Legal update on property law - May 2011

If premises are "untenantable", then the lease will be deemed to have been terminated.  Lawyers have had some difficulty following the earthquake in advising their clients on exactly what constitutes untenantability, due to the relative lack of case law, particularly in New Zealand.  It is ironic that the first useful court decision on this issue since the earthquake (and the first in several years) should concern a property in Auckland.

In Russell & Others v Robinson & Others (1 April 2011, Auckland High Court, Priestley J), the first floor of a three storey commercial building was leased to tenants who intended to sublet the premises as office space.  Painters engaged by the tenant had covered up halogen ceiling lights with masking tape, and on the first day of the lease the lights were turned on and the masking tape ignited.  The resulting fire caused serious damage to the building and in particular the first floor.

The lease was on the 4^th edition of the ADLS form (which contains the same clause as the current 5^th edition).  The lease provided that where premises were destroyed or damaged so as to be untenantable, the lease would terminate.  Otherwise, if, in the reasonable opinion of the landlord, the premises required demolition or termination the landlord (but not the tenant) may give notice to terminate.

The insurance assessor estimated that restoration of the premises would take nine to ten months.  Following some discussion between the parties, the owner's solicitors asserted in writing that the premises were untenantable, and that the damage would require "demolition and [sic] reconstruction".  In the end, reconstruction works took over ten months.

The tenants disputed the termination of the lease in the District Court.  Overall, the Court found that the premises were untenantable, and the lease terminated automatically on that basis.  The Court also decided that even if its decision as to untenantability was wrong, the damage justified the decision by the landlord to give notice to terminate.

The present case was an appeal by the tenant to the High Court.  The main argument put forward was that if the tenant wished to continue, the premises could not be untenantable.  The Court built on the consideration by the District Court of the existing authorities as to the meaning of "untenantable".  The Court reiterated the previous best authority on what untenantable meant, as approved by the Court of Appeal in DFC NZ Limited v Samson Corporation Limited (1994) ANZ ConvR 216:

"[Tenantable] means nothing more nor less than able to be used and enjoyed by tenant.  [It] involves some degree of permanence.  In other words, something which is merely transitory or temporary will not make a building untenantable.  However, where there is a substantial interference with the tenant's ability to enjoy, use and operate, particularly when one is talking about commercial premises, then you have 'untenantability'."

The Judge in the present case decided that this assessment is an objective one (i.e. the views and intentions of the parties are irrelevant), and that the focus of the inquiry is on whether the premises are capable of being tenanted by the lessee, who entered the lease for a specific purpose and term.  If the premises are objectively untenantable, the lease terminates, without reference to the preferences of either party.  Of course, it is open to the parties to negotiate a continuation of the lease by agreement.

In the end, the Judge found that the fact that carrying out the necessary repairs would mean the premises were not capable of being used for the purposes of the lease for ten months of the agreed four year term was sufficient to render the premises untenantable.  The lease had therefore terminated.  Accordingly, it was unnecessary for the Court to consider the effect of the landlord's notice of termination.  However, the Court did comment that the evidence showed that the landlord had reasonably arrived at the conclusion that demolition or reconstruction was required, on the basis of their own observations and the advice of the insurance assessor.

The decision provides welcome judicial commentary on the issue of when premises might be considered to be untenantable.  However, in many if not most cases, this assessment will still be difficult.  Even where it is clear that premises cannot currently be used for the purpose contemplated by the lease, it is difficult to determine how long this state of affairs must continue in order to be untenantable.  Ten months out of four years (around 20% of the term)) was sufficient in this case.  In DFC, a period of around three weeks out of six years (around 1% of the term) was not long enough.  

At some point, this assessment will be quite arbitrary, and undoubtedly the calculation of time will not be the only issue.  In the present case, it was also reasonably certain how long reinstatement would take, and the Court had the benefit of hindsight.  Many in Christchurch are uncertain for various reasons as to how long their premises will be out of action.  For those people, the objective assessment contemplated by the Court in the present case is easier said than done.

This article is provided for general information purposes only and not as legal advice.  For further information please contact a member of our national property law team - John Buchan, Mark Odlin, Blake Cescon, Stephen Whittington, Charlotte von Dadelszen, Wayne Chapman, Lloyd Davies, Dominic Lundon, Daniel Kelleher, Mel Easton, Angela Chitty, Simon Munday or Gareth Harbinson.