistencies of expression in the words used in a natural and common sense way: Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at 437 per McTiernan, Webb and Taylor JJ.

51 The purpose of construction of contracts is to ascertain, by reference to the words used, in the factual matrix in which the parties dealt with one another, what an objective person would reasonably understand the parties to have intended. As Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 at 292-293[2002] HCA 5; ; 76 ALJR 436 at 439 [10]:

‘[10] In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities (In particular, speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1383-5; [1971] 3 All ER 237 at 239-241; L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 at 261[1973] UKHL 2; ; [1973] 2 All ER 39 at 53; and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-7; [1976] 3 All ER 570 at 574-6) which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract: (Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-6; [1976] 3 All ER 570 at 574)

"... presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

"The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used."’

52 Gleeson CJ, Gummow and Hayne JJ said in Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; (2001) 210 CLR 181 at 188:

‘Interpretation of a written contract involves, as Lord Hoffmann has put it (Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 at 912[1997] UKHL 28; ; [1998] 1 All ER 98 at 114. See also the remarks of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 350-352, and of Lord Bingham of Cornhill in Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 at 259): "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." That knowledge may include matters of law, as in this case where the obtaining of intellectual property protection was of central importance to the commercial development of Mr Allen's ironing board (cf Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 at 282, per Lord Clyde).’

53 It is necessary to construe an agreement so as to avoid making it commercial nonsense or working commercial inconvenience. The commercial purpose of the provision, that is to say the purpose of a reasonable person in the position of the parties to the contract, is relevant. That in turn requires attention to the genesis of the transaction, the background, the context, and the market in which the parties were operating, as known to both parties: Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530 at 559 [82] (see too Australasian Performing Right Association Ltd v Monster Communications Pty Ltd (2006) 71 IPR 212 at 236-237 [105]-[108]).

54 In Graham [1943] HCA 8; 67 CLR 567, the tenant removed an existing lavatory in the basement of a hotel, in the course of doing renovation. The tenant closed up the basement lavatory. It used adjoining premises to provide lavatory facilities to patrons of the hotel during the tenancy. By the time the tenant vacated, legislation had been enacted which prevented a lavatory from then being constructed in a basement area. Thus, it had to be located on the ground floor of the hotel, which required very expensive reconfiguration and renovation work to be undertaken. Latham CJ called attention to the covenant on which the landlord there relied. It contained an express undertaking to ‘maintain and keep all buildings’. He said that the tenant had taken the premises with the lavatory upon them and was bound to maintain a lavatory upon them. Instead of maintaining the lavatory, ‘...the defendant had abolished the only lavatory which existed on the demised land’. That was a breach of the lease because the tenant was bound to yield up the building, containing a lavatory, at the end of the term: Graham 67 CLR at 580. The Chief Justice continued (Graham 67 CLR at 582):

‘The general rule for assessing damages for breach of a covenant by a lessee to deliver up the demised premises in repair was settled in Joyner v Weeks [1891] 2 QB 31, where it was held that the damages were the cost of putting the premises into the state of repair provided by the covenant. ... It should be realized that it is the action of the defendant himself in removing the lavatory from the demised premises that has placed him in the position of being required to pay such damages.’

55 Latham CJ reasoned that the tenant had destroyed the existing sanitary accommodation without providing any other accommodation upon the demised premises: Graham 67 CLR at 582. Here, Tabcorp argued that it did replace, almost immediately, the new foyer which it destroyed, with another, and has maintained that replacement.

56 Starke J said that the state of repair required by a covenant to yield up and deliver premises well and substantially repaired depends primarily upon the words used. In that case, he said, there was an obligation to yield and deliver up the premises in such a state of repair as that in which they would be found if managed by a reasonably minded owner having regard to their age, character, ordinary use and the requirements of the tenants likely to take them at the time of the demise or subletting: Graham 67 CLR at 585 citing Lurcott v Wakely & Wheeler [1911] 1 KB 905, Anstruther-Gough-Calthorpe v McOscar [1924] 1 KB 716. In the latter case, Atkin LJ had said, as Starke J pointed out, that such a covenant connotes the idea of making good damage so as to leave the subject matter as far as possible as though it had not been damaged (McOscar [1924] 1 KB at 734). Starke J continued by saying that the covenant ‘... involves renewal of subsidiary parts: it does not involve renewal of the whole’: Graham 67 CLR at 585.

57 Starke J observed that at the conclusion of the tenancy the landlord had required the tenant to put the hotel premises into their original condition, but the tenant refused. He said that this proved a breach of the covenant to yield and deliver up the premises well and substantially repaired: Graham 67 CLR at 585-586. Like the Chief Justice, (see Graham 67 CLR at 582,) Starke J agreed that the measure of damages for breach of a covenant to yield and deliver up in good and substantial repair was authoritatively stated in Joyner [1891] 2 QB at 46. There Fry LJ said that:

‘Where the action is brought upon the covenant to repair at the end of the term, the damages are such a sum as will put the premises into the state of repair in which the tenant was bound to leave them.’

‘If the law requires that repairs shall be effected in a particular manner, then the repairs must be effected in that manner, but it does not follow, because premises must be properly repaired, that the nature and character of the structure in whole or in part must be altered and a totally different structure erected. The question is one of degree and fact (Lurcott [1911] 1 KB at pp 914, 924, 296; Howe v Botwood [1913] 2 KB 387).’

58 He then distinguished the application of s 133A of the Conveyancing Act 1919 (NSW), which has no counterpart in Victoria: Graham 67 CLR at 587.

59 Williams J held that in order to remedy the breach, the tenant had to pay whatever sum was required to reinstate upon the demised premises a lavatory ‘... equivalent to that which was removed ... [t]his will amount merely to the restoration of a subsidiary part of the premises (Lurcott [1911] 1 KB at 924), and the making good the damage so as to leave the subject as far as possible as though it had not been damaged (McOscar [1924] 1 KB at 734)’: Graham 67 CLR at 597; see too at 593-594. Rich J agreed with the three other justices (Graham 67 CLR at 584).

