Must the painting be done before the cost can be recovered under a decoration covenant in a lease?

Commercial leases contain decoration covenants, such as: the tenant must “decorate the inside of the property in the last 3 months of the lease period”.

Sometimes it is the landlord, not the tenant who has the obligation to paint and repair.

If the party with the benefit of the covenant carries out the renovation, then the cost is recoverable.

But is it possible to recover the cost recoverable before the decoration is carried out?

That was the issue decided by the Court of Appeal, Supreme Court of New South Wales in Ellis’s Town House Pty Ltd v Botan Pty Ltd [2017] NSWCA 20.

The decoration covenant in Ellis’s case

Ellis was the owner of the Albury Town House, a motel in Albury, which it leased to Botan. The lease was a 5 year lease with 4 five year options.

The lease contained a decoration covenant that the landlord maintain the motel premises in good condition and serviceable repair. In particular, “no later than 6 calendar months prior to the expiration of each five year term”, the landlord would “cause to be painted and varnished (where applicable) the exterior and interior surfaces of the Motel building”.

The commercial basis for the covenant was that the rent included an unquantified component referable to the anticipated cost of carrying out the painting work.

The painting and repair work carried out by the landlord was incomplete and/or defective.

Accordingly, the tenant claimed a breach of the decoration covenant and was awarded damages of $54,952.09 on a ‘cost of cure’ basis by the lower court.

Why did Ellis’s challenge to the award of damages fail?

Ellis submitted that the ‘cost of cure’ basis was not correct, and that the ‘difference in value’ basis should apply because the painting and repair work had not been done. If so, there should be no award of damages because there was no evidence of any loss in the market value of the lease resulting from the painting and repair work not having been done.

The Court applied the decision of the High Court of Australia in Tabcorp Holdings ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 where damages for breach of an express negative covenant in a lease were awarded on a ‘cost of cure’ basis.

In Tabcorp the tenant renovated the foyer of the premises without approval from the landlord. Damages calculated on a ‘difference in value’ basis were $34,820, as against damages on a ‘cost of cure’ basis, to reinstate the foyer to its original condition which were $580,000 for cost to restore and $800,000 for loss of rent during the restoration period.

The High Court held:

So here, the Landlord was contractually entitled to the preservation of the premises without alterations not consented to; its measure of damages is the loss sustained by the failure of the Tenant to perform that obligation; and that loss is the cost of restoring the premises to the condition in which they would have been if the obligation had not been breached.

In Ellis’s case, Gleeson JA came to this conclusion (with which Lemming JA & Simpson JA agreed):

Botan was contractually entitled to the maintenance of the motel premises in a state of good condition and serviceable repair with repainting during each five-year term of the lease. Application of the ‘ruling principle’ governing the measure of damages for breach of contract means that Botan is entitled to the amount of money required to put it in the position it would have been in had Ellis, as lessor, performed its painting and repair covenants under the lease. That Botan had not yet incurred this expense was no answer to its claim for damages.

Conclusion

It is not necessary for the painting and repair work to be carried out before a landlord or tenant who has the benefit of the decoration covenant is able to recover the cost.

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