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When reasonable compensation upon demolition needs no mitigation
The tenant (who was an individual) operated a Halal food business from a shop in the owner's retail shopping centre, Raptis Plaza. The tenant's lease was for a period of 5 years, commencing on 1 June 2002, with an option to renew for a further 5 years.
Raptis Plaza was to be demolished by the owner. The owner caused the tenant to vacate the shop before the end of the lease and the tenant made a claim for compensation under section 43(f) of the Retail Shop Leases Act (the Act). Section 43(f) of the Act provides that an owner is obliged to pay a tenant reasonable compensation for loss and damage suffered because the owner causes the tenant to vacate the leased shop before the end of a lease or a renewal of it because of the extension, refurbishment or demolition of the retail shopping centre.
The Tribunal accepted that it was the tenant's intention to carry on the business from new premises after it vacated Raptis Plaza. In calculating the compensation, the experts both started with the net present value of the likely cashflows to be received by the new business over the remaining lease period (including the option). The tenant's expert adopted a discount rate of 27% and the owner's expert adopted a discount rate of 27.8%.
The owner argued that the amount of compensation awarded to the tenant should be discounted by the amount that the tenant:
The Tribunal found that the discount applied by both experts should not be used because the discount "reflects risk factors that might be taken into account by an intending purchaser". The Tribunal held that compensation should be assessed by looking at how the tenant may reasonably be compensated in establishing a similar business in another location, including:
The Tribunal rejected the owner's Mitigation Arguments because:
It is unfortunate that the Tribunal considers that "reasonable compensation" is a debt owed by an owner irrespective of whether the conduct of the tenant may have contributed to or caused the loss. The decision casts no obligation on a tenant to take steps to minimise the loss that it suffers upon vacating the premises. The interpretation of section 43 in this manner could see an owner paying a tenant for a loss that hasn't actually been suffered by the tenant. For example, the tenant claims loss of profits that it would have received had it continued to trade but, in the meantime, the tenant has been gainfully employed. Applying the decision, there is no need to discount the loss of profits on account of the income that the tenant received, even though but for the demolition, the tenant would not have been able to take on the further employment.
Whilst it is easy to see that a corporate tenant may not necessarily be obliged to offset the income earned by a director or employee against the loss of income caused by early vacation of the premises, it is difficult to understand why an individual tenant is not obliged to offset the income.
The decision is a timely reminder to owners that forcing a tenant to vacate its premises can be expensive.
For more information on this topic, please contact Serena Vale.
Raptis Plaza was to be demolished by the owner. The owner caused the tenant to vacate the shop before the end of the lease and the tenant made a claim for compensation under section 43(f) of the Retail Shop Leases Act (the Act). Section 43(f) of the Act provides that an owner is obliged to pay a tenant reasonable compensation for loss and damage suffered because the owner causes the tenant to vacate the leased shop before the end of a lease or a renewal of it because of the extension, refurbishment or demolition of the retail shopping centre.
The Tribunal accepted that it was the tenant's intention to carry on the business from new premises after it vacated Raptis Plaza. In calculating the compensation, the experts both started with the net present value of the likely cashflows to be received by the new business over the remaining lease period (including the option). The tenant's expert adopted a discount rate of 27% and the owner's expert adopted a discount rate of 27.8%.
The owner argued that the amount of compensation awarded to the tenant should be discounted by the amount that the tenant:
- (a) should have been able to earn in compatible employment during the time that the lease would otherwise run; and
- (b) received for a disability support pension
What the Tribunal decided
The Tribunal found that the discount applied by both experts should not be used because the discount "reflects risk factors that might be taken into account by an intending purchaser". The Tribunal held that compensation should be assessed by looking at how the tenant may reasonably be compensated in establishing a similar business in another location, including:
- the costs of relocating;
- the loss of profits for the time needed to re-establish the business;
- the costs for the time taken by the tenant in finding new premises; and
- new advertising costs.
The Tribunal rejected the owner's Mitigation Arguments because:
- the legislation does not warrant a limitation on compensation;
- the common law duty to mitigate does not apply where the amount being sued for is a debt rather than damages;
- the notion of discounting compensation based on earning capacity cannot be used when earning capacity is not the issue.
Why the decision is important
It is unfortunate that the Tribunal considers that "reasonable compensation" is a debt owed by an owner irrespective of whether the conduct of the tenant may have contributed to or caused the loss. The decision casts no obligation on a tenant to take steps to minimise the loss that it suffers upon vacating the premises. The interpretation of section 43 in this manner could see an owner paying a tenant for a loss that hasn't actually been suffered by the tenant. For example, the tenant claims loss of profits that it would have received had it continued to trade but, in the meantime, the tenant has been gainfully employed. Applying the decision, there is no need to discount the loss of profits on account of the income that the tenant received, even though but for the demolition, the tenant would not have been able to take on the further employment.
Whilst it is easy to see that a corporate tenant may not necessarily be obliged to offset the income earned by a director or employee against the loss of income caused by early vacation of the premises, it is difficult to understand why an individual tenant is not obliged to offset the income.
The decision is a timely reminder to owners that forcing a tenant to vacate its premises can be expensive.
For more information on this topic, please contact Serena Vale.