New Zealand landlords are now, in many circumstances, prevented from forcing tenants to make good the damage to premises where the damage arises from particular risks. This is due to new legislation, which applies to all leases regardless of when entered into and even prevents claims for damage arising from the tenant's negligence.
Property Law Act 2007– new limits on tenants' liability
Under the Property Law Act 2007 a landlord can no longer require the tenant to meet the cost of making good the damage to the premises from either:
- Fire, flood, explosion, lightning, storm, earthquake or volcanic activity (specified risks).
- Any other risk which the landlord is insured against or has covenanted to insure (insured risks).
In addition, where the lease requires the tenant to make good the damage, the landlord must indemnify the tenant for the cost of doing so.
These new rules relate to any damage occurring after 1 January 2008 and apply to any leased commercial premises (but not residential premises) regardless of when the lease was entered into. They apply even where the damage is caused by the negligence of the tenant. The new rules also prevent claims for consequential loss arising from the damage. So landlords should consider loss of rent cover as there are now fewer circumstances where they can look to the tenant for consequential loss.
These limits on the tenant's liability apply except to the extent that either:
- The damage was intentionally done by the tenant or was the result of conduct by the tenant that constitutes an indictable offence.
- Any insurance money that would otherwise have been payable to the landlord is irrecoverable because of the conduct of the tenant.
The landlord and tenant can also agree to 'contract out' of these new rules so that the tenant takes responsibility for damage arising from particular risks. This contracting out can be in full or in part but must meet certain criteria to be effective. It is not possible to avoid the effect of these new rules other than by compliance with the 'contracting out' criteria.
If the landlord's insurance is affected
Landlords do have limited rights to terminate the lease or recover any increased insurance premiums or excess that arise as a consequence of particular damage – but only where that damage was caused by the negligence of the tenant.
Insurance excess and operating expenses
Landlords can continue to recover insurance premiums and related valuation fees from the tenant through the recovery of operating expenses in the normal manner. However, it appears that the landlord is not able to recover any insurance excess from the tenant unless the lease is adequately drafted to capture the recovery of the excess under the 'contracting out' provisions. In this regard, it appears doubtful whether the drafting of the Auckland District Law Society Deed of Lease is adequate to allow a landlord to recover the excess. We recommend that landlords vary that form of lease accordingly and, generally, check that any new leases they enter into adequately 'contract out' - to ensure there is no doubt about the ability to recover insurance excess.
This difficulty in recovering the excess will apply to all leases, regardless of when they were entered into. As a consequence, and unless the 'exceptions' noted above apply, there is a question mark over the ability to recover the excess under leases drafted without the Act's 'contracting out' rules in mind (which will be most pre-2008 leases). If the recovery of excess is in doubt under an existing lease, the landlord may decide to negotiate a reduced excess (no doubt at the cost of a higher premium).
Where damage occurs, landlords will continue to look to their insurance in the first instance. However, the main impact of the new rules is that the landlord (and its insurer) cannot seek redress from the tenant where the damage was caused by the tenant - unless the damage was intentional, arose from an indictable offence or the insurance was irrecoverable because of the conduct of the tenant. Accordingly, the risk of damage from the specified risks and insured risks defaults onto the landlord. As a result, landlords need to ensure the following:
- That they carry the required insurance cover.
- That their leases are appropriately drafted so that there is no doubt about the ability to recover insurance excess.
- If 'contracting out' and passing any risk on to the tenant, that their leases are appropriately drafted to comply with the rules in this regard.
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