In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, a tenant breached its covenant (legally binding promise) with the landlord, not to change the physical character of a leased hotel without the landlord’s permission.  The breach involved renovations to the hotel lobby.  The renovations were held to have diminished the overall value of the hotel by approximately $34,000.00.  This was the sum initially awarded to the innocent landlord in damages.  On appeal, however, the Full Federal Court made a decision (which the High Court ultimately upheld) that the appropriate measure of damages was the cost of restoring the lobby to its condition when the tenant moved in.  This award amounted to an incredible $1.3 million!

In making this decision, the High Court (which is Australia’s highest court) rejected the “doctrine of efficient breach” which is generally accepted and applied by the courts in America.  This doctrine basically says that anyone who enters into a contract is at complete liberty to break it as long as they pay the other party enough money to compensate them for any resulting commercial losses.

In rejecting this doctrine, the High Court recognised that the look and character of a building have intrinsic value, which goes beyond the amount that a willing buyer would be prepared to pay for the building.  The same principle should apply to home builders.  Any builder who wilfully departs from the contract plans and specifications in order to save money and thinks that they will come out ahead as long as the finished product is worth about the same as it would have been if it had been properly built, might find themselves having to pay a lot more to remove the offending structures and deliver what the consumer has actually bargained for!

Related Havilah Legal service(s): Property Law