Untenantable property - an objective test
When is a property considered untenantable? In Russell v Robinson(1) the High Court considered, among other things, the elements that are required for a property to be considered untenantable so as to lead to termination under Clause 26.1 of the Auckland District Law Society Incorporated Lease.(2) This form is widely used throughout New Zealand for leasing commercial premises.
The findings in this case are likely to have a wider impact on the property market in New Zealand, particularly in the wake of the Christchurch earthquakes. The court held that what constitutes being untenantable is an objective test, and that damage must be more than "merely transitory or temporary".(3) However, the material damage required to meet this threshold is still unclear.
The effect that the decision in Russell will have within New Zealand is likely to become obvious soon. As Christchurch begins to rebuild itself in the aftermath of the earthquakes, both landlords and tenants will be looking to their lawyers for advice on whether a property is considered untenantable and what the effect of this will be on their commercial leases. The consequence of premises being untenantable is that the lease is terminated. Russell v Robinson will continue to be a useful test in law and is likely to be the first of many cases to deal with this issue.
The appellants in Russell v Robinson had entered into a lease with the respondents for the first floor of a commercial building for a term of four years. The appellants intended to sublease the area as office space. On the first day of the lease, a fire broke out (due to masking tape being left over the lights by painters, who had been engaged by the appellants), causing extensive damage to the building, particularly the first floor.
On inspecting the damage, it was estimated that around 10 months would be required to restore the premises. The respondents notified the appellants of their intention to terminate the lease under Clause 26.1. Both the District Court and the High Court held that the damage to the property was extensive enough to render it untenantable.
However, even if the damage were not extensive enough, it was held that the respondents had validly terminated the lease, pursuant to Clause 26.1(b), as in their reasonable opinion (after consultation with the insurance assessor) the premises required demolition or reconstruction.
The relevant clause of the lease read as follows:
"DAMAGE TO OR DESTRUCTION OF PREMISES
26.1 IF the premises or any portion of the building of which the premises may form part shall be destroyed or so damaged
(a) as to render the premises untenantable then the term shall at once terminate; or
(b) in the reasonable opinion of the landlord as to require demolition or reconstruction, then the Landlord may within 3 months of the date of damage give the Tenant 1 month written notice to terminate and a fair proportion of the rent and outgoings shall cease to be payable as from the date of damage.
Any termination pursuant to this clause shall be without prejudice to the rights of either party against the other."
The meaning of 'untenantable' as stated in Clause 26.1 is where the dispute arose. The appellants disputed the termination of the lease, and disputed that the property was untenantable as the appellants wished to continue leasing the damaged premises. The appellants submitted that the clause was for the benefit of the tenant, not the landlord.
Untenantable property - an objective test
The District Court defined the term 'untenantable' as follows:
"In my view the meaning of clause 26.1(a) is clear and it is the physical state of the premises which renders the premises not able to be tenanted. In other words, if the premises are not fit for occupation, they are 'untenantable'."
The High Court further elaborated and stated that the word 'untenantable' described an "objective state to be determined on the specific relevant facts". The authority of DFC New Zealand Limited v Samson Corporation Limited(4) applied in its definition of the term. In that case, it was stated that the term meant:
"Nothing more nor less than able to be used and enjoyed by a tenant. Within the general catalogue of Clause 26, sub clause (a) 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'."
Despite a tenant's willingness to continue a lease, the purpose for which the tenant leased the premises must still be able to be satisfied in order to render the premises tenantable. The subjective intentions of the parties are irrelevant.
Both Russell and DFC New Zealand Limited show untenantablilty as an objective test. However, even in light of this clarification, there is little guidance as to the degree of damage or 'permanence' that exceeds the "merely transitory or temporary" criterion so as to make premises untenantable. The case gives no guidance on the length of time for which the premises must be damaged or the extent of the damage. In Russell it was deemed that damage requiring 10 months reconstructive work (in a lease of four years) was long enough to make premises untenantable.
Issues not contemplated by Russell will no doubt surface in the context of the reconstruction of Christchurch. If access to premises is restricted, does this amount to sufficient damage to make them untenantable? In many cases, the facts will not play out as clearly as in Russell, therefore making an objective test difficult to apply.
For further information on this topic please contact Chris Moore at Meredith Connell by telephone (+64 9 336 7500), fax (+64 9 336 7629) or email ([email protected]).
(2) The lease in Russell was on the fourth edition; however, the current fifth edition contains the same provision.
(3) Russell v Robinson  2 NZLR 424, at 25.