Bell Gully’s David Friar, Partner; Morgan Powell, Senior Associate, and Solicitor Simone Cooper, discuss the recent case of Precinct Properties Holdings Limited v OMV New Zealand Limited, which explored the definition of “untenantable” premises.
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 NZHC 1939, a case involving a Wellington office building that was damaged as a result of the Kaikoura earthquakes.
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.
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.
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.
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.
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David Friar is a partner in the Bell Gully litigation team with 20 years’ experience as a commercial litigator. He has particular expertise in commercial disputes, insurance litigation, and corporate and insolvency law. David regularly represents clients in court. He represents insurers and insureds in a wide range of insurance disputes. David has particular experience in professional indemnity (PI) and directors and officers (D&O) litigation, and has litigated cases involving directors, auditors, accountants, solicitors, liquidators, investment bankers and a professional society. He also has experience in life and health insurance. He regularly acts for receivers, liquidators and banks. He also acts for a number of corporate clients and financial institutions. The Legal 500 Asia Pacific 2018 ranks David as a leading lawyer for insurance. Chambers Asia Pacific 2018 also ranks David as a leading lawyer for insurance. David writes and speaks extensively on directors’ duties, insurance law, insolvency, commercial law and litigation, including at professional and legal conferences and at New Zealand Law Society seminars. Contact David at email@example.com or connect via LinkedIn.
Senior Associate Morgan Powell is an experienced commercial litigator with particular expertise in commercial, insurance, and leasing disputes. Morgan acts for a wide range of clients in relation to commercial, insurance, and leasing disputes. Morgan acts for a number of insurers in proceedings arising from the Canterbury earthquake sequence, including appearances before the High Court and representing clients at settlement meetings, mediations, and judicial settlement conferences. Morgan has also appeared before the High Court and District Court for clients in a range of commercial disputes and has advised clients in relation to complicated leasing and property disputes. He also has extensive experience advising banks, directors, and creditors in contractual disputes, including debt claims, liquidations, and shortfall recovery. Qualifications: BA, LLB(Hons), University of Canterbury. Admitted 2011, New Zealand. Contact Morgan at firstname.lastname@example.org or connect via LinkedIn.
Simone Cooper is a Solicitor at Bell Gully. Contact Simone at email@example.com or connect via LinkedIn.
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.