New Zealand: Property Law Act 2007 - the effect of Sections 268-272 on landlord-tenant recovery

Insurance Update
Last Updated: 1 March 2010
Article by Peter Leman

When the Property Law Act 2007 (PLA) came into effect it seemed to be one of those rare pieces of legislation that made life simpler – landlords could no longer recover from tenants for destruction or damage to 'leased premises, or the whole or any part of the land on which the leased premises are situated'. Of course there were exceptions to the general exclusion of recovery, such as when the destruction or damage was done intentionally by the tenant (see section 269(3) PLA). It appeared that an area of recovery/liability conflict was gone. Of course, nothing is as simple as it first seems.

One uncertainty was whether the protection afforded tenants was for them alone, or whether it extended to protect employees of the tenant. The recent case of Sheehan v Watson1 has clarified that issue – tenant's employees are as protected as the tenant itself. Other questions remain, however.

WHAT PROPERTY IS COVERED BY THE PLA REGIME?

The first hurdle for any person considering the application of the PLA regime is deciding exactly what destroyed or damaged property falls under its provisions. The ambit of the PLA regime will, perhaps, not become clear until more cases are taken to court for judicial consideration. The issue lies in the phrase below which comes from the opening words of section 268:

Sections 269 and 270 apply if, on or after 1 January 2008, leased premises, or the whole or any part of the land on which the leased premises are situated, are destroyed or damaged by one or more of the following events...[emphasis added]

The phrase, to which we have added emphasis, is not defined in the PLA nor is it a phrase that has been judicially considered.

Despite the uncertainty surrounding what the phrase intends to cover, a general observation can be drawn.

The property covered by the PLA extends beyond the footprint of the leased premises - the PLA covers destruction and damage to the land on which the leased premises are situated. This seems to suggest that the PLA regime intends to prevent recovery for destruction or damage that is caused to surrounding land when the source of the damage is from the leased premises

For example, envisage the scenario of a multi-storey building with multiple tenancies. Obviously the 'leased premises' for tenant A will not include what is leased by tenant B, yet the land on which both leased premises are situated is the same. Due to the PLA regime, the costs of remedying the destruction or damage to tenant B's leased premises, which has been caused by the negligence of tenant A, should not be recoverable from tenant A (or tenant B) by the landlord.

However, we are still left with the uncertainty of exactly what the term 'leased premises' includes. Is it only the building structure ('real property'), or does it include the chattels ('personal property')?

Without judicial guidance, dictionary definitions provide assistance. Black's Law Dictionary defines 'premises' as 'a house or building, along with its grounds'. This definition suggests that 'premises' refers only to real property. 'Leased premises' should therefore refer to the real property that is the subject of the lease.

But what amounts to 'real property'? The dividing line between real and personal property can be blurry. Any object that is fixed to the land or building becomes real property. However, determining whether something is a fixture is sometimes a difficult exercise. Consider the following items and whether they would be defined as part of the 'leased premises':

  • Fitted carpet that is not glued to the floor.
  • Window-mounted removable air conditioning units.
  • A dishwasher or stove.
  • A heat-pump.

As the above shows, deciding exactly what falls under the term 'leased premises' can be problematic. However, the boundaries of what is covered by the PLA regime will have to be decided in order to determine what costs a negligent tenant is protected from in a recovery action brought by the landlord (or its insurer).

APPLICATION OF THE PLA REGIME: AN EXAMPLE

While there is uncertainty over the extent of property covered by the PLA regime, it is useful to consider a scenario to illustrate the PLA regime's possible application and to address the other issues that may arise. This includes issues such as the recovery of losses consequential upon destruction or damage to property.

Scenario

Green Inks Ltd owns a two-storey building and occupies half of the ground floor. Green Inks' business is making printers' inks. The other half of the ground floor is leased to Leather Bindings Limited, a specialist book binder. Aotea Printing Limited leases level 2.

One day, Shane Smith, a printer's apprentice employed by Aotea, was washing his hands. He left the tap running which overflowed the basin and flooded level 2 of the building, as well as causing damage to the building on the ground floor below. The plant and stock of both ground floor occupants were damaged, and both suffered a business interruption loss. Green Inks also had to give rent rebates to both Aotea and Leather.