60 This leads to consideration of the general principle of construction of a repair covenant in a lease in Proudfoot v Hart (1890) 25 QBD 42. Lord Esher MR and Lopes LJ held that the words ‘good tenantable repair’, and their analogues, meant:

‘... such repair as, having regard to the age, character, and locality of the house, would make it reasonably fit for the occupation of the reasonably-minded tenant of the class who would be likely to take it.’ (Proudfoot 25 QBD per Lord Esher MR at 52-53, and per Lopes LJ at 56)

61 The principle in Proudfoot 25 QBD 42 has been applied in a variety of situations: e.g. Summers v Salford Corporation [1943] AC 283 at 289-290 per Lord Atkin; Abrahams v Shaw (1969) 72 SR (NSW) 225 per Sugerman JA, Herron CJ and Walsh JA agreeing; Wincant Pty Ltd v South Australia (1977) 69 SASR 126 at 127-128 per Doyle CJ agreeing with Matheson J at 134-135, 137-138. In Proudfoot 25 QBD at 54-55 Lord Esher MR discussed examples of particular kinds of repair. He suggested that a house in a poorer neighbourhood would never be painted in the same way as one in a richer location. We need not decide whether that is necessarily so today. But the point which the Master of the Rolls made was that even a tenant in Grosvenor Square, the more salubrious location, would not be bound to repair a gilded ornamental ceiling on which, over the years, the gilding had fallen into disrepair, by reinstating the gilded ornamentation. He said that a reasonable tenant taking a house in the same location would not require a gilded ceiling. So a tenant who had entered into a mere covenant to leave the premises in tenantable repair would not be bound to regild the ceiling at all: Proudfoot 25 QBD at 54.

62 That emphasises the importance of construing the particular terms of the lease at hand to ascertain what state of repair the parties contemplated in cl 2.10, having regard to cl 2.13.

63 The principal problem with the present proceedings, from their inception, is that the parties ignored the construction of the lease as a whole, searched for and did not find a particular clause reflecting exactly what had been included in the heads of agreement and sought relief to amend, or resist the amendment of, the lease so as to incorporate such a clause. However, the ordinary and natural meaning of the provisions of cl 2, which are set out above, reveal that the parties objectively intended that Tabcorp, as tenant, would have to make good structural changes it effected without Bowen Investments’ consent, unless that consent was unreasonably withheld: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179 [40] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Zhu 218 CLR per the Court at 559 [82]. Thus, cl 2.10 posed an obligation on Tabcorp, when, where and so often as the need would arise, ‘to maintain repair and keep the whole of the demised premises in good and substantial repair working order and condition’.

64 In my opinion, the work that was done to destroy the newly built lobby, and then replace it, could not be characterised as falling within the compass of cl 2.10. That work did not maintain, repair or keep the demised premises. Rather it involved the destruction of a part of them and, then, its refashioning. In addition, cl 2.10 also provided that the principal obligation of maintenance, repair and keeping extended to all fixtures, fittings and things belonging to demised premises ‘... which at any time shall with the approval of the landlord be erected therein or thereon or any part thereof...’ (emphasis added). This made it clear that structural alterations for which Bowen Investments had given consent, such as under cl 2.13, attracted the obligation to maintain, repair and keep to which the introductory words of the clause referred. And, if the parties had not by then made their meaning plain enough, the proviso at the conclusion of cl 2.10 excepted from the obligations of the tenant, any work of a structural nature ‘except such as may be occasioned by the act ... or default of or by the Tenant or relating to the Tenant’s use or occupancy of the Demised Premises’.

65 The work done by Tabcorp in July-August 1997 fell within the latter description. It was structural work occasioned by the direct act of Tabcorp. The work related to its use and occupancy of the building. At the trial, and in the pleadings, no attention was paid to cl 2.10, nor does it seem to have been relied on before the primary judge. Rather the parties concentrated on the effect of cl 2.11. This provided relevantly that, at the expiration of the lease, Tabcorp’s obligation was peaceably to surrender and yield up to Bowen Investments the whole of the demised premises and every part of it together with the fixtures and fittings of the landlord ‘in good and tenable repair, order and condition in all respects (but subject to the exceptions described in Clause 2.10) ...’. Once again, the obligation to yield up the premises at the conclusion of the lease was related to the exceptions referred to in cl 2.10. What was good and tenantable repair, order and condition in all respects was in part, at least, to be ascertained by Tabcorp’s performance of the obligation under cl 2.10 to maintain, repair and keep the whole of the demised premises in good and substantial repair working order and condition during the currency of the lease.

66 Next, cl 2.12 commenced with a chapeau that provided that Tabcorp was obliged at all times during the term, without affecting the generality of cll 2.10 and 2.11, at its expense, inter alia, to make good ‘any breakage or damage to the building or any part thereof ... occasioned by ... misuse or abuse on the part of the Tenant ... or otherwise occasioned by any breach or default of the Tenant hereunder ...’ (cl 2.12.4). Again, these words capture the demolition work performed in July 1997 on the brand new foyer in breach of cl 2.13. What Tabcorp did, as the judge found, was to perform structural alterations in breach of its obligation under cl 2.13 to seek and obtain Bowen Investments’ prior consent, subject to any withholding of the consent being reasonable. Damage was done to the building by removing the expensive new fittings and fixtures in the foyer. That was a breach of cl 2.13 of the lease by Tabcorp, as found by the judge. And, it was damage or breakage to the building occasioned by the misuse or abuse of Tabcorp, namely its unauthorised destruction of the foyer.

67 For this purpose, making good the damage under cll 2.10, 2.11 and 2.12 must involve replacing the part of the structure which Tabcorp destroyed with its substantive equivalent, in terms of not just function, or dimensions for the purposes of restoring the original net lettable area, but also quality of materials and appearance. One reason why cl 2.13 afforded both landlord and tenant the capacity to make reasonable structural alterations and to impose reasonable conditions for that to be done, was that Bowen Investments’ consent to the work would affect the operation of cll 2.10, 2.11 and 2.12.

68 And, cl 2.12.4 reinforced the construction, at which I have arrived, that the obligation of Tabcorp to make good did not extend to do work of a structural nature ‘... except such as may be occasioned by the act ... misuse or default of or by the Tenant or relating to the Tenant’s use or occupancy of the Demised Premises’. The latter part of that clause, like the exception in cl 2.10, shows that the parties intended the tenant to have an obligation to make repairs to structural damage for which it had been responsible, inter alia, because it breached the terms of the lease, including cl 2.13. I am of opinion that the provisions which I have highlighted from cll 2.10-2.12 ensured that if structural alterations were made in breach of cl 2.13, the tenant had to make good its unauthorised changes when the term came to an end.

69 The primary judge noted that the parties had agreed in April 2006 (signed and returned by Tabcorp on 15 May 2006) that the lease was extended for a period of six years from 1 February 2006. He said that this agreement provided that the existing lease should continue to operate subject to certain immaterial modifications and that an option for a further five year term until 31 January 2017 was also agreed. His Honour also noted that the April 2006 agreement contained a clause which provided that nothing in it should be construed as affecting, limiting or compromising in any way the present proceeding. Before us there was debate as to whether we should receive this agreement in evidence. We said that we would give our decision on that question in our reasons.

70 The considerations governing the exercise of the power to admit further evidence on appeal under s 27 of Federal Court of Australia Act 1976 (Cth) were discussed by McHugh, Gummow and Callinan JJ in CDJ v VAJ (1998) 197 CLR 172 at 199-203 [100]-[113]. Because the section is remedial in nature, its principal purpose is to give a court exercising appellate power a discretion to admit further evidence where that evidence would buttress findings already made at the trial: CDJ 197 CLR at 201 [109]. Given that both parties sought to place the original evidence of their April 2006 arrangements before his Honour and neither suggested any prejudice would be occasioned to it by our receiving the original, I am of opinion that, since it buttresses his Honour’s description of the terms of the arrangement, it ought be admitted on appeal.

72 We were not informed of, and the parties did not seek to lead any evidence before his Honour or us, whether the April 2006 agreement had become reflected in a registered or registrable variation of the original demise or a new demise of the premises: Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242. There was no evidence that any final form of variation of lease had been agreed or signed.

73 In my opinion, the intention of the parties was to agree that their relationship, so far as it related to the dispute concerning the foyer, was to be governed on the basis of their position under the original lease at the time it expired. The parties accepted that that was the time at which any accrued rights crystallised in respect of what had happened in the foyer. If there were an obligation on Tabcorp to make good the foyer, either contained in the lease or to be imposed through the granting of relief to Bowen Investments by rectification or variation of the lease under s 87 of the Trade Practices Act, the parties accepted that the question whether or not Tabcorp was in breach of the obligation to make good would be assessed as at the expiry of the original lease. That position of the parties should be given effect. In any event it is correct.

74 The commercial purpose of the April 2006 arrangements was to ensure that the parties had a future relationship which they defined in that document, subject to the making of any later agreed charges. As a matter of commercial common sense the entry into the April 2006 agreement meant that the parties would be able to continue a long-term relationship while accepting that they were in a substantial dispute as to the obligation to make good asserted by Bowen Investments. This was necessary because of cl 5.1 of the lease. It granted Tabcorp an option to take a further term of five years from the expiry of the original 10 year term on 31 January 2007. The option had to be exercised not less than nine months prior to that time. But, it could only be exercised if, at the time of exercise, Tabcorp were not in default of the covenants and agreements contained in the lease and Bowen Investments had not waived any default: Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1959) 59 SR (NSW) 122; Commonwealth v Antonio Giorgio Pty Ltd (1986) 12 FCR 51; see too Falk v Haugh [1935] HCA 35; (1935) 53 CLR 163 at 176-177. Since the commencement of the proceedings in 2005, there had been a substantial issue between the parties as to whether Tabcorp could satisfy cl 5.1 because of its alleged defaults. The April 2006 agreement ensured that the parties would be able to proceed with a commercial relationship of landlord and tenant while, as it were, agreeing to differ as to the result of the proceedings. Neither wished the outcome of the proceedings to prejudice the continuance of their relationship.

75 In those circumstances, the April 2006 agreement does not affect matters. On the evidence before us, at common law the original lease continued in operation until 31 January 2007 when it expired by effluction of time. Although there may have been an executory agreement for an extension or variation, there is no evidence that that agreement had been executed by creating a variation or new lease in registrable form. In equity, the April 2006 agreement may have operated by determining the original lease a year earlier on 31 January 2006 and granting a new lease for six years from 1 February 2006. That would have the effect of crystallising the parties’ rights at 31 January 2006: Chan 168 CLR at 252 per Mason CJ, Brennan, Deane and McHugh JJ.

76 It does not appear to make any difference whether the term of the original lease expired on 31 January 2006 or 2007 because the April 2006 agreement expressly so provided. However, this issue was not argued. The parties were entrenched in their positions. Bowen Investments wanted to enforce its rights. Tabcorp was insistent that it had no obligation to make good or repair or pay damages at the expiry of the original lease – whether the expiry occurred in 2007 or would be taken to have done so on the commencement of the new six year lease on 1 February 2006. It follows, that Tabcorp was in breach of the obligation to make good at the expiry of the lease on 31 January 2007 or a year earlier. The relief to which Bowen Investments may be entitled can be moulded so as to take account of Tabcorp’s breach as at the expiry of the lease. But, in my opinion we should hear the parties as to the correct date.

77 Tabcorp argued that there was no reason to disturb the primary judge’s assessment of damages for the breach of either cl 2.13 itself, or that clause and one or more of cll 2.10, 2.11 or 2.12. It argued that the basis upon which the primary judge reached his assessment provided a true reflection of the reasonable cost of repair and restoration work needed to address its breaches of the lease. It also pointed to criticisms of the application of the rule in Joyner [1891] 2 QB 31 by academics and various Parliaments in enacting legislation such as s 133A of the Conveyancing Act (NSW). However, Tabcorp accepted that the policy of the Parliament of Victoria was reflected in its inaction on this issue, in contrast to other jurisdictions.

78 Nonetheless, Tabcorp argued that, in reliance on James [1950] 1 KB 9 and the decision of the House of Lords in Ruxley Electronics & Construction Ltd v Forsyth [1995] UKHL 8; [1996] 1 AC 344, the intention of the injured landlord or plaintiff as to the use of any damages he, she or it receives, can be relevant to their quantification. Thus, in James [1950] 1 KB 9, the official referee had found that despite making a claim for damages for alterations to the heritage façade, the landlord in that case had no intention of actually effecting repairs for which damages were sought. The English Court of Appeal held that the plaintiff was only entitled to nominal, not substantial damages. Tabcorp relied in particular on what Lord Lloyd of Berwick had said in Ruxley [1995] UKHL 8; [1996] AC 344 at 372C-D:

‘... the courts are not normally concerned with what a plaintiff does with his damages. But it does not follow that intention is not relevant to reasonableness, at least in those cases where the plaintiff does not intend to reinstate.’

See also Dowding and Reynolds, Dilapidations: The Modern Law and Practice (3^rd ed, Sweet & Maxwell, 2004) at [31-05]; cf: Alfred McAlpine Construction Ltd v Panatown Ltd [2000] UKHL 43; [2001] 1 AC 518 at 549C-551G per Lord Jauncey of Tullichettle, cp: the dissenting views per Lord Goff of Chieveley at 589F-590H and per Lord Millett at 592F.

79 Their Lordships reviewed a number of authorities including Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 and Jacob & Youngs Inc v Kent 230 NY 239; 129 NE 889 (1921) in which the majority judgment of the Court of Appeals of the State of New York was delivered by Cardozo J. The House of Lords concluded that a relevant matter for the Court to take into account in quantifying damages, in a case where work as constructed did not completely meet the specifications but achieved the practical purpose for which it was built, was whether the plaintiff owner intended to use any damages awarded in reinstating the work. They held that the intention of the plaintiff not to use the award to reinstate, when as a practical matter the work as construed substantially served its purpose, could make it unreasonable to quantify the damages at the cost of reinstatement.

80 The underlying policy rationale for this reasoning seems to be that the owner can keep and use the technically defective, but practically useful, work and, at the same time, have the whole of the cost of its rectification in his or her pocket. Lord Jauncey of Tullichettle observed that damages are designed to compensate for an established loss and not to provide for a gratuitous benefit to the aggrieved party. It followed, he said, that the reasonableness of an award for damages was to be linked directly to the loss sustained: Ruxley [1996] AC at 357E-F. Thus, he held that if it were unreasonable in a particular case to award the cost of reinstatement, that must be because the loss sustained did not extend to the need to reinstate. A failure to achieve the precise contractual objective did not necessarily result in a loss which was occasioned by a total failure to comply with the contract. He said that such a result was recognised by the High Court’s qualification of the rule for the award of damages in a building case expressed in Bellgrove 90 CLR at 617-618. He characterised this as providing that the quantification of damages to achieve conformity with a contract would be qualified by the requirement that the work to be undertaken was not only necessary to achieve conformity but was a reasonable course to adopt. Lord Lloyd of Berwick used similar reasoning: Ruxley [1996] AC at 366E-370B.

81 In Bellgrove 90 CLR at 618-619 Dixon CJ, Webb and Taylor JJ said that a building owner’s right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions ‘necessary’ and ‘reasonable’. They observed that many examples could be given of remedial work which, though necessary to produce conformity, would not constitute a reasonable method of dealing with the situation. They held that:

‘... in such cases the true measure of the building owner’s loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials.

As to what remedial work is both "necessary" and "reasonable" in any particular case is a question of fact.’ (emphasis added)

82 The words just emphasised refer to a different test to that provided by the rule in Joyner [1891] 2 QB 31 and Graham 67 CLR 568. They reflect a general measure of damages similar to the qualification of the rule in Joyner [1891] 2 QB 31 applied by a provision such as s 133A of the Conveyancing Act 1919 (NSW).

83 But in Bellgrove [1954] HCA 36; 90 CLR 613 the High Court proceeded on a distinct, and conceptually sounder, basis than the intention of the owner to limit the damages recoverable for defective work. They looked at whether the rectification work was objectively both necessary to produce conformity with the specifications and a reasonable expedient. Dixon CJ, Webb and Taylor JJ did not have regard to the subjective intention of the plaintiff to use any award. Rather, they held that if it were objectively reasonable to require the work, damages were payable. Dixon CJ, Webb and Taylor JJ said in Bellgrove 90 CLR at 620:

‘It was suggested during the course of argument that if the respondent retains her present judgment and it is satisfied, she may or may not demolish the existing house and re-erect another. If she does not, it is said, she will still have a house together with the cost of erecting another one. To our mind this circumstance is quite immaterial and is but one variation of a feature which so often presents itself in the assessment of damages in cases where they must be assessed once and for all.’ (emphasis added)

See too Carter & Harland’s Contract Law in Australia (4^th ed, Butterworths, 2002) at [2156]; Seddon & Ellinghaus, Cheshire & Fifoot’s Law of Contract (8^th Aust ed, Lexis Nexis, 2002) at [23.26], p 1001.

84 If a reasonable person would not require rectification or reinstatement because the work or cost necessary to bring about conformity with the specifications was out of all proportion to the disconformity, and if the work substantially served its purpose, then it would not be reasonable to use, as the measure of damage, the cost of reinstatement. This has nothing to do with the subjective purpose of a plaintiff in an action for breach of contract. Nor should it.

85 Where issues of personal taste affect a person’s decision to specify work of a particular kind or quality to be performed as part of a contract, the other contracting party is not usually at liberty to depart from that specification in performing the work. That is why the Court held in Bellgrove 90 CLR at 617 that a builder who provided a building painted in quite a different colour to that specified in the contract would be liable for the cost of repainting.

86 Many actions for damages for breach or enforcement of rights under a contract involve cases in which a party will not use the amount recovered as any form of compensation. Thus, the rules for quantifying damages in cases of sales of goods or shares may give buyers or sellers windfalls because they depend on market prices on a particular day when the plaintiff, had the transaction actually occurred on that day, would have suffered a loss or made a profit according to how radically the market changed on the next day. In such cases it is still necessary and reasonable to award damages, even though the plaintiff may, in truth, not be compensated by such an award and, indeed, may receive a windfall. The use of a plaintiff’s subjective intentions as to what will be done with the award as a criterion for assessing his or her entitlement to damages for a breach of contract will produce commercial uncertainty. The purpose of the law of contract is to enforce bargains, good or bad, according to their terms. It is not to enforce or ignore what the subjective views of a party might be.

