Can a tenant break a lease when its premises are damaged or destroyed?

Tuesday 6 November 2018

Authors: David Friar, Morgan Powell and Simone Cooper

​​Most leases allow a tenant to cancel a lease if the premises are damaged or destroyed and become “untenantable”. But just what does that mean? The High Court recently considered this in Precinct Properties Holdings Limited v OMV New Zealand Limited,1 a case involving a Wellington office building that was damaged as a result of the Kaikoura earthquakes.

Background

The tenant leased space in Deloitte House in Wellington in 2007, and renewed the lease in 2015 through to 2020. In late 2016, however, the Kaikoura earthquake hit Wellington. The landlord closed the building pending an engineering inspection of the damage. Its engineer ultimately cleared the tenant’s floor for occupation, but the tenant was unable to use the premises for four months until March 2017 while the inspections were undertaken.

As a result, the tenant issued a notice terminating the lease and obtained new premises elsewhere.

The landlord argued that the tenant was not entitled to terminate the lease, and sued the tenant for rent from March 2017 onwards, which totalled more than $1 million.

Lease

As is common, the lease provided that if the premises are destroyed or damaged so as to “render the premises untenantable” then the lease automatically terminates (and no further rent is payable).

The tenant argued that it was not required to pay rent from March 2017 onwards because its lack of access had made the premises untenantable and the lease had come to an end. The landlord, by contrast, argued that a lack of access for four months in the context of a 13-year lease did not make the premises untenantable.

Decision

The High Court ruled that for premises to be untenantable, there must be “some degree of permanence”. It is not enough if the damage is “transitory” or “temporary”. In order to assess this, the courts will consider the duration of the disruption and compare that with the full term of the lease.

The Court observed that the landlord’s argument was “a strong one”, and that the tenant’s inability to access the premises for a period of four months was “not, in and of itself, sufficient to render the premises untenantable”.

However, the Court also ruled that “the concept of untenantability includes premises that do not meet a minimum structural integrity requirement”. This is a novel conclusion, and it is unclear to what extent the Court considered that premises may be “untenantable” in circumstances where they nevertheless meet the requirements of the Building Code.

The Court was considering an application for summary judgment, and said that it was not necessary for it to decide what that “minimum requirement” is. It said that this issue should be considered at a full trial.

Comment

The Court was influenced by the fact that the landlord had not provided full disclosure of its engineer’s report to the tenant, as well as the fact that the tenant’s engineer did not have full access to all of the building. As a result, it remains to be seen whether the Court’s comments will be applied more generally.

Unfortunately, however, there is now some uncertainty as to the extent to which a tenant can argue that issues with a building’s structural integrity makes the building “untenantable”, thereby bringing the lease to an end. Given the importance of certainty to both landlords and tenants, we would hope that the courts address this issue promptly.

If you would like to discuss the implications of this case and what it means for your lease, please contact the lawyers featured or your usual Bell Gully adviser.


1 [2018] NZHC 1939.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • David Friar

    Partner Auckland
  • Jane Holland

    Partner Auckland
  • Sally Whincop

    Special Counsel Auckland
  • Morgan Powell

    Senior Associate Auckland
Related areas of expertise
  • Litigation and dispute resolution
  • Property and real estate