Property / Real Estate

Uncertainty on landlords' ability to terminate leases where premises are untenantable

The most recent High Court decision on untenantabilty has created uncertainty in relation to termination of leases when premises become untenantable as a result of damage or destruction to the premises or the building of which the premises form part. In such instances, does the lease terminate automatically under clause 26.1(a) of the commonly used ADLS lease form? Or, if the lease does not terminate automatically, can landlords, or only tenants, terminate a lease?

Clause 26.1 of the ADLS current form of lease (Fifth Edition 2008(2)) provides as follows:

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 20 working days notice to terminate...

Background

Prior to the judgment in New Lynn Compliance Centre Limited v Birdwood Custodians Limited (New Lynn v Birdwood), which was released in September 2011, the High Court had essentially ruled that clause 26.1(a) was for the benefit of both landlords and tenants. In GP 96 Limited v FM Custodians Limited and Russell v Robinson, which we previously reported on*, the Court essentially ruled that if premises were untenantable due to damage, the lease would terminate automatically. In both of these cases the landlord, not the tenant, was seeking to terminate the lease.

In terms of what constitutes untenantable, GP 96 Limited v FM Custodian Limited and Russell v Robinson considered that untenantability was an objective state to be determined on specific relevant facts. The focus of the inquiry was on whether the premises were capable of being tenanted by the tenant who went into the premises for a specific purpose and for a specific term. The tenant's purpose was deemed to be inextricably linked with the permitted use of the premises. Untenantability required some degree of permanence, so that damage that was merely transitory or temporary would not be enough.

New Lynn Compliance Centre Limited v Birdwood Custodians Limited

In the more recent case, New Lynn v Birdwood, Justice Ellis ruled that clause 26.1(a) is solely for the benefit of the tenant, and the lease does not terminate automatically when damage or destruction renders premises untenantable. The High Court ruled that only a tenant, and not a landlord, can terminate a lease under clause 26.1(a).

The brief facts of the case were as follows. There was a fire on 2 November 2008 that resulted in damage to premises leased by the tenant. On 20 November 2008 the landlord wrote to the tenant terminating the lease with immediate effect and the landlord then brought proceedings against the tenant for outstanding outgoings. The tenant then counter-claimed for conversion of chattels that had remained at the premises after the fire, based on the landlord denying the tenant entry to the premises as a result of a purported wrongful termination of the lease. The Court was required to consider whether appropriate notice of termination had been given by the landlord.

The District Court had found that the premises were untenantable at the time of the fire and the lease therefore terminated on that day, being 2 November 2008. This was notwithstanding that the landlord did not give notice of termination to the tenant until several weeks later, on 20 November 2008. The High Court disagreed, holding that the lease did not terminate automatically. The High Court considered that there was an important distinction between clause 26.1(a) and (b). The former existed for the benefit of the tenant, and was exercisable solely by the tenant. By contrast, clause 26.1(b) applied when the tenant remained in the premises and it was the landlord who wished to terminate the lease. Clause 26.1(b) required the landlord to give the tenant one month's written notice of termination within three months of the date of the damage. Accordingly, the High Court held the lease was not validly terminated as, on the Court's analysis, the landlord needed to have given the tenant one month's written notice to terminate.

The High Court considered that if a lease could be terminated with immediate effect by the landlord (under 26.1(a)) the tenant's rights to remove its chattels from the premises within seven days of the lease terminating (as was provided for in the lease) would be lost even though the tenant had been led to believe after that date that the lease might continue, and it was not told by the landlord until several weeks later that the lease had been terminated.

The High Court made little comment as to the substantive test of when premises are untenantable. However, it did note that while untenantability under the lease is to be judged from the tenant's perspective, it might well be expected that that choice would be exercised reasonably. Further, as the Court noted that tenantability is a fundamental prerequisite from the tenant's perspective not the landlord's, the tenant's perspective on untenantability may receive an increased focus if the approach taken by Justice Ellis is followed.

The Current Position

In New Lynn v Birdwood the High Court did not make reference to the recent High Court judgments in GP 96 Limited v FM Custodian Limited and Russell v Robinson. Now, with differing rulings on whether a lease terminates automatically on premises being rendered untenantable, and whether or not landlords can invoke termination rights under clause 26.1(a), future District Court and High Court decisions are able to follow either line of cases so there will be uncertainty until the Court of Appeal considers the point.

In any event, it remains open to a landlord to terminate a lease pursuant to clause 26.1(b). This requires that premises are destroyed or damaged and in the reasonable opinion of the landlord the premises require demolition or reconstruction. This election must be made within three months of the date of the damage, and the landlord must give the tenant 20 working days notice to terminate the lease under the current ADLS lease form.

Given the contrasting case law, it is important that landlords and tenants seek legal advice both prior to entering into a lease and also prior to terminating a lease in reliance on clause 26.1 of the ADLS lease form.

We understand ADLS Inc is reviewing the deed of lease, so changes may be forthcoming that will provide some clarity on the issue.

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*Refer to our earlier articles 'Untenantable Premises - A Question (Somewhat Resolved)' and 'Untenantable Revisited'

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