Property / Real Estate

Untenantable Revisited

We revisit the definition of "untenantable" in light of a recent case in the Red Zone in Christchurch.

Our recent article published in June 2011 commented on the decision of the High Court in the case of Russell v Robinson in which the Court held that "untenantable" is an objective state to be determined on the specific relevant facts. Certainly the focus of the enquiry must be whether the premises are capable of being tenanted by the lessee, who in terms of the lease, went into the premises for a specific purpose and for a specific term. The tenant's purpose is inextricably tied up with a permitted use of premises.

The case of GP 96 Limited v F M Custodians Limited also considered this question. The background is complicated and we do not intend going into a full summary of the facts but this case is of particular relevance to the current situation in Christchurch as it concerns premises located in the "Red Zone", at 96 Lichfield Street.

F M Custodians Limited (FMC) as mortgagee of the landlord wrote to GP 96 Limited (tenant):

"... the lease terminated at 12.51pm on 22 February 2011 when, due to the earthquake that occurred at that time, the premises became so damaged as to be untenantable."

and further:

"Our client has taken possession of the premises given the termination of the lease."

The tenant alleged the termination of the lease (which was on the commonly used ADLS form) and related steps by FMC, breached the lease and were invalid. It made application for an interim injunction preventing FMC from taking any further steps in connection with the purported termination.

The Court dealt with a number of issues but this article deals only with the question of whether the premises were untenantable.

The Court referred to several cases including Russell v Robinson. It held that:

  • The test of tenantability is an objective test which reflects that the clause is for the benefit of both parties. Before the building can be untenantable there needs to be some degree of permanence, and something that is merely transitory or temporary will not be enough. All relevant facts need to be taken into account including the purpose of the lease, the duration of the lease, the extent of the damage, and an estimated time for repairs before occupancy can be resumed. If the building is rendered untenantable the lease would automatically terminate.
  • The indication that the cordon is unlikely to be removed this year was relied on by FMC to support its contention that the property at 96 Lichfield Street was untenantable.
  • Given the widespread use of the ADLS lease form, FMC's submission, if accepted, was likely to have very significant implications in Christchurch. A huge number of leases within the Red Zone would most probably be automatically terminated with the result that landlords and tenants would be able to walk away from binding lease obligations. There would be commercial chaos.
  • Accordingly Chisholm J was not prepared to accept FMC's arguments that the lease had been rightfully terminated, especially in the context of an interim injunction.
  • Overall the Judge found that the tenant's case could be described as "relatively strong", ie that the building remained tenantable.

While this decision did not resolve the effect of the Red Zone given the interim nature of the proceedings, it does give some useful pointers as to matters which the Court will consider in determining whether premises are untenantable, namely:

  • the enquiry as to whether any portion of the building was so damaged as to render the premises untenantable is an objective test;
  • there needs to be some degree of permanence, and damage that is merely transitory or temporary will not be enough;
  • all relevant facts need to be taken into account including the purpose of the lease, the duration of the lease, the extent of the damage, and estimated time for repairs before occupancy can be resumed; and
  • in determining the length of term, rights of renewal should not be ignored.

The Judge also dealt briefly with the doctrine of "frustration" in the context of the lease. This is a matter that we will deal with in a future article.

Ian McCombe

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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