87 In Director of War Service Homes v Harris [1968] Qd R 275 at 278-279 Gibbs J, with whom Stable and Hart JJ agreed, held that Bellgrove [1954] HCA 36; 90 CLR 613 established the applicable measure of damages which a building owner was entitled to recover when a builder, in breach of contract, delivered to the owner a building which did not conform to the specifications. Gibbs J said:

‘If the owner subsequently sold the building, or gave it away, to a third person, that would not affect his accrued right against the builder to damages according to the same measure. The fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to effect the remedied work, but assuming that it would be reasonable to do the work the owner would still be entitled to recover as damages the cost of remedying the defects or deviations from the contract (assuming of course that the contract price had been paid). In assessing those damages it would not be relevant whether the owner was under a legal liability to remedy the defects, or whether he had made a profit or a loss on the sale of the building, for the builder has no concern with the details of any contract that the owner might make with a third party. There is a principle that in actions of non delivery or breach of warranty under a contract for the sale of goods "the law does not take into account in estimating the damages anything that is accidental as between the plaintiff and the defendant, as for instance an intermediate contract entered into with a third party for the purchase or sale of the goods" (Rodocanachi v Milburn (1886) 18 QBD 67 at 77: Williams Brothers v Ed T Agius Ltd [1914] AC 510; Slater v Hoyle [1920] 2 KB 11). And this principle (which has been applied to a contract for the sale of a lease, plant, buildings and stock, treated as Realty-Brading v F McNeill & Company Limited [1946] Ch 145) should in my view be similarly be applied to the case of a building contract.’ (emphasis added)

88 Gibbs J then applied that principle. He held that the owner of the defective building had an accrued right to damages, the quantum of which was not affected by what the owner might decide to do in the future. I am of opinion that the principle stated by Gibbs J was correct and should be followed.

89 However, since then, a number of appellate decisions in Australia has examined the application of the principle in Bellgrove [1954] HCA 36; 90 CLR 613 in a variety of situations, principally in building contracts. The Court of Appeal of the Supreme Court of New South Wales in Hyder Consulting (Australia) Pty Ltd v Wilh Wilhemsen Agency Pty Ltd [2001] NSWCA 313 decided that the actual cost of the replacement work should be awarded. This result was unsurprising. There, the trial judge had applied a theoretical cost for rectifying defective building work in proceedings taken against an architect who did not pass on instructions to the civil engineer as to the strength required for a pavement which was constructed. However, the actual cost of the rectification work was in evidence and was significantly less than a quote which the trial judge had applied. Meagher JA held that the actual cost should be discounted for betterment, but the majority, Sheller and Giles JJA disagreed.

90 Giles JA delivered the leading judgment, with which Sheller JA agreed: Hyder [2001] NSWCA 313 at [25]. Giles JA discerned a principle that if rectification work had not been carried out, then a theoretical cost had to be found, because damages must be assessed once and for all, and must be awarded even though the rectification work might not be carried out: Hyder [2001] NSWCA 313 at [99]. He added that previously in Central Coast Leagues Club Limited v Gosford City Council (unreported, Sup Ct, NSW, 9 June 1998) he had held that no damages should be awarded if it were found that the rectification work would never be carried out. He said that Harris [1968] Qd R 275 and De Cesare v Deluxe Motors Pty Limited (1996) 67 SASR 28 (a decision of the Full Court of the Supreme Court of South Australia) were distinguishable on the ground that the actual cost of rectification was not known in either case. He also said that, in Harris [1968] Qd R 275, it had been held that the reasonable cost of rectification ‘... could still be the measure of the former building owners’ losses’: Hyder [2001] NSWCA 313 at [99]- [100] (emphasis added).

91 However, in Harris [1968] Qd R 275, the actual cost of rectification work had been paid by the Director of War Service Homes after he had sold the properties to purchasers who had complained about the building defects. Hyder [2001] NSWCA 313 was, in fact, a case very similar to Harris [1968] Qd R 275 on the facts, because the building work had been rectified in each case. In the Queensland case the property had been sold, but the original building owner was held to be entitled to recover. As Meagher JA pointed out in Hyder [2001] NSWCA 313 at [19] the ratio of Bellgrove 90 CLR at 617-618 was that:

‘... where the price of rectification is ascertained, that price cannot be discounted because of the fact that the plaintiff will not, or might not, spend all the money on the rectification in question.’

92 Most recently in Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253, Giles JA, with whom McColl and Campbell JJA agreed (at [112] and [113]), accepted a criticism of his reasoning in Hyder [2001] NSWCA 313 subsequently made by Hodgson JA in Scott Carver v SAS Trustee Corporation [2005] NSWCA 462 (from which special leave to appeal was refused on the ground that no challenge had been made to Bellgrove [1954] HCA 36; 90 CLR 613; see Ace Ceramics Pty Limited v SAS Trustee Corporation [2006] HCA Trans 325). Giles JA noted that in Hyder [2001] NSWCA 313 at [99] he had referred to his earlier decision in Central Coast Leagues Club as holding that if it were found that rectification work would never be carried out, no damages should be awarded. In Chocolate Factory [2007] NSWCA 253 at [62], he accepted the reservations expressed by Hodgson JA in SAS Trustee [2005] NSWCA 462 at [40]- [44] and agreed that what he said in Central Coast Leagues Club was apt to mislead. Giles JA revised his earlier view saying that it is necessary to ask why the rectification work would never be carried out. He held that if rectification work would not be carried out because of supervening events and it was established that the plaintiff had not been deprived of the benefit of the performance of the contract, it would suffer no compensable loss. Giles JA said that the plaintiff’s intention to carry out the rectification work was not of significance in itself. He said in Chocolate Factory [2007] NSWCA 253 at [60]:

‘The significance will lie in why the plaintiff intends or does not intend to carry out the rectification work, for the light it sheds on whether the rectification is necessary and reasonable. Putting the same point not in terms of intention, but of whether or not the plaintiff will carry out the rectification work, whether the plaintiff will do so will have significance for the same reason, and not through the bald question of whether or not the plaintiff will carry out the rectification work. That question is immaterial, see Bellgrove v Eldridge.’

93 In my opinion that reasoning is contrary to the decision in Bellgrove [1954] HCA 36; 90 CLR 613. A plaintiff whose walls were painted the wrong colour would suffer a loss, equating to the cost of repainting. The fact that the plaintiff may not wish to spend that money because he or she had changed their mind about the attractiveness of the colour, or subsequently sold the house, does not affect the fact that the work was performed in breach of contract and, in order to make good the breach, rectification was both reasonable and necessary. The necessity which the rule in Bellgrove [1954] HCA 36; 90 CLR 613 addresses goes to the question of bringing the work into conformity with the contractual promise. Reasonableness goes to whether the performance provided, defective as it was, ought be corrected having regard to the objective intentions of the parties discerned from their contract. Hence the example in Bellgrove 90 CLR at 618 of it being unreasonable to require rebuilding where the specification was for second-hand bricks and new ones were used. Doyle CJ captured the applicable principle neatly in De Cesare 67 SASR at 32 saying:

‘... the owner who chooses to make do with defective contractual performance is entitled still to an appropriate award of damages because that is the measure of what the plaintiff has lost.’