The following losses were paid by the respective insurers (correctly calculated with no betterment), and subsequently claimed against Aotea.

Green Inks

Building repairs

$160,000

Loss of rent

$45,000

Plant repairs

$85,000

Stock loss

$80,000

Business Interruption

$50,000

TOTAL

$420,000

Leather

Plant repairs

$190,000

Stock loss

$50,000

Business Interruption

$30,000

TOTAL

$270,000

GREEN INKS' CLAIM (THE LANDLORD)

Building repairs

The cost associated with repairing the building should be within the ambit of the PLA regime and therefore not recoverable from Aotea. The building is both the leased premises (being Aotea's second floor) and the land on which the leased premises are situated (being the rest of the building - the ground floor). The building is real property. Sub-sections 269(1)(a) and (b) provide:

269

(1) If this section applies, the lessor must not require the lessee-

(a) to meet the cost of making good the destruction or damage; or

(b) to indemnify the lessor against the cost of making good the destruction or damage;

Due to section 269, Green Inks should be prevented from pursuing Aotea for the building repairs cost.

Plant repairs

The costs associated with plant repairs may be recoverable from Aotea. However, consistent with our conclusion earlier, the ability to recover would depend on whether the plant was considered a fixture of the building. If so, the likely conclusion would be that the plant formed part of the leased premises, or part of the land on which the leased premises are situated. If this is the case, damage to the plant would not be recoverable from Aotea (due to section 269).

Stock loss

The stock loss should remain recoverable from Aotea even with the PLA regime in place. If our conclusion that the PLA regime only covers damage to real property is correct, stock loss falls outside the ambit of the PLA regime. Business stock is undoubtedly personal property as it is not a fixture to the land. Green Inks' normal rights of recovery for stock loss should remain unaffected by the PLA regime.

Loss of rent

Loss of rent is a loss that is consequent upon the damage to the building. Section 269(1)(c) provides that the lessor must not require the lessee 'to pay damages in respect of the destruction or damage.' The destruction or damage that section 269(1)(c) is referring to is the destruction of damage to the leased premises or the land on which the leased premises are situated.

The effect of section 269(1)(c) could be that it prevents Green Inks from recovering consequential losses from Aotea. We believe that this is a natural interpretation of the section. The loss of rent, being directly consequential to the damage to the building, would therefore be covered by the PLA regime and not recoverable from Aotea.

Business interruption

Whether the PLA regime prevents Green Inks from recovering business interruption losses from Aotea may depend on whether business interruption losses are considered a consequential loss on the damage to the building. If they arise from Green Inks' trading operations independent of the landlord/tenant relationship, they may well be recoverable.

LEATHER'S CLAIM (NEIGHBOURING TENANT)

When considering Leather's claim against Aotea, it is important to remember that the PLA regime only deals with the relationship between landlord and tenant. Tenant­to-tenant relationships remain unchanged.

Therefore, the PLA regime does not remove Leather's rights to recover the stock loss, plant repairs and business interruption losses from Aotea.

BACK TO THE BEGINNING

Taking the above scenario, up until now we have only considered the PLA regime's effect on the right to recovery from Aotea as a tenant (and its employees). Although the Sheehan decision makes it clear that tenant and employee are equally protected, that is not necessarily the end of the matter. Who is an employee?

For example, owner/drivers are typically set up as self-employed contractors. Being contractors are they therefore not protected? If Cunningham Lindsey leases an office, but employees of its subsidiary Sergon work there, then the Cunningham Lindsey employees seem to be protected but the Sergon employees may not be.

There are many other categories we can imagine, relatives of the employee – their husband or wife visiting. Temporary workers hired from a labour company, and so on.

Harrison J thought it doubtful that 'drafters of the legislation foresaw the resourcefulness of property insurers ... who would attempt to circumvent the statutory intention ... by suing only the lessee's employees'. I wonder if Harrison J in giving his judgment foresees the resourcefulness of these same insurers (and their adjuster) in circumventing his intention.

1. Auckland High Court, Harrison J, 23.12.09

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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