New tenant-friendly law limits liability

By Sally Whincop, Senior Associate

The Property Law Act 2007 (the Act) has altered and clarified the rights and liabilities of landlords and tenants relating to insurance cover. The new, tenant-friendly legislation places limits on the rights and powers of landlords, particularly around insurance payments and recovery for costs of damage to a property.

Under a commercial lease, the landlord commonly insures the premises and pays a proportion of the premium, usually through the operating expenses for the property. In the past, the landlord's insurer could step into the shoes of the landlord and recover the loss directly from the tenant in respect of the damaged premises, even if the tenant had paid the insurance costs. The reforms now prevent the landlord or its insurer from bringing any action against the tenant for destruction to the property, except in certain limited circumstances.

Reforms and their implications

The new provisions of the Act, which took effect on 1 January 2008, mean that a tenant is not liable for any costs resulting from destruction caused by certain risks, provided that the damage was not intentionally caused by the tenant, or was not the result of a criminal act/omission, or an act/omission which renders the insurance monies irrecoverable. These risks are destruction caused by the following, and occurring after 1 January 2008, regardless of the date of the lease:

• fire
• flood
• explosion
• lightening
• storms
• earthquakes and volcanic activity; and
• any other insured risks

This means that the landlord cannot require the tenant to meet the cost of repair, nor can the tenant be compelled to indemnify the landlord against such costs or be required to pay damages in respect of any destruction caused by such risks. This exclusion of liability also applies where the destruction or damage has occurred as a result of the tenant's negligence.

Reasons for inclusion of specific risks – less room for error or dispute

Prior legislation left it up to the landlord to determine what risks insurance cover would extend to under a commercial lease. This meant that there was a greater likelihood of error and dispute where a lease was not drafted clearly. The new Act eliminates the likelihood of error by specifying these seven risks. It is important that these seven risks are listed in the lease from the outset to avoid any further doubt as to when the insurance provisions are invoked. Landlords may also choose to specify further additional risks in the lease, if their insurance policies apply to these.

How does this affect an application for insurance cover in higher-risk zones?

The nature and location of the premises will obviously impact on the practicability of an application for insurance cover for the risks specified under the new provisions. Specific reference to earthquakes and volcanic activity under the current Act will have significant implications for some landlords. Landlords who own properties located in earthquake-prone zones or areas where there is a history of increased volcanic activity may have more difficulty obtaining insurance cover for such risks. Landlords are advised to reassess their insurance policies and check the cost of excess on such risks.

Opt outs and rights retained by landlords under the new Act

Landlords can contract out of the new provisions and call upon the tenant to meet the cost of any damage or destruction resulting from one of the specified risks, provided there is an express statement in the lease to this effect. This option is only effective where a landlord is not covered, or fully covered, under an insurance policy for one of the specified risks when the destruction occurs and the tenant has acknowledged this. One area where this may apply is in relation to insurance excesses, where a landlord may require a tenant to pay the insurance excess in the event of a claim brought about by the tenant's breach of the lease or negligent act. Conversely, where the tenant is under an obligation to insure the premises for certain risks, it is recommended that the landlord ask for a copy of the tenant's insurance policy and request that they be noted as a joint party under the insurance policy to ensure that cover has actually been obtained.

Landlords are also entitled to terminate a lease where the destruction or damage to the leased premises is caused or contributed to by the tenant's negligence and subsequently affects the landlord's ability to obtain insurance. In such circumstances, the landlord may also recover any increased insurance costs from a tenant, including any increased premium or excess in respect of future claims for damage of a similar nature.

The Act does not affect the right of the landlord, if expressly provided for in the lease, to end a lease immediately where total destruction of the property has occurred, rendering the premises untenantable.

Please contact us if you require any further information on these issues.

Enquiries and information

For more information on any of the cases, articles and features in Property Update, please email Jane Holland or call on 64 9 916 8983.