Tabcorp Holdings Ltd
(Tabcorp) has failed in a High Court appeal against a judgment of the Federal Court ordering it to pay the cost of reinstating leased premises to their original condition. In
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd, the High Court confirmed that vacating tenants can be required to reinstate the premises to their original condition.
The High Court confirmed Tabcorp's obligation to pay Bowen Investments Pty Ltd (Bowen) $1.38 million in damages.
In 1997 Bowen leased to Tabcorp a newly constructed office building for ten years. The lease contained a general 'make good' clause and general repair obligations. Tabcorp was required to obtain Bowen's prior written consent to any substantial alteration or addition to the premises. Tabcorp was also required to provide plans and specifications of any proposals to alter the premises for approval by Bowen.
Tabcorp proceeded with a fit-out of the foyer area of the premises, without providing any information to Bowen and without Bowen's consent. The landlords described the new foyer as 'very minimalist and very much early 1990s' - in stark contrast to the high quality design and special materials originally used by Bowen, including 'San Francisco Green' granite, 'Canberra York Grey' granite floors, marble pillars and 'sequence-matched crown-cut American cherry' wood wall panels.
In dismissing Tabcorp's appeal, the High Court held that:
- A landlord has a legitimate interest in protecting the physical character of the building. Bowen was protected by a covenant in the lease against making alterations without consent. It was entitled to receive the property back in the form in which it was leased. The damages are the cost of reinstating the premises to that form, not merely the decrease in the value of the property.
- Where a tenant breaches an obligation not to make alterations without consent, the landlord must be put in the same situation as if the contract had been performed, not merely the same financial situation. The amount of these damages will equal the cost of reinstating the premises to the previous form.
This case is a warning for tenants that 'close enough is not good enough' when it comes to make good obligations, meeting a landlord's repair standards and that the value of commercial premises for a particular landlord is not limited to its objective market value.
All tenants should carefully review their obligations under a lease before undertaking any works to the premises and ensure that they clearly understand their make good obligations. During the term of the lease, a tenant should take care in monitoring the state of repair of the premises and should consult with the landlord before commencing alterations or surrendering a lease.
Hall & Wilcox has experienced lawyers who can advise you on leases and help you avoid nasty shocks during or at the end of a lease.
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