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CANTERBURY EARTHQUAKE
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Commercial LeasesThe Effect Of The Earthquake On Commercial LeasesEffects of EarthquakeThe earthquakes in Canterbury, particularly the earthquake on 22 February 2011, raise a number of issues in relation to commercial leases in Christchurch. The effects of the earthquakes on commercial leases generally fall into three broad categories:
In the meantime, a tenant may have no option but to take out a long lease for alternative premises in order to keep trading. The tenant then faces the risk that it will be held to its original lease for the original premises for the unexpired term once the original premises have been repaired or reinstated or when access is regained.
Tenantability Many commercial leases in Christchurch will be on the standard Auckland District Law Society (ADLS) lease form. This form of lease deems a lease to be at an end if the premises are destroyed or damaged to the extent that they become “untenantable”. Whether the premises are deemed to be untenantable depends upon an objective assessment of the facts in each case. The test for “untenantability” is broadly whether the property is able to be used and enjoyed by a tenant.
The amount of time that a property is unable to be used and enjoyed by a tenant will be key to a determination of whether it is deemed to be untenantable as the courts have made it clear that where the loss of the ability to use and enjoy the premises is merely transitory or temporary, the property will not be considered untenantable.
In DFC New Zealand Limited v Samson Corporation Limited, CA250/92, 23 September 1993, the Court of Appeal considered the question of untenantability in relation to damage caused to the premises by fire. The lease was for a six year term. Reinstatement took a period of 10 weeks. The tenant agreed that the premises were untenantable. The unexpired portion of the lease was approximately three and a half years. The Court of Appeal concluded that the premises were not untenantable as the disruption was transitory and temporary in nature.
There must be substantial interference with the tenant’s ability to use, enjoy and operate the premises in order for the premises to be deemed untenantable as illustrated in the District Court decision of Russell v Robinson 12/8/10, Judge Sinclair, DC Auckland CIV 2008-004-1283. In that case a fire caused damage to the premises on the first day of a four year lease which required 10 months of repair work. In a well reasoned decision the District Court found that the interference was sufficient to render the premises untenantable. This decision was upheld by the High Court in Russell v Robinson HC AK CIV 2010-404-5992, 1 April 2011.
Russell v Robinson, above, was unusual in that the tenant wished the lease to continue and argued that the tenant had the option of affirming the lease even if the premises had been so damaged as to be rendered untenantable. This argument was rejected by the High Court which found that when the premises are rendered untenantable, it is not an option for one of the parties to elect to continue with the lease. The lease automatically terminates. The High Court added that both parties could, of course, agree to enter into a new lease.
The standard ADLS lease also provides that whether or not a property is deemed to be untenantable, the landlord is entitled to terminate the lease by giving stipulated notice within three months from the date the premises were damaged, if in a landlord’s reasonable opinion the premises need to be demolished or reconstructed.
The standard ADLS lease further provides that if the property is damaged not sufficiently to render it untenantable, the landlord is obliged to immediately repair or reinstate the premises with any insurance money received. In the meantime, the tenant is entitled to a fair abatement of rent and outgoings.
Not all commercial leases are the same. There are a number of different types of commercial leases in use. Further, standard forms are often modified to suit particular parties.
For instance, the standard Building Owners and Managers Association NZ (BOMA) lease, which refers to “totally untenantable” premises, has not been considered by the courts following damage to the premises. The standard BOMA lease also provides that the lease will terminate if, in the opinion of the landlord, it is impracticable, undesirable or uneconomical to repair or reinstate the premises.
These examples illustrate that each lease must be considered on a case by case basis.
Frustration A commercial lease may not deal with a situation where the building is tenantable but cannot be used or enjoyed because access is denied by central or local government regulation or where services are not available to the site.
Parties to a contract which is silent as to the performance of the contract following an event, such as an earthquake, may be relieved from the obligations of the contract by the doctrine of frustration, otherwise known as the doctrine of subsequent impossibility. The Supreme Court held in Steele v Serepisos [2007] 1 NZLR 1 that a contract will be discharged under this doctrine where, through no fault of either party, an unforeseen supervening event makes performance of the contract impossible or makes it so different from what was intended that the contract simply cannot apply to the changed circumstances.
The House of Lords in National Carriers Limited v Panalpina (Northern) Limited [1981] 1 All ER 161 accepted that the doctrine of frustration would apply to commercial leases but that the circumstances in which it would apply would be rare. In that case a local authority closed a street preventing access to a warehouse leased by the tenant because of the dangerous condition of a building opposite the warehouse. The lease was for a period of 10 years. The tenants lost access for two years. A three year term remained after the tenants regained access. In those circumstances, the House of Lords concluded that the loss of access was not sufficient to allow for the discharge of the lease on the basis of frustration.
National Carriers,above, illustrates that it will be difficult to argue that a lease is frustrated if a reasonable portion of the term of the lease subsists after the building has been repaired or reinstated. The fact that a tenant is put to considerable expense and inconvenience will not be enough. In addition, absent frustration, it seems that the tenant will be obliged to continue to pay the rent during the period that the premises are inaccessible.
It is worthy of note that the standard form of the ADLS lease does not provide for the situation where a tenant is unable to gain access to the premises. By way of contrast the standard BOMA lease provides for an abatement of rent where the premises become substantially inaccessible. Whether this provision refers to the actual building access or to access more generally remains to be decided. These differences serve to illustrate that each lease and the surrounding circumstances must be considered in each case before any conclusions can be drawn.
The same considerations apply where no services are available unless the lack of services are caused by damage to the premises. Although different considerations may apply if the premises are deemed by authorities to be unsafe or unsanitary as a result of the lack of services.
It makes sense for both the landlord and the tenant to look for practical solutions where the premises have been damaged or are inaccessible. That said, the parties should be careful in conducting such negotiations in order to ensure that they do not waive their rights or unintentionally affirm the lease or prejudice their insurance cover. For that reason it is important that both the landlord and the tenant seek legal advice at an early stage.
For further information contact either Brian Burke or Alan Prescott on 352-2293
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