The Proper Measure of Damages for Loss of Use of Real Property

Leeda Projects v Zeng (2020) 61 VR 384 [2020] VSCA 192

The applicant builder contracted to construct the fit out of a floor of an apartment building in the Eureka Towers as a private art gallery and adjoining residence for the respondent and her husband. The builder suspended work following a dispute between the parties, but eventually completed the work and gave possession after a delay of 130 weeks. The builder issued proceedings in VCAT to obtain payment and the respondent counterclaimed for delay damages, based on a breach of an implied term to complete the works within a reasonable time.

The respondent did not intend to live at the premises during the period of delay and did not intend to use the art gallery to make a profit. She sought damages for loss of use and enjoyment of the premises, either on the basis of the residential rental value of the property during the period of delay, or wasted expenditure occasioned by her costs of ownership during the period.

The Tribunal found that there was an implied term for the works to be completed within a reasonable time, and awarded nominal damages to the owner. It made no order as to costs: Leeda Projects Pty Ltd v Zeng [2018] VCAT 679 at [93] – [94].

On appeal, McDonald J awarded damages based on the commercial rental value of the property, in the amount of $357,500 plus interest, representing 130 weeks’ rental: Zeng v Leeda Projects [2019] VSC 106 at [98].

The builder sought leave to appeal on grounds that the judge erred in, inter alia, concluding that the owner was entitled to substantial rather than nominal damages.

The owner issued a notice of contention supporting her claim for damages on the basis of general damages in the form of wasted expenditure.

The Court of Appeal allowed the appeal on the first ground and upheld the notice of contention.

The commercial rental value of the premises as the basis for loss and damage

The Court found that the judge had erred in awarding damages based on the commercial rental value of the property, when the owner had not intended to use the property during the period of delay.

Kaye JA referred to a line of authority recognising that loss of use of a non-profit making asset may be compensable as part of general damages: [24]-[42].(1) These damages generally amounted to the “holding cost” of the chattel during the period in which it could not be used: [43] and [52].

These authorities did not support the trial judge’s evaluation of the loss or damage as the rental value of the property during the delay period: [49]. Because the respondent did not at any time intend to use the apartment to earn income, an award of damages for rental value would not put her in the same position as if breach had not occurred: [50].

McLeish JA referred to the same line of cases: [146]-[173]. His Honour noted that in the context of general damages, which were dealt with in these cases, absence of an intention to make a profit does not disentitle the party to loss of use damages. However, in the assessment of special damages under the second limb of Hadley v Baxendale (2), the use to which property is to be put is critical in the assessment of damages: [152].

McLeish JA found that the underlying principle of these cases in respect of loss of use of chattels applies to land, that is, but for the wrong or the breach, the other party would have had the use of the land, and they suffer compensable loss while unable to use it: [174]. The relevant question is whether an award of damages satisfies the tests for causation and remoteness of damage without yielding unreasonable outcomes: [176].

Here, where it was not intended to rent the property out, and no other property was required in its place while it was not available, an award of damages based on its commercial rental value would go beyond the compensatory principle: [184].

The notice of contention

The Court upheld the notice of contention on the basis that the owner’s loss and damage in terms of costs of ownership was a reasonably foreseeable consequence of the builder’s breach. These costs included owners’ corporation fees, council rates, electricity and water charges totalling some $284,000. Kaye JA found that those charges were attributable to particular intended use by the respondent of the property, namely as an art gallery and occasional residence: [55].

Kaye JA found that the cases that had been referred to, including for loss of use of vessels that had been damaged by negligence, supported an award of damages for loss of use of the property even though no direct financial loss had been sustained. Those damages were awarded to compensate the property owner for the costs of ownership during the period in which the asset was unusable: [52]. In a number of the vessel cases, that loss comprised the notional depreciation of the vessel during the period in which it was unusable: [53]. His Honour found that this measure of damages illustrates the manner in which the law seeks to compensate a property owner for loss of use of the property (at [53]), and that these “wasted costs” were an appropriate measure of the loss and damage occasioned by reason of the respondent’s inability to use the apartment: [57].

In contra-distinction to Kaye JA, McLeish JA did not consider that “notional” or “wasted” costs of ownership are an appropriate “default” measure of damage in cases where real property intended for purely personal use is unavailable due to breach: [177]. His Honour considered that the cited cases were too few in number to extract any general principle.

Real property, McLeish JA said, is distinguishable from chattels because when used as a residence, it is used to meet a necessity, not for profit or pleasure alone. Because land can be used for multiple purposes, it cannot be said that measure of the loss of its use is ordinarily calculated by any one measure: [179]. It was necessary to decide each case on its own facts: [184].

McLeish JA found that damages for “wasted expenditure” are not a true alternative head of damage, but are a manifestation of the Robinson v Harman principle.(3) His Honour found that it must have been within the parties’ reasonable contemplation that the respondent would have to make these payments if there was delay, in respect of an apartment that she could not use. The fact that they would have to have been paid anyway did not mean that they could not be recovered: [189].

Tate JA agreed generally with both Kaye and McLeish JJA; however, on this particular point her Honour agreed with McLeish JA. Although wasted expenditure was the appropriate measure of damages in this case (and therefore the reason to uphold the Notice of Contention), her Honour did not consider that there was a settled principle that notional or wasted costs of ownership are an appropriate measure of damages for loss of use of real property: [2].

Summary

The majority decision reflected in the judgment of McLeish JA, with whom Tate JA agreed, provides that in cases where breach of contract results in the loss of use of real property, the claimable loss and damage will depend on the circumstances of each case, and in particular, the intended use of the property. While ‘wasted costs’ of ownership may be included in that loss and damage, there is no settled principle that such loss and damage can always be recovered.

(1)   The cases included Bella Casa Ltd v Vinestone Ltd [2005] EWHC 2807, [44], [58]–[59], [70]; Yates v Mobile Marine Repairs Pty Ltd [2007] NSWSC 1463 Vautin v BY Winddown, Inc [No 4] (2018) 362 ALR 702773–5 [315] [320]–[324]; Wyzenbeek v Australasian Marine Imports Pty Ltd (2019) 272 FCR 373, 402–4 [110]–[115], 407 [138]; Pix v Suncoast Marine Pty Ltd [2019] QSC 45[25]Owners of No 7 Steam Sand Pump Dredger v Owners of SS `Greta Holme’ (The `Greta Holme’) [1897] AC 596Owners of the Steamship `Mediana’ v Owners, Master and Crew of the Lightship `Comet’ (The `Mediana’) [1900] AC 113Calabar Properties Ltd v Stitcher [1984] 1 WLR 287 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1; One Step (Support) Ltd v Morris-Garner [2019] AC 649.

(2)   (1854) 9 Exch 341; 156 ER 145.

(3)   (1848) 1 Exch 850; 154 ER 363. 

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