94 Most recently, in UI International Pty Ltd v Interworks Architects Pty Ltd [2007] QCA 402 the Court of Appeal of the Supreme Court of Queensland looked once again at this question. Keane JA, with whom Holmes JA agreed, delivered the leading judgment. The case involved an appeal against a striking out of certain paragraphs of a statement of claim. There, UI International had developed and sold most of a major residential, retail and office development project. After construction was completed, the development was subdivided into a number of community title schemes. Most of the lots in the schemes had been sold. No loss was claimed on the basis that UI International had not received full market value for lots that it had sold, or that any lots it retained were worth less than full market value by reason of the alleged defects. Rather, UI International claimed that it was entitled to damages against the builder and others on the basis that the project as constructed failed to meet its ‘development objective’. That ‘development objective’ was defined in the statement of claim to be a development erected on the land which was reasonably fit for its intended purpose, namely a good quality marketable mixed purpose commercial, retail, and residential complex. The Queensland Court of Appeal held that it was not arguable to assert that the defendants had not constructed a good quality marketable project when the lots in it were sold or were worth no less than they would have been had the alleged defects not been present.

95 In UI International [2007] QCA 402 at [89], Keane JA said that the Court must ask what amount of money is necessary to put the plaintiff in the position it would have been in had the project been marketable as promised in accordance with the fundamental principle of assessment of damages for breach of contract. In the factual context of that case, he held that the answer was the amount of money which reflected the difference between actual realisable value in the market and the realisable value the project should have had. On the pleaded case there, he said that difference was nil. Keane JA distinguished Bellgrove [1954] HCA 36; 90 CLR 613 saying that it stood in marked contrast to cases where a plaintiff’s expectation interest under the contract was in the marketability of the development. In cases like that, Keane JA said that the plaintiff’s expectation interest could be fully vindicated by an award of damages which reflected the diminished value of the asset as an article of commerce in comparison with the article which should have been produced: UI International [2007] QCA 402 at [88]. Keane JA followed what Gibbs J had said in Harris [1968] Qd R at 278-279 (UI International [2007] QCA 402 at [94], see too at [93]), saying:

‘The private intentions of one party must not be confused with the contractual intentions of the parties enshrined in the contract’.

96 In the present case, Bowen Investments had at least an expectation interest that its rights under cl 2.13 to approve proposed structural alterations would be given effect, subject to it not acting unreasonably by withholding its consent. Moreover, it had the contractual expectation of the premises being delivered up at the end of the term in good repair, and of the tenant, Tabcorp, being contractually bound by the terms of the lease to make good and repair under cl 2.10.

97 Here, Tabcorp took a lease of a new building with the suite of covenants referred to above. It made alterations for which it never sought and never received approval. I am of opinion that the proper construction of the lease requires a conclusion that Tabcorp was not entitled to return the premises in the altered condition at the end of the term. While a reasonably minded tenant would be likely to take the Bowen Investments’ building in its current condition, subject to the slight alterations found by his Honour to be required, the lease did not permit the making of the alterations in the way in which they were made in the first place: cp: Proudfoot 25 QBD at 52−53.

98 In Bellgrove 90 CLR at 617-618, the High Court elucidated the principle which it applied from a number of building cases in which lump sum building contracts had not been completed in exact accordance with the specifications. Thus, in some, the building owners sought to escape liability to make any payment at all on the basis that the contract being entire, unless fully performed, did not permit the builder to recover. In others, the builder sought to recover on the basis of badly performed work which nonetheless conferred some benefit on the owner. In all of the cases it was recognised that the owner had obtained something of value. Thus, in some, the builder was allowed to recover upon a quantum meruit for work and materials, while in others the owner was entitled to deduct the cost of rectification. That is how Dixon CJ, Webb and Taylor JJ distilled the principle that the building owner was entitled to recover the cost of rectification provided that the rectification proposed was both necessary, to bring about conformity with the contract, and a reasonable course to adopt. ‘Reasonableness’, in that context, can be seen to be what the owner could require having regard to the terms of the contract and the nature of the departure from them in the performance proffered by the other party. That is, of course, a factual enquiry.

99 Here, Tabcorp deliberately demolished a brand new foyer. It now asserts that because it rebuilt a different foyer, to its own design, the owner is financially no worse off, apart from the small amount necessary to restore the larger net lettable area. Tabcorp argued that Bowen Investments still has a building with a serviceable foyer and that the rent that Bowen Investments will be able to attain with the foyer, altered by using the small amount of damages awarded by his Honour, will generate a rent no less than would be achievable had the foyer been the original one.

100 There is no reason not to apply the rule in Joyner [1891] 2 QB 31 in such a situation. Victoria’s Parliament has not sought to mitigate against its operation, unlike other parliaments. No term of the lease justified the alteration and delivery up by Tabcorp in the altered state. Whether or not Bowen Investments intends to restore the foyer to its original condition is not relevant for the reasons given by Gibbs J in Harris [1968] Qd R at 278-280.

101 In Gates v City Mutual Life Assurance Society Ltd [1986] HCA 3; (1986) 160 CLR 1 at 11-12 Mason, Wilson and Dawson JJ lucidly explained that the object of an award of damages in contract was to place the plaintiff in the position in which it would have been had the contract been performed. They said:

‘... he is entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred, in reliance on the contract (reliance loss). In tort, on the other hand, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the tort not been committed (similar to reliance loss).’

Here, the bargain, relevantly, was for Tabcorp, as tenant, to repair and make good the demised premises at the expiry of the existing lease. The landlord had constructed a foyer using high quality materials. The tenant decided it was unsuitable for its purposes. Tabcorp decided to take the drastic step of demolishing the new foyer without Bowen Investments’ permission or consultation. The foyer was replaced with another, using different materials adapted to the tenant’s needs and tastes. This suggests that there is nothing unreasonable about the landlord insisting on the performance of the tenant’s promise to make good at the end of the term.

102 Had the parties agreed under cl 2.13 on a specification for Tabcorp to construct the foyer which now exists, and had Tabcorp departed from those specifications, depending on the extent of the disconformity and the material of what was built, it may not be reasonable for the landlord to insist on compensation or restoration of the foyer as now claimed by Bowen Investments. But that is not what happened here.

103 There is a distinction between the principle in Joyner [1891] 2 QB 31 and that adopted in the building cases. The prima facie rule laid down in Joyner [1891] 2 QB 31 and applied in Graham [1943] HCA 8; 67 CLR 567 provides commercial certainty for landlord and tenant as to their responsibilities at the end of leases. It avoids arguments as to whether the landlord is to receive damages assessed as the diminution in value rather than reinstatement cost for breach of the usual forms of covenant to yield up at the end of the lease in good order and repair.

