Home Disputes & Litigation A Landlord’s Entitlements to Claim Losses and Damages Following Termination of a Commercial Lease

A Landlord’s Entitlements to Claim Losses and Damages Following Termination of a Commercial Lease

By understanding and navigating the legal frameworks in relation to breach and termination, commercial landlords can protect their financial interests and streamline the process of recovering losses arising from a breach of a lease.

To maximise recovery, landlords should adhere to the following:

Seek Legal Advice: Engage legal professionals to ensure claims are properly substantiated and procedural requirements are met.
Issue Proper Notices: Ensure compliance with section 129 of the Conveyancing Act 1919 (NSW) when terminating a lease.
Mitigate Losses: Take prompt steps to re-let the premises or reduce ongoing expenses.
Document All Losses: Maintain records of rent arrears, repair costs, marketing expenses, and other financial losses.

The Detail

This article will provide an overview of:

The types (or heads) of damages that are available to a commercial landlord when a tenant is in breach of a commercial lease.
Practical issues that arise and recommended steps Landlords should take to protect their interests.
Limitations on the damages that are recoverable by a landlord.

Overview of Damages for Breach of Lease

Before considering the damages that are available to a landlord, it is first necessary to explain the circumstances in which damages are available.

Damages are generally available when there is a breach of a lease by one of the parties. Damages for breach of a lease are normally awarded to put the innocent (non-breaching party) in the same situation that they would have been in, if the contract had been performed (so far as money can do it).

By way of example, if a tenant to a lease fails to pay rent, then the landlords damages are the amount of the unpaid rent.

The situation is somewhat more complicated where a landlord relies on a breach of the lease to terminate and bring the lease to an end. When a landlord terminates a lease because of the tenant’s breach, they may be entitled to claim further damages that arise from the terminating, and need for the landlord to re-let the premises.

Is there a right to terminate?

For a landlord to claim losses flowing from the termination of the lease, the termination must be lawful.

Critical in determining whether or not there is a right to terminate a lease for breach is the express terms of the lease.

It is important to recognise that not every breach of the lease gives rise to a right to terminate it.

Common grounds for lawful termination include:

Non-payment of rent or outgoings.
Breach of essential terms (e.g., operating hours or permitted use).
Failure to remedy breaches within a reasonable timeframe after notice.
Abandonment of premises by the tenant.
Insolvency of the tenant.

It is also important to ensure that all notice provisions have been complied with. For example, a lease may specify that prior to being able to terminate a lease the landlord must give the tenant notice of the breach and give them an opportunity to remedy the breach.

Further, section 129 of the Conveyancing Act 1919 (NSW) requires landlords to serve a valid notice to remedy breaches before termination, except in cases where the breach cannot be remedied.

Types of Heads of Damages available to a Landlord

Once a lease has been validly terminated, landlords may claim compensation for financial losses resulting from the tenant’s breach. The entitlement to claim damages arises from the lease contract, common law, and relevant statutory provisions.

The key categories of damages landlords may claim include:

Unpaid Rent and Outgoings: Rent and other charges due up to the termination date.
Re-Letting Costs: Expenses incurred in finding a new tenant, such as marketing costs, agent fees, and legal expenses.
Loss of Future Rent: Damages for rent lost during the remainder of the lease term. However, landlords must take steps to re-let the premises to mitigate this loss (discussed below).
Repair Costs/Making Good: Costs for repairing damage to the premises caused by the tenant’s breach or restoring the premises to the state required by the lease (also discussed below).

Practical Issues

While landlords have clear legal entitlements to claim losses and damages following the termination of a commercial lease, several practical issues can arise that may complicate recovery. We address some of those issues, below. Understanding these challenges can help landlords take proactive steps to protect their interests.

Relief against forfeiture

One of the key risks for landlords seeking to recover damages is the possibility that the tenant may seek relief against forfeiture. Courts have discretion to reinstate a lease where termination has occurred due to a breach, particularly for non-payment of rent. If relief is granted, the lease is effectively reinstated, and the landlord may lose the right to claim damages for future rent or loss of re-letting opportunities.

