Fankhauser v Mission Beach Property Management [2017] QCATA 65

CITATION: Fankhauser & Anor v Mission Beach Property Management [2017] QCATA 65 PARTIES: Matthew Fankhauser Laura Fankhauser (Applicants/Appellants) v Mission Beach Property Management (Respondent) APPLICATION NUMBER: APL197-16 MATTER TYPE: Appeals HEARING DATE: On the papers HEARD AT: Brisbane DECISION OF: Justice Carmody DELIVERED ON: 26 May 2017 DELIVERED AT: Brisbane ORDERS MADE: IT IS THE DECISION OF THE APPEAL TRIBUNAL THAT: 1. Leave to appeal is granted. 2. The appeal is allowed to the extent that the compensation order is varied by adjusting the quantum of compensation $1,800 to $500. 3. The appellant/applicant (Fankhauser) is to pay the respondent (Mission Beach Property Management) $608.70. 4. Otherwise, the decision is confirmed. CATCHWORDS: APPEAL – LEAVE TO APPEAL – MINOR CIVIL DISPUTE – where landlords agent applies for compensation for accidental damage to an eight year old carpet in residential premises – where former tenants admit breach – where carpet irreparable and lessor proposes to reinstate it by replacement – principles for measuring loss -- 1 of 9 -- 2 of depreciated fixtures in rented premises and betterment deduction claim Queensland Civil and Administrative Tribunal Act 2009 (Qld), ss 13, 32, 38, 100, 102 Residential Tenancies and Rooming Accommodation Act 2008 (Qld), ss 362, 421 Badham v Williams [1968] NZLR 728 Bellgrove v Eldridge (1954) 90 CLR 613 Hanson v Newman [1934] Ch. 298 Harbutt's “Plasticine” Ltd v Wayne Tank & Pump Co Ltd [1970] 1 QB 447 Hoad v Scone Motors Pty Ltd [1977] 1 NSWLR 88 Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd & Anor [2001] NSWCA 313 Jones v Herxeimer [1950] 2 K.B.106 Joyner v Weeks [1891] 2 QB 31 Lukin v Godsall (1795) Peake Add. Cas. 15 One Door Property Pty Ltd v Hawthorne [2015] QCATA 58 Ruxley Electronics & Construction Pty Ltd v Forsyth Laddingford Enclosures Ltd [1995] 3 WLR 118 Strang v Gray [1952] 55 WALR 9 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 The Gazelle (1844) 2 W.Rob.(Adm.) 279 Yates v Dunster (1855) 11 Ex. 15 APPEARANCES and REPRESENTATION: This matter was heard and determined on the papers without the attendance of either party in accordance with s 32 of the Queensland Civil and Administrative Tribunal Act 2009 (Qld) (QCAT Act). REASONS FOR DECISION [1] This is an application for leave to appeal the quantum of a compensation award against the applicant tenants for permanently staining a carpet in leased residential premises. -- 2 of 9 -- 3 [2] The respondent claim the estimated replacement cost ($2,500) less betterment ($700). The applicants concede that the damage exceeds fair wear and tear and admit liability limited to $300 or about 20 per cent of their new for old quote of $1,529. [3] Since reinstatement (old for old) is clearly not feasible here and meeting the full cost of a new replacement carpet would be an inequitable solution, the tribunal capped the respondent’s compensation liability at two-thirds (2/3rds) of the replacement cost on account of so called betterment. [4] The applicants contend the award is excessive for a depreciated carpet that only cost the landlord $1,590 to install in 2008 and want it reduced to $300 on appeal. [5] Their key legal complaint is that the compensation is more than the estimated lowest reasonable of a like for like substitute because the tribunal chose to accept the higher respondent’s quote over the cheapest one they produced. [6] They also challenge the correctness of using a quote for work that may never actually be done to calculate the amount of compensation instead of insisting on production of a receipt for the completed job. Quote v receipt [7] What amounts to reasonable compensation for damage to property is a question of fact to which there is not always one conclusive or uniquely correct answer. It is usually a matter of judgment and degree. [8] There is no appellable error in preferring one quote over another provided it is rational and reasonably open on the evidence. The appeal tribunal will only intervene to correct glaring errors of principle or substantial injustice. Picking one of three possible alternative estimates as the closest in kind to the compensable loss does not qualify. [9] Moreover, there is no rule or principle of law requiring proof of actual expenditure for awarding compensation, nor is the intention of the claimant to use the money for reinstatement a precondition to recovery,1 unless it is clear that it will not be used for that purpose2 or the work has already been done for less.3 The old for new option [10] The applicants assert that the tribunal erred in its assessment of damages by allowing the replacement of the old carpet with a new carpet without making adequate allowance for windfall (including intangible) gains. 1 Bellgrove v Eldridge (1954) 90 CLR 613 at [620]. 2 Harbutt's “Plasticine” Ltd v Wayne Tank & Pump Co Ltd [1970] 1 QB 447. 