104 Moreover, it is not the role of this Court to develop the law of landlord and tenant to take account of later developments, since the High Court has applied the principle in Joyner [1891] 2 QB 31 in Graham [1943] HCA 8; 67 CLR 567. In Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 at 403 [17] Gaudron, McHugh, Gummow and Hayne JJ said that it was for the High Court alone to determine whether one of its previous decisions was to be departed from or overruled.

105 In his classic speech in British Westinghouse Electric & Manufacturing Company Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673 at 691 Viscount Haldane LC recognised that the rule in Joyner [1891] 2 QB 31 was outside the ordinary principle of mitigation. The Lord Chancellor said that the decision in Joyner [1891] 2 QB 31 recognised that:

‘... there had been a constant practice of laying down the measure of damages as being the cost of putting into repair, and that in the particular class of cases with which they were dealing it was a highly convenient rule which ought not to be disturbed. Any other measure appeared to involve complicated enquiries. Moreover, the arrangement between the lessor and the new lessee was res inter alios acta with which the original lessee had nothing to do and which he was not entitled to set up.’ (emphasis added)

106 The enquiries to which he was referring would include issues as to the landlord’s intentions and the effect on the value of the reversion. Viscount Haldane LC distinguished that position from the one in British Westinghouse [1912] AC at 691 where the jury or judge or arbitrator was entitled to look at what had actually happened and balance loss and gain. In that case, their Lordships held that, acting prudently, the plaintiff would have replaced the inferior turbines with more modern ones anyway and could not throw upon the contract breaker the cost of the new machines. This was because a reasonable, prudent business person in the position of the plaintiff would have updated his or her equipment with the more efficient, recently invented, equipment.

107 The anomaly which the rule in Joyner [1891] 2 QB 31 throws up has been addressed by legislation in some jurisdictions. However, it is not for us to discard a well-established rule of law. It is regarded as an exception, but applicable and important for providing a prima facie measure of compensation where a lease expires and a tenant has not carried out the covenant to deliver up the property in the order and condition in which it ought to have been kept during the currency of the lease.

108 Of course, here, the parties could have addressed the impact of any anomaly arising under Victorian law by providing for it in the lease itself. In cases of relief against forfeiture arising from a tenant’s breach of a covenant in a lease, the Court expects people to carry out their bargains in accordance with the terms of their agreement. Equity will not allow contracting parties to buy their way out of the consequence of departure from an agreement by an uncovenanted payment, so as to obtain relief against forfeiture simply by paying money (Shiloh Spinners Ltd v Harding [1973] AC 691 at 723F-G per Lord Wilberforce). Likewise, a tenant in breach of its obligations under a lease cannot expect that the Court will allow it to eschew the consequences of its breach.

109 Here, the conduct of Tabcorp demonstrated that there was a radical difference between what the landlord had newly constructed and what Tabcorp wanted in its place, which made the former’s foyer unsuitable for Tabcorp’s operations. There does not seem to be any good reason in principle why, when Tabcorp had to resort to such a significant alteration of the demised premises, in breach of its lease, the Court should take the view that this the radical change should be forced upon the party not in default. It follows that the rule in Joyner [1891] 2 QB 31, which the parties must be taken to have known (Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 at 645 per Stephen J), applied to their relationship of landlord and tenant at the time they entered into the contract, and ought now to apply in the events that have occurred.

110 Tabcorp argued that there was insufficient evidence to warrant a conclusion that Bowen Investments would reinstate, were it awarded compensation based on the principle in Joyner [1891] 2 QB 31. Tabcorp pointed to the absence of any evidence led by Bowen Investments, through witnesses, of an intention to reinstate. Tabcorp argued that by June 1998 it had made its intention not to reinstate then or in the future very clear. After a meeting at that time with Bowen Investments, Tabcorp said that the next time the issue of reinstatement arose was at the time of the 2004 rent review. Then, reinstatement was raised as a justification by Bowen Investments for a proposition that a higher rent would have been earned by a reinstated foyer compared to the one which Tabcorp had constructed. On 4 May 2004, Tabcorp wrote to Bowen Investments refusing to reinstate or pay for reinstatement. Tabcorp also argued that the independent valuer appointed to conduct the rent review concluded that a reinstated foyer would make no difference to the rent that was payable.

111 Bowen Investments pleaded that it had asked Tabcorp to reinstate in 2004 and that Tabcorp had refused in its letter of 4 May 2004. Tabcorp admitted those matters on the pleadings. In its defence it reiterated that it did not intend to and would not reinstate the foyer to the condition it was in prior to the commencement of its work in July 1997.

112 When confronted with the fact that Tabcorp’s pleaded case demonstrated that although it had been asked to reinstate and had refused to do so in 2004, it said that the context in which the request arose did not demonstrate an intention by Bowen Investments to reinstate at the expiry of the lease. In that context, Tabcorp argued that Bowen Investments had failed to discharge an onus of proof that the reinstatement was a reasonable, or necessary, or even realistic course of action which would be adopted by Bowen Investments were it to receive the compensation sought. It argued that the primary judge had found that the June 1998 meeting had made it clear that Tabcorp would not be reinstating. This raised a question as to whether Bowen Investments had an onus of proving either a present intention to reinstate, were compensation paid, or an actual commitment to do so. Tabcorp argued that a principle was discernable from the decision in James [1950] 1 KB 9 and that Bowen Investments carried an onus of proving at least its intention to reinstate. It contended that, absent any evidence in support of the proposition, the Court could not find any genuine intention of Bowen Investments to reinstate on the evidence.

113 The purpose of the rule in Joyner [1891] 2 QB 31 was to establish a prima facie measure of damages based on the objective fact that the tenant had left the property at the end of the lease in a state of repair falling short of that which it had covenanted it would have achieved at that time. Their Lordships made a policy decision to avoid arguments both of the present kind as well as other arguments including comparisons between the value of the reversion and the cost of the work that ought to have been, but was not, performed. Thus, there would be a simple, readily known, way of calculating the damages which would be payable by the tenant. So much was recognised in Graham 67 CLR 576 and Maori Trustees [1994] 3 NZLR at 420.

