The cyclonic weather and flooding experienced over the past few months have created enormous difficulties for Australians, both personally and commercially.
One issue that frequently requires consideration following such natural disasters is the rights of the parties under commercial leases where the leased premises have been destroyed or substantially damaged so as to make the operation of the tenant’s activities from the premises impossible or substantially reduced.
It is recognised law that the damage or destruction of leased premises will not "frustrate" the lease and, accordingly, will not of itself allow either the landlord or the tenant automatically to treat the lease as being at an end.
Most commercial leases will, however, contain certain rights applicable in the event of destruction or damage of leased premises by events such as fire, lightning, storm, flood, earthquake, explosion or malicious damage which make the premises inaccessible or wholly or substantially unfit for the tenant’s use and occupation.
These rights include:
a rental abatement and, occasionally, an outgoings abatement available to the tenant proportionate to the nature and extent of the damage sustained for the period until the premises shall have been made fit for use and occupation;
a right for the landlord to terminate the lease should the repair of the premises be undesirable or impracticable; and
a right for a tenant to terminate the lease should repair to the premises not be undertaken by the landlord within a specified time i.e. usually between 30 days and 3 months.
If a commercial lease does not contain an express abatement clause, unless expressly excluded from the lease, such a right is implied in New South Wales, Queensland and Northern Territory leases pursuant to the statutorily implied covenants to pay rent.
Each abatement or termination clause must be interpreted strictly on its terms.
Important issues to be observed are as follows:
the damage must occur to the premises itself and not just to the tenant’s own property;
the damage must have arisen from the specified cause e.g. if an abatement clause permits rental abatement only in the case of flooding, damage caused by rain damage will not allow the abatement;
the premises must be rendered at least partially unfit for occupation by the tenant in the conduct of its business;
an abatement clause will frequently disentitle a tenant from abatement or termination rights if the loss or damage was caused, or contributed to, by the act of the tenant or its employees;
a tenant will be entitled to a full abatement of rental where the premises cannot be used for the purpose for which they were originally leased. The fact that the original business can be carried out by the tenant in some reduced or truncated form is irrelevant.
Most abatement clauses will provide a mechanism for the determination of the degree and period of the appropriate abatement. If agreement cannot be reached by the landlord and the tenant these issues are frequently required to be referred to an independent valuer or loss assessor, acting as an expert, for determination.
A tenant who intends to make a claim for rental abatement should be careful to notify the landlord, prior to payment of the rent, of the inