As the rebuilding commences following the devastation of the Queensland floods, landlords and tenants of flood-affected properties need to consider carefully their respective rights and obligations under the leases of those properties.
Damage or destruction clause
Damage or destruction clauses are stated expressly in most commercial leases. These provisions deal with the rights of the landlord and tenant where the building or premises are damaged or destroyed and the tenant is unable to use or have access to the premises.
The wording of the clause will identify the nature and extent of the damage required for the clause to apply. There are two main circumstances in which the clause is likely to apply:
- Damage to the premises so its use is substantially reduced.
- The premises are not damaged but access to the premises is affected, making the premises either partially or wholly inaccessible.
While most clauses will identify both these circumstances, some may only apply when there is actual damage to the premises.
Rights
Whilst it is uncommon for the landlord to be required to pay compensation to the tenant, the successful application of the damage or destruction clause will generally attach other specific rights for tenants and landlords:
- Abatement of rent and other expenses: The tenant is not obliged to pay rent during the period from when the damage or destruction occurs until the premises may be used or accessed again. The extent of the abatement allowed is usually proportionate to the extent of the damage or destruction, which achieves a more reasonable application. The abatement of other expenses, such as outgoings, for the same period of time depends on the terms of the lease.
- Right for landlord or tenant to terminate the lease: The terms of the clause outline the landlord's and tenant's right to terminate due to the damage or destruction. The landlord's right to terminate, rather than restore the premises, is usually limited to where there is a substantial loss of use of the premises and there is normally a period of time for the landlord to make the election to restore the premises before termination is permitted.
Disentitling circumstances
Under the clause, the tenant may be disentitled from abatement if the loss or damage to the premises was caused or contributed to by the act or omission of the tenant or its employees (such as negligence).
Service of notice
Landlords and tenants need to be aware of any procedural requirements to bring these rights into effect. In the event that the rights do not come into effect automatically when the damage or destruction occurs, there will be a specific procedure to follow. For example, the tenant may need to serve notice on the landlord within a certain timeframe and the landlord will need to respond as to whether it will reinstate the premises or access. The procedure will vary from lease to lease.
Mitigate damage
In every case, the landlord and tenant should take all reasonable steps to mitigate the extent of the damage. This increases their chances of obtaining the most beneficial outcome in terms of protection afforded by the lease and the general law.
Construction of the lease clause
In the event that the flood damage sustained does not fall within the express description of damage outlined in the lease, the damage and destruction clause will not apply. Therefore is it essential for landlords and tenants to be aware of the provisions of their lease.
The Property Law Act
If the damage or destruction clause fails to address the abatement of rent due to flood damage, or a damage or destruction clause is not included in the lease, then section 105 of The Property Law Act 1974 (QLD) may apply, unless its application has otherwise been excluded by the parties to the lease.
If section 105 is applicable, a rent abatement clause is implied into the lease so that rent will be suspended whist the premises are 'unfit for occupation and use' due to flood damage. The rent abatement period extends until the landlord reinstates the premises 'fit for the occupation and use' of the tenant.
Right to quiet enjoyment
Tenants are entitled to possession of the leased premises without any interruption or disturbance by the landlord or any other person lawfully claiming under the landlord. Where the lease does not expressly contain a clause for the right to quiet enjoyment, it is implied into the lease.
A breach of this covenant requires the landlord to have caused the interruption or disturbance. Flood damage, which is clearly beyond the control of the landlord, does not constitute a breach of quiet enjoyment.
Frustration
When events beyond control of the both the tenant and the landlord make the performance of a lease radically or fundamentally different from what is outlined in the document, the parties may be discharged from their respective obligations due to frustration.
Frustration only applies when the actual damage or destruction does not correspond with that expressed in the damage and destruction clause of the lease. The lease will not be frustrated when the parties have provided expressly for the consequences of flood damage. In such cases, the lease cannot be discharged and is still 'on foot'.
Frustration only applies in exceptional circumstances that were not contemplated by the parties when entering into the lease. The application of the damage and destruction clause is a matter of construction from lease to lease.
© 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.