3 Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd & Anor [2001] NSWCA 313. -- 3 of 9 -- 4 [11] The tribunal’s power to award compensation in residential tenancy disputes is regulated by s 13 of the QCAT Act and Ch 6 Pt 2 Div 3 of the Residential Tenancies and Rooming Accommodation Act 2008 (Qld) (RTRA Act). [12] The tribunal may award compensation that it considers ‘fair and equitable to the parties’, having regard to the matters mentioned in s 421(1) RTRA Act, to place the owner of damaged property back in the position he or she would have been had the tenancy agreement been properly performed. [13] The duty conferred on the tribunal by the ‘fair and equitable’ requirement gives it the freedom to make necessary and reasonable adjustments or allowances when applying orthodox legal principles to avoid or moderate unfairness. This does not authorise the application of idiosyncratic, arbitrary or subjective concepts of economic justice or those governing purely equitable claims. [14] At common law the measure of damages for a tenant’s breach of a repair covenant differs according to whether the action was brought during the tenancy, or after the tenancy had ended. [15] Where an action is brought during the tenancy, the measure is the reduction in value of the reversion; that is, the difference between its marketable value in its repaired and unrepaired state.4 [16] As Jenkins LJ observed in Jones v Herxeimer:5 “There must be many cases in which it is in fact quite obvious that the value of the reversion has, by reason of a tenant’s failure to do some necessary repair, been damaged precisely to the extent of the proper cost of effecting the repair in question.” [17] Where the claim is brought after the tenancy has ended and the lessor has retaken possession, the landlord is entitled to the cost of reinstatement (i.e. repair or replacement but not improvement).6 [18] Related business or other provable financial losses (e.g. rent abatement pending reinstatement) are considered, but the measure of damages is not affected by the fact that the lessor could re-let the premises with the damaged carpet without any rental reduction.7 [19] There is, however, no entitlement to compensation for unmitigated8 (i.e. reasonably avoidable), unrelated, uncertain or prospective expenses.9 [20] An owner must act reasonably to reduce the cost of losses caused by a tenant. This may include early preventative expenditures to avoid larger 4 Hanson v Newman [1934] Ch. 298, CA at 305. 5 [1950] 2 K.B.106, CA at 117. 6 Joyner v Weeks [1891] 2 QB 31. 7 Joyner v Weeks [1891] 2 QB 31. 8 RTRA Act s 362(3)(b). 9 McGregor on Damages, 17th ed, (2003), Sweet and Maxwell, London at [1.024]. -- 4 of 9 -- 5 losses later. It does not require accepting the lesser alternative between restoration cost and lost value. [21] Conversely, tenants are legally obliged to restore, not renew, premises. They do not have to enhance the value of damaged fixtures or fittings. However, assessing compensation for tenant breaches when exact reinstatement of an inclusion which does not reduce the saleability or profitability of the premises itself is not possible and the only option is replacement is notoriously difficult and inexact. Without being too technical about it the tribunal has to find a way of making orders that neither over nor under compensate landlords for their real loss. [22] Because there is an established market trading in used cars or secondhand furniture, most people would rightly think that having to foot the bill for a brand new car or even a piece of furniture to compensate the owner for being deprived of an old version of the same thing is unfair. However, not all property or loss is the same and the indemnity principle dictates contribution to the cost of a brand new substitute as the price for destroying property that was almost at the end of its serviceable life if it is necessary and reasonable to do so in the circumstances. The equally unsatisfactory alternative is to refuse replacement or repair costs as exorbitant and spare the tenant from paying any compensation at all because there is no provable reduction in value of the reversion. [23] In past cases lessors have recovered substantial costs for repairing damage to property that was about to be replaced soon anyway10 and where the damage did not result in a significant reduction in the market value of rent for the property. [24] In the early 19th century case of Yates v Dunster,11 for example, the cost of repairing damaged premises was reduced for the value that was added. [25] Lord Kenyon applied the standard one third deduction historically used in marine insurance policies to assess compensation for tortious land damage in Lukin v Godsall12 but an award for loss was not decreased in The Gazelle for betterment on the basis that any enhanced value or collateral benefit “derives incidentally” from the absence of alternative methods of indemnification.13 [26] Widgery LJ refused to decrease damages for a contract breach to reflect betterment in Harbutt’s “Plasticine” Ltd v Wayne Tank and Pump Co14 on the ground that “to do so would be the equivalent of forcing the plaintiffs to invest their money in the modernising of their (destroyed factory) which might be highly inconvenient for them”. As Lord Denning MR pointed out in the same case15 the owners really had no choice but to replace the 10 Strang v Gray [1952] 55 WALR 9. 