Destruction and leases (again)

by | Sep 28, 2011 | General property Law, Leasing

There has been another case in relation to the ADLS standard lease clause, which provides the term of a lease shall at once terminate if there is destruction or damage rendering the premises untenantable.  We wrote about an April 2011 decision of the Auckland High Court following a fire in Kingsland (see Destruction and leases).  The latest decision was heard in the High Court in Christchurch and followed on from the February earthquake.

The same analysis was applied as the Kingsland case, but to a different set of lease terms and with a different degree of damage.  The lease for the Christchurch premises was 6 years from 6 October 2009 with two rights of renewal each for a period of six years.  The annual rental was $520,000.00 per annum.  The property operated as a hotel. 

The building was damaged in the September 2010 earthquake however the hotel was able to resume operation after the cordon was lifted (on a reduced scale).  Following the February 2011 earthquake there was minor structural and moderate cosmetic damage.  The evidence before the court was that initial repairs would require 17 working days, which would enable the business to resume on a limited scale.  Full repairs would take about 15 and a half weeks.  The building was also in the Red Zone.  Therefore it might be some time before the repairs could be completed. 

The judge found that in the context of a lease with 16 and a half years still to run a period of 15 and a half weeks was not sufficient “permanence” to make the premises untenantable.  The judge commented that even if the Red Zone cordon was not to be lifted for 7 months or so then he doubted this would alter the situation, given the length of term of the lease.  The renewal terms were included in the analysis by the judge here (the Court was aware of the renewal but did not make a finding on that issue directly in the Kingsland case referred to above). 

The judge was very concerned about opening the floodgates in Christchurch given so many leases use the ADLS form.  If all those leases terminated automatically following the February earthquake then “commercial chaos” could follow. 

This was a hearing for an interim injunction.  By necessity those are quick and the judge does not have full evidence before it.  The judge is determining whether or not the termination should be prevented in the interim pending a full determination of the matter.  The judge granted an interim injunction here preventing the termination, finding that on the evidence before him so far, the damage had not likely caused the premises to be “untenantable”. 

Unfortunately more litigation is likely to follow in this area.  For those negotiating new leases, particularly using the ADLS form, parties should consider whether they are happy for a right of automatic termination to remain in the lease where the premises are “untenantable”.

By <a href="" target="_self">Denise Marsden</a>

By Denise Marsden