Court of Appeal dismisses appeal in lease dispute over repair costs

The Court of Appeal has dismissed the appeal of a landlord who claimed to have spent $1.75m in repairs for damage allegedly caused by the tenant on the leased premises.

In Gama Foundation v Fletcher Steel Limited [2023] NZCA 243, the Gama Foundation leased its warehouse premises in Christchurch to Fletcher Steel. The lease ran for ten years, which expired in 2016. The lease contained several repair and maintenance covenants. Fletcher admitted that it was in breach of many of these covenants. Following the expiry of the lease, Gama undertook extensive repair work, incurring costs of more than $1.75m. Fletcher accepted liability for some $900.000 of that amount but denied liability for the balance, saying that the work that Gama undertook went beyond and cost more than that which it was required to pay for.

The parties arbitrated the dispute, and the arbitrator eventually awarded Gama $320,000. However, Gama argued that the arbitrator did not award the full amount that Gama claimed. Gama asserted that the arbitrator erroneously understood and applied the relevant legal principles of case law.

Gama sought leave from the High Court under the Arbitration Act. The High Court declined Gama’s application. Gama brought the matter to the Court of Appeal, asking for a grant of leave to appeal the award to the High Court.

The appeals court noted that the arbitrator recognised as a general rule of contractual damages that costs incurred by a plaintiff acting reasonably to mitigate their damages are recoverable but found that this rule did not apply in the circumstances of this case. Accordingly, the arbitrator concluded that the onus was on Gama to establish the costs it claimed for repair works were the properly assessed costs of the repair work which Fletcher was liable to perform under the lease but which it had failed to do so.

Gama argued that it should have been for Fletcher to prove that the repair costs were unreasonable, not for Gama to prove they represented the damages it was entitled to for the breach by Fletcher of its covenant to repair.

The appeals court recognised that the law does not allow a plaintiff to recover damages to compensate for the loss they would not have suffered if they had taken reasonable steps to mitigate the loss. Whether the plaintiff has failed to take a reasonable opportunity of mitigation is a question of fact dependent upon the particular circumstances of each case. The burden of proving such failure rests upon the defendant.

The appeals court further said that despite what Gama claims, its steps were not in mitigating the damages. The court explained that those steps may have mitigated consequential losses. It would be open for Fletcher to say that delays by Dama in carrying out the repair work reflected a failure to mitigate.

The appeals court explained that the general principle of damages provides that if the defendant can perform the contract in alternative ways, damages must be assessed on the assumption that he will perform it in the way most beneficial to himself and not in that most advantageous to the claimant. If there are several ways of performing the covenant to repair, damages will be assessed by reference to the cost of the lesser and cheaper work. Furthermore, suppose the landlord must limit the work and not completely remedy the disrepair. In that case, the landlord remains entitled to the reasonable cost of the remedial work, for which the tenant was liable under the covenant.

The appeals court, referring to case law, further said that if the works carried out by the landlord remedy the disrepair, the principles of mitigation may result in his claim being limited to the cost incurred, even if the effect of the covenant against alteration is that the tenant could not itself lawfully have carried out the work. The court cautioned that the fact that the works carried out by the landlord go further than the works for which the tenant was liable does not mean that the tenant escapes liability for anything. Instead, it means that the sum recoverable is limited to the reasonable cost of repair works that the tenant should have carried out.

The court emphasised that the arbitrator deciding the award was highly qualified. If leave were granted, and if then the High Court found in favour of Gama, a new arbitrator would need to be appointed. The process would begin again. The lease ended in 2016, and the award was issued in 2022. The court pointed out that the amount of money on the line is not very substantial in the context of a commercial lease such as this one. A decision to grant leave here would cut across the clear legislative policy underpinning the Arbitration Act, which favours finality, certainty and party autonomy.

Accordingly, the court dismissed Gama’s appeal.