For landlords, this means:

Ensuring procedural compliance when terminating a lease, including issuing proper default and termination notices.
Being prepared for tenant applications for relief and gathering evidence to oppose reinstatement where the breach is serious or ongoing.
Considering negotiated settlements, as relief is often granted on conditions that may allow landlords to recover arrears while avoiding lengthy litigation.

Ordinarily, a tenant seeking relief against forfeiture will need to remedy the default relied upon by the landlord (for example, by paying the outstanding rent).

Retail leases – disclosure of outgoings

Under the Retail Leases Act 1994 (NSW), landlords must provide tenants with a disclosure statement outlining the outgoings payable under the lease. If a landlord fails to properly disclose outgoings, the tenant may be able to dispute their liability for certain expenses, affecting the landlord’s ability to recover unpaid outgoings as damages.

To mitigate this risk, landlords should:

Ensure full and accurate disclosure of outgoings before the lease is signed.
Keep records of all notices and invoices provided to the tenant regarding outgoings.
Review outgoings clauses in lease agreements to confirm enforceability.

Failure to comply with disclosure requirements could lead to disputes and reductions in recoverable damages.

Conditions of Premises for ‘make good’ clause

A landlord’s ability to recover make-good costs depends on proving the condition of the premises at the start and end of the lease. This can be especially difficult when:

The landlord purchases a property subject to an existing tenancy and does not have firsthand knowledge of the premises’ original condition.
No entry condition report or photographic evidence was obtained when the lease commenced.
The landlord has made structural alterations after the tenant vacated, potentially undermining the basis for a make-good claim.

To address these issues, landlords should:

Obtain a detailed condition report (including photographs) at the start of the lease.
Ensure make-good clauses are clear and specific to avoid disputes over their interpretation.
Engage valuation or building experts to provide evidence of deterioration or non-compliance with lease obligations.
Be mindful of section 133A of the Conveyancing Act 1919 (NSW), which may limit recovery to the diminution in property value rather than the cost of repairs, as confirmed by the Supreme Court of NSW in Midcoast Petroleum.

Pursuing guarantors

Where a lease includes a personal guarantee, landlords may seek to recover outstanding debts from directors or third parties who guaranteed the tenant’s obligations. However, practical challenges include:

Ensuring the guarantee is enforceable—some guarantees may be defective if not properly executed or if the lease was varied without the guarantor’s consent.
Locating the guarantor—if the guarantor has changed addresses or is no longer financially viable, recovery may be difficult.
Assessing the financial standing of the guarantor—if the guarantor is insolvent, enforcement efforts may be futile.

To maximise the likelihood of successful recovery from guarantors, landlords should:

Ensure that guarantees are executed properly and include an indemnity clause.
Obtain up-to-date contact and financial details of the guarantor/s.
Act quickly when enforcing guarantees, as delays may reduce recovery prospects.
Consider including a security bond as well as a personal guarantee.

Limits on Damages Recoverable

In any case of a breach of contract (including a lease) the party claiming damages has certain limits on the damages they can recover.

Damages are capped at the diminution in the value of the landlord’s reversionary interest caused by the breach. Furthermore, no damages can be recovered if the premises would have been demolished or structurally altered in a manner that renders repairs valueless.

Duty to Mitigate Losses

A party claiming damages to a contract cannot recover damages for loss which could have been prevented by reasonable mitigating action. This is sometimes referred to a duty to mitigate losses.

A common example of this principle in the lease context is a tenant claiming that a landlord should have found a new tenant for the premises as soon as possible so as to avoid the loss of future rent payable for the remainder of the lease term.

This means landlords must take reasonable steps to minimise their financial losses, including:

Making genuine efforts to re-let the premises, including by advertising and engaging leasing agents;
Offering commercially reasonable terms and not imposing excessive conditions to inflate damages; and
Reducing ongoing expenses by adjusting utility usage, reducing cleaning and maintenance services.

A failure to mitigate may result in a reduction of recoverable damages.

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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.