Kevin Hodges, Director of Kevin Hodges Real Estate in South Australia challenged the ‘unfairness’ of the SACAT in relation to the landlord’s duty to mitigate the loss of a tenant in relation to a break lease scenario and came out on top.
There is a requirement in most cases, that in the event of a tenant breaking their lease, that the landlord must take ‘reasonable steps’ to mitigate the tenant’s loss. So, where a tenant breaks their lease before the end of the agreement, they are normally liable to continue to pay rent until a new tenant can be found. Where a tenant stops paying rent, the landlord (property manager) can go to the Tribunal seeking an order for compensation.
For compensation to be awarded, the landlord (property manager) must have taken steps to show that they have done sensible things to limit the amount of compensation that the tenants could owe. Things like re-advertising the property for let, not putting the price up, and not unreasonably refusing applicants.
This was the case for a property that Mr Hodges’ office represented at Tribunal, seeking relief in a break lease situation. He says, “This issue arose when one of our tenants broke his lease and it took us quite some time to re-lease the property. The tenant got unlawful advice from the Tenancy Advice people at Consumer Affairs and stopped paying the rent…we finally got a tenant and the old tenant then refused to pay the missing rent. The Tribunal member ruled in the tenant’s favour. The grounds for her decision was on that section of the Act that states that a landlord must do everything to mitigate losses in re-letting the property”.
In this case, the tenants had broken a lease because they had purchased a property and stopped paying rent after three weeks had lapsed, even though new tenants had not yet been found.
Given the extraordinary lengths that he knew his office had gone to in trying to let the property for a landlord who was in hardship, but struggling due to a depressed marketplace, Mr Hodges gathered a steely resolve and applied to the appeal Jurisdiction of SACAT hoping to address the unfairness and to cure what he believed to be an incorrect application of Section 78 of The Residential Tenancies Act (South Australia – the section requires that the landlord take ‘reasonable’ steps to mitigate (limit) the loss of the tenant in this scenario.
Mr Hodges says, “The Tribunal Members had made up their own definition of this section and said to us that if the rent is not reduced in three weeks of marketing, then the Landlord has not used due diligence to mitigate the tenant’s losses!”.
“I was mad enough to order a review, paying the outrageous fee of $509 out of my own pocket.”
The Hon. Justice Parker heard the review and preferred Mr Hodges’ submission. In a statement of reasons, Parker J had this to say about the duty to mitigate loss at [20 – 22]:
“It is important to recognise that a party who has breached a contract carries the onus of proving that the other party has not taken reasonable steps to mitigate their loss.4 Thus, if a tenant does not prove that the landlord failed to take reasonable steps to find another tenant they will be liable to compensate the landlord in full for their loss. The ordinary civil standard of proof will apply, i.e. the balance of probabilities.”
“I emphasise that the duty is to take reasonable steps to mitigate loss. A party is not required to take extraordinary steps, nor are they required to do what is unreasonable, so as to reduce the loss occasioned by the breach of contract.”
“The starting position is always that the person who has breached the contract will be liable to compensate the other party for the loss they have suffered as a result of the contract not being performed as they had agreed. For that reason persons who are party to contracts, including residential tenancy agreements, need to be very mindful of their prima facie obligation to pay compensation before deciding not to honour their contractual commitment. They will only avoid the obligation to pay compensation if they can prove that the other party has not done what is reasonable to reduce their loss.”
It is a frustration felt by many property managers who in the face of a break lease have left tribunal feeling unsatisfied with the stretching of this duty to mitigate a tenant’s loss during the break lease.
Showing what can happen when we all work together, one of Mr Hodges’ competitors who had a listing in the same unit complex and were struggling to find tenants for it in the over-supplied marketplace, actually provided Mr Hodges’ with their own records of that property to support his cause and demonstrate a benchmark of what was ‘reasonable’ given the market conditions at the time.
“I must add that we were helped enormously by another Property Manager Kelly Shaw, from Rosalind Neale Realty. Kelly had another unit in our group which also took a long time to let out. Her written evidence was very helpful in our cause,” said Mr Hodges.
Although the Tribunals are not bound to follow their own decisions, let alone the decisions of Tribunals in other states, they are bound to decide cases fairly and in accordance with the law.
Meanwhile, Mr Hodges emerges as the Darryl Kerrigan of Real Estate having won this day on the side of fairness and justice. He says, “I reckon this has now set a precedent for the whole industry, and indeed even interstate. A win for Landlords and Property Managers alike! Incidentally, the REISA have picked it up and are going to re-pay my $509 fee which is the icing on the cake!”