11 (1855) 11 Ex. 15 as cited in McGregor on Damages. 12 (1795) Peake Add. Cas 15 as cited in McGregor on Damages. 13 The Gazelle (1844) 2 W.Rob.(Adm.) 279 as cited in McGregor on Damages. 14 [1970] 1 QB 447, 473. 15 Ibid, 468. -- 5 of 9 -- 6 building as quickly as possible to mitigate profit losses and therefore acted out of necessity. [27] A compromise option was approved by the House of Lords in Ruxley Electronics & Construction Pty Ltd v Forsyth Laddingford Enclosures Ltd16 where an intermediate figure between full replacement and the reduced market value of the premises representing the loss of the enjoyment of a swimming pool constructed to six (6’) feet instead of 7 feet 6 inches (7’6”) but otherwise perfectly safe and serviceable. [28] In Bellgrove v Eldridge17, however, the trial judge awarded a building owner £4,950 for the cost of demolishing a house constructed on dangerous faulty foundations and replacing it with the one she paid £3,100 to have built according to plans and specifications. The builder contended on appeal that the proper measure of damage was the difference between the value of the house as it stood and what it would have been worth if the contract had been properly performed. [29] The High Court disagreed and said: “… the respondent was entitled to have a building erected upon her land in accordance with the contract … her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. … cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract.”18 [30] Farmers replaced an old tractor destroyed by fire with a new one in Hoad v Scone Motors Pty Ltd19 because they could not find a comparable second hand vehicle and had to act quickly to avoid crop losses. They were clearly better off after the purchase than they were before the fire and were going to sell the old tractor when their non-renewable lease ran out in a couple of years’ time anyway. [31] The majority (Moffit P and Hutley JA) held that betterment should be taken account of in measuring damages. [32] Samuels JA (dissenting) thought the duty to mitigate and the unavailability of a suitable replacement of the same age and condition made it reasonable for the farmers to buy the new one and, therefore, they were entitled to recover the full replacement cost as damages without any deduction for depreciation even though they were “left with the price of 16 [1995] 3 WLR 118. 17 (1954) 90 CLR 613. 18 Ibid at [165]. 19 [1977] 1 NSWLR 88; Badham v Williams [1968] NZLR 728. -- 6 of 9 -- 7 equipment…substantially more valuable than that which he lost, and will have lost no profits.”20 [33] In Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd & Anor,21 Sheller JA held it was inappropriate to reduce damages for betterment if there was no evidence that the plaintiff had any reasonable alternative remedy other than to replace property damaged by the defendant’s negligence. [34] Meagher JA, by contrast, would have reduced the amount of damages by (an arbitrary) 20 per cent as reasonable allowance for the replacement of a defective pavement about halfway through its 20 year designated life on the basis that the owner had obtained a windfall gain. [35] In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd 22 the High Court held that provided it was both necessary and reasonable, the measure of damages was the cost of the work to reinstate what was there when the tenancy started and that which the tenant had failed to preserve in compliance with the terms of the lease agreement. [36] In that case a long-term commercial tenant altered a foyer without the landlord’s consent including destroying valuable marble fittings. The Full Court decision to increase damages from $34,820 to $580,000 (based on the estimated difference in value between the old and new foyer at the end of the 10 year lease) was confirmed. [37] Overall the decided cases indicate that a fair compensation figure for the landlord’s total loss of the old carpet lies somewhere between nil (or nominal) and the full replacement cost. [38] Carpet in residential premises has an effective tax life of 10 years so that it loses 10 per cent of its value annually via depreciation and to maintain the premises competiveness in the rental market is either fully written off or replaced about every decade. [39] There is no evidence of the tax deductions claimed for the carpet but it can safely be assumed that they were claimed and received in line with the habit of the vast majority of lessors. Nor is there any historical information about how regularly the carpet was replaced. Nothing suggests that the premises are any less saleable and lettable (without any rent reduction) after as they were before the damage. [40] What is known is that the breach devalued the soft furnishings and interior fittings at least aesthetically, if not functionally, and undoubtedly accelerated their replacement by at least two years. The stains were, however, unlikely to have any or much impact on the overall saleability or rentability of the premises. 