Does Earthquake Damage Cancel My Lease?

Christchurch’s February earthquake impacted many commercially leased buildings. Some were destroyed, while others were damaged or left inaccessible. Affected landlords and tenants now face the following issues, amongst others – is rent still payable and how much, and what obligation does the landlord have to repair the premises?

What does my lease say?

The first port of call is the terms of your lease. However, many leases provide the following:

• My Building is badly damaged or destroyed

The lease only ends if:

The premises are “untenantable” following damage or destruction.

This is fact specific. The test is whether the premises have become unfit for the occupation and use of someone assumed to want the premises for the same use as the tenant.

Key factors will include the type and extent of the damage (expert evidence such as engineering/building reports is likely to be required), the length of time that the premises will be unavailable for use by the tenant (again expert evidence may be required on the type of repairs required and the length of time this will take) and the term of the lease remaining (all rights of renewal should be considered).

If the premises are only temporarily unusable then this is unlikely to qualify. In other words, it seems there must be a degree of permanence about the damage for untenantability to be found.  Although each case will turn on its own facts, several different cases have suggested that:

1. In the context of a lease with 16.5 years to run (if all right of renewal were exercised), a repair period of 15.4 weeks (of which approximately 12 of those weeks could be during the limited operation of the business) did not indicate sufficient permanence to qualify the premises as untenantable.  Neither did a period of 7 months, when the tenant allegedly could not access the premises due to the property being in the Christchurch central city “red zone”.

2. In the context of a 4 year lease, a repair period of 10 months was central to the finding of untenantability.

3.In the context of a 6 year lease (with rights of renewal of up to 18 years in total), a repair period of 10 weeks did not render premises untenantable.

If the premises are untenantable, the tenant does not have to pay “a fair proportion” of rent from the date of damage to the property (see further information below).

The Landlord believes that, in his/her reasonable opinion, the premises are so damaged or destroyed as to require demolition or reconstruction.

Key factors will be the nature and extent of the damage, likely solutions and cost. Again engineering/building evidence is likely to be required. The tenant does not have to pay a “fair proportion” of rent and outgoings from the date of damage.

Valuation evidence may be required to determine what is a “fair proportion”, taking into account such things as the area of the property which has been damaged, the degree to which it has been damaged, and the significance of the affected area to the tenant’s business.

• My Building is only partially damaged

If the premises are not untenantable and the landlord does not exercise the right (if any) to demolish, the landlord must apply his/her insurance proceeds with all reasonable speed towards repairing the premises but only to the extent of the insurance monies.

The lease only ends if the landlord cannot get the necessary permits/consents, or the insurance monies are insufficient, to repair the premises.

If the landlord is able to repair the premises, the tenant is entitled to have the rent reduced by a “fair proportion” from the date of the damage until the repairs are completed. Valuation evidence may again be required to determine what is a “fair proportion”.

• My Building is undamaged but inside a police cordon

Few leases deal with this situation.

If the lease does not, the tenant needs to show that their inability to use the property has been caused by the landlord’s actions (which would be difficult to show in most instances of inaccessibility due to a police cordon) or that they cannot access the premises for the whole or a a substantial part of the remaining term. Even then, each situation will turn on its own facts.

Check Your Insurance Policies Before Acting

Your lease is not your only port of call. Both landlords and tenants should also check the terms of any business interruption or loss of rental insurance policies they hold. Do not take any action in respect of your lease which might invalidate your insurance policies. Touch base with your insurer as soon as possible and check the terms of your policy (don’t just take your insurer’s word for it!)

Whatever circumstances you find yourself in, collect evidence to assist you with any lease or insurance claim. Take photos of the damage, collect articles relating to your building’s accessibility, document what property was in the premises and locate receipts relating to its purchase.

If we can assist, please don’t hesitate to contact Kris Morrison or Paul Cowey at krismorrison@parryfield.com or paulcowey@parryfield.com.