114 Moreover, the absence of Victorian legislation (such as s 133A of the Conveyancing Act 1919 (NSW)) reversing the rule in Joyner [1891] 2 QB 31 suggests that there is no good reason here to displace the common law rule. In James [1950] 1 KB 9, there was no discussion of onus of proof in this context. Rather, there was a finding by the official referee that the owner had no intention of reinstating. And, as Viscount Haldane LC recognised in Underground Electric Railways [1912] AC at 691, ordinarily, where a claim for damages has been made out, the defendant has the onus of proving circumstances which would suggest that the award ought not be made on the basis put forward. He recognised that Joyner [1891] 2 QB 31 stood as an exception to that rule, because it fixed the measure of damages and removed alternative methods of calculating them in the particular category of case. Likewise, in Bellgrove [1954] HCA 36; 90 CLR 613, Ruxley [1995] UKHL 8; [1996] AC 344 and Jacob & Youngs Inc 230 NY 239 the reasonableness of reinstatement, as a practical matter at least, was put in issue by the builder. Notably, none of those cases involved landlord and tenant issues of the present kind or the rule in Joyner [1891] 2 QB 31.

115 I am of opinion that when Joyner [1891] 2 QB 31 applies, the prima facie rule must be that the defendant carries an onus of proof to displace its ordinary operation, to the extent that the authorities have permitted such displacement to occur.

116 In the present proceedings, Bowen Investments pleaded that it had sought reinstatement by Tabcorp and that Tabcorp had refused. Therefore, there was no issue on the pleadings that:

117 The fact that Bowen Investments sought reinstatement in the context of its claim to rent review simply demonstrated a genuineness in its mind that the foyer it had designed and seen destroyed would have been a better rental proposition than that which Tabcorp had provided. While it is true that the valuer had rejected that view, there was no evidence to suggest that Bowen Investments had ceased to hold it. Indeed, it had pleaded that that should happen and in its application had sought relief that required Tabcorp to reinstate the premises. Moreover, on the pleadings, Tabcorp admitted that it would not reinstate although it had been requested to do so. There was no serious issue to suggest that Bowen Investments, if paid the compensation, would not reinstate. The real issue at the trial was whether it was reasonable for Bowen Investments to pursue reinstatement having regard to the small damage to the reversion compared with the cost of reinstatement. At the trial Tabcorp did not put in issue the quantification of the cost of reinstatement. It did not proffer some cheaper or more economical alternative. Indeed, such an alternative is difficult to countenance given the radical steps Tabcorp itself had taken, in breach of cl 2.13 to get the foyer it wanted for its purposes.

118 In that context, there did not appear to be any issue concerning Bowen Investments’ genuineness in making its request in 2004, following the earlier requests, which ceased six years before, and its claims for relief. During the trial, no questions to make good such a case were asked of Mrs Bergamin, as Bowen Investments’ principal. It would have been simple enough for Tabcorp’s counsel to put to her that she had no intention of reinstating if Bowen Investments got the money and that it would simply receive a windfall. That would have provided the factual foundation of the kind which so clearly appeared in the case on which Tabcorp relied, James [1950] 1 KB 9. Ordinarily, a defendant must plead that a plaintiff has failed to mitigate, so that this issue will be squarely raised in the proceedings. Tabcorp did none of this despite resisting a claim that it should reinstate.

119 In my opinion, Tabcorp should have pleaded, and carried the onus of proving, either that Bowen Investments did not genuinely intend to reinstate, or that reinstatement was unreasonable. Tabcorp failed to discharge that onus.

120 In light of my conclusion that on its true construction, the lease contained the requirement of reinstatement, there is no utility in deciding whether Tabcorp acted unconscionably on the hypothesis that that construction of the lease was wrong. The primary judge made no finding that Tabcorp knew that the lease did not contain an obligation to reinstate or that what was asserted by Bowen Investments’ solicitors’ correspondence in July 1997 on that topic was false. His Honour had the advantage of seeing and hearing Tabcorp’s witness, Mr Gullquist. He did not find that Mr Gullquist or Tabcorp engaged in conduct in July and August 1997 that came within the concept of ‘unconscionable’ as used in ss 51A or 51AC of the Trade Practices Act.

121 Bowen Investments at all times sought to enforce an obligation of Tabcorp to reinstate the foyer to its original condition or pay the vale of the cost of doing so. In those circumstances, although the pleadings do not actually seek relief on the basis of the actual, but overlooked, terms of the lease, the substance of Bowen Investments’ claim has been upheld.

122 The parties agreed that we should publish our reasons, and invite them to make submissions on the form of any relief following their consideration of the reasons. As noted above, there are some difficulties in the Court disposing of the matter immediately. The Court has a duty under s 22 of the Federal Court of Australia Act to prevent all multiplicity of proceedings and to try and resolve all issues between the parties in one cognate decision so far as is possible: Thomson Australian Holdings Pty Ltd v Trade Practices Commission [1981] HCA 48; (1981) 148 CLR 150 at 161 per Gibbs CJ, Stephen, Mason and Wilson JJ. Here, because no-one pleaded or paid attention to cl 2.10 or the construction of the lease, on one view it may be appropriate or necessary for the parties to amend their pleadings. On the other hand, the issues which the parties litigated at the trial involved the question whether Tabcorp was under an obligation to make good, though for somewhat different reasons than relying on the actual wording of the lease.

123 It was clear enough that the wording Bowen Investments sought to have added to the lease, either through rectification or an order under s 87, would have achieved the same result. The latter relief is unnecessary, since Tabcorp was already bound by the existing terms of the lease to do what Bowen Investments sought.

124 It may well be appropriate for the Court to grant declaratory relief as to the proper construction of the lease in the events which have happened, so as to make clear the following:

125 For these reasons I am of opinion that the appeal should succeed, but I would have allowed the parties to address us on the relief that ought be granted. I would have directed the parties to prepare draft orders reflecting the results reached in these reasons and, if there were disagreement between them, those draft orders should have been supplemented by written submissions and, if necessary, oral argument.

I certify that the preceding ninety-four (94) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Counsel for the Appellant:	M Colbran QC T Best

Solicitor for the Appellant:	Scanlan Carroll

Counsel for the Respondent:	C Macaulay SC E Woodward

Solicitor for the Respondent:	Mallesons Stephen Jaques

Date of Hearing:	12 & 13 November 2007

Date of Judgment:	13 March 2008

Federal Court of Australia - Full Court

Bowen Investments Pty Ltd v Tabcorp Holdings Ltd [2008] FCAFC 38 (13 March 2008)