20 Hoad v Scone Motors Pty Ltd [1977] 1 NSWLR 88, [94]. 21 [2001] NSWCA 313. 22 (2009) 236 CLR 272, 285-6. -- 7 of 9 -- 8 [41] Faced with a similar situation in One Door Property Pty Ltd v Hawthorne23 the tribunal denied a lessor’s claim of new for used carpet and ordered a tenant to pay only part ($200) of the $4,000 cost of replacing five and a half year old carpets that were normally replaced every 7 years anyway. [42] In refusing the owners appeal, the appeal tribunal calculated the compensable loss at 22 per cent (5+5/7ths) of the replacement cost of $4,000, that is $880, but despite the significant percentage and dollar disparity did not disturb the tribunal’s order because the lesser amount was considered to be within the range of reasonable possibilities supported by the evidence. [43] Arguably the real loss of the breach from the lessor’s point of view is not the depreciated value measured by a new version of the same thing less improvement, but having to forgo the more profitable use of the money that had to be spent on replacing the damaged carpet two or three years earlier than otherwise required. Ascertaining the so-called time cost of money is a pragmatic, simpler, more certain, fairer and more principled way of costing the loss of an aging carpet in rented residential premises than both loss of enjoyment or betterment methods. However, the compensation claim was not put or defended on this basis and evidentiary gaps stand in the way of applying it on appeal. [44] The effect of the order is that the applicants have to contribute $1,800 – or 72 per cent – to the total cost of replacing a carpet worth about $500 to the landlord and nothing to anyone else when it was damaged. [45] In my judgment this plainly exceeds the reasonable compensable range to the point of economic injustice. Correction on appeal is called for. The fair and equitable amount of compensation is either the probable depreciated value of the old carpet expressed in dollars (i.e. $500) or the replacement cost $2,500 reduced for betterment by $2,000 to $500; that is, 20 per cent of the cost of a new substitute. [46] Expressed as simple equation the measure of loss = reinstatement = replacement cost = $2,500 – $2,000 betterment ($2,500 1 𝑥 8 10) = $500; or $2,500 ÷ 2 10 ( 𝑙𝑖𝑓𝑒 𝑙𝑒𝑓𝑡 𝑙𝑖𝑓𝑒 𝑠𝑝𝑎𝑛) = $500. Windfall intangible benefits [47] The applicants challenge the reasonableness of allowing the cost of new underlay because of the intangible ‘windfall’ benefit of an extended manufacturer’s warranty. [48] The value of the manufacturer’s warranty cannot be safely calculated on the evidence before the appeal tribunal. Indeed, the value of a warranty will, in most cases, be speculative or relatively insignificant. Accordingly, 23 [2015] QCATA 58. -- 8 of 9 -- 9 no allowance was legally necessary for any purported windfall gained from a new manufacturer’s warranty applying to the carpet. Procedural unfairness [49] The next proposed ground of appeal is based on the respondents allegedly unfair litigation conduct in not informing the applicants of the original cost of the carpet until just before the hearing started is not reasonably arguable. No adjournment of the hearing was requested. How much the carpet cost to lay in 2008 had only marginal relevance to the calculation of compensation. It was reasonably discoverable from other trade sources and clearly did not stop the applicants from getting an alternative cheaper quote for replacing it. Even if the information was given late there is no clear evidence that it could have been discredited or of any other genuine prejudice or forensic disadvantage. [50] Leave to appeal on this ground is not justified. The costs award [51] Finally, the applicants submit the respondent should not have been allowed filing costs because it is said to be contrary to the standard no cost rule in s 100 of the QCAT Act, and they are both students on Centrelink benefits. This ground is misconceived. Successful parties are entitled to reimbursement of the prescribed fees they had to pay to file successful proceedings to enforce the rights the respondent wrongly demand.24 The sections of the QCAT Act the applicants cite in their submissions25 apply only to professional (legal) costs and are not relevant. Orders 1. Leave to appeal is granted. 2. The appeal is allowed to the extent that the compensation order is varied by adjusting the quantum of compensation $1,800 to $500. 3. The appellant/applicant (Fankhauser) is to pay the respondent (Mission Beach Property Management) $608.70.26 4. Otherwise, the decision is confirmed. 24 QCAT Act s 38. 25 Sections 100 and 102. 26 $500 compensation and $108.70 prescribed (application) fee. -- 9 of 9 --