The Christchurch earthquakes have resulted in many insurance issues. One of the more unexpected ones is whether leases have come to an end because of damage to the building, or prevention of access to it. This turns on whether the premises are untenantable. Coverage for Landlords under business interpretation policies usually turns on this.
The High Court's recent decision in Russell v Robinson (1 April 2011) provides us with a timely reminder of the meaning of the word 'untenantable' as it applies to leased premises.
The case involved a four year lease, on the ADLS form (4th edition 2002), of the first floor of a three storey building. On the first day of the lease, a serious fire broke out as a result of work being undertaken for the tenants. There was extensive structural damage, floors were burnt through, partition walls were damaged and the electrical and air conditioning systems were destroyed. The estimate for the restoration of the premises was 9-10 months, and in the end reinstatement was completed within 10 months.
Two months after the fire, the landlord gave notice to the tenant terminating the lease pursuant to clause 26.1 of the ADLS lease on the basis that the premises were 'untenantable'. The tenant disputed this and following rejection of its claim in the District Court, appealed to the High Court.
The tenant's main argument was that as it wished to continue leasing the damaged premises then the premises could not properly be described as 'untenantable'.
However, the High Court found that for the purposes of clause 26.1(a) the word 'untenantable' is to be interpreted objectively. The test is whether the reasonable landlord or tenant would consider the premises untenantable, not the actual landlord or tenant's subjective view of this.
Both the District Court and the High Court Judges reviewed the authorities and applied the following general principles:
- Untenantable means substantial interference with the tenant's ability to enjoy, use and operate in the premises.
- Within the context of clause 26, the interference requires some degree of permanence. Merely transitory or temporary interference will not make a building untenantable. In this case, the inability to use the premises whilst they were repaired, for a likely period of 9-10 months, was sufficient to be more than temporary or transitory.
- The tenant does not have the option to terminate the lease in these circumstances. Clause 26(1)(a) provides that the lease shall terminate at once where the damage is such as to render the premises untenantable. This is automatic and not dependent on either party taking any steps.
- Clause 26(1)(b) provides for termination at the option of the landlord if in the reasonable opinion of the landlord the premises require demolition or reconstruction. This does not require the whole of the building to be destroyed and is dependent on the bona fides and reasonableness of the landlord's opinion as to the extent of any necessary demolition or reconstruction.
This is a useful checklist for landlords and tenants of premises in Christchurch that are damaged or inaccessible. Each case will turn on its own facts.
Insurers should apply these principles when considering whether the earthquake has made their insured's premises untenantable, triggering cover for loss of rent .
© DLA Piper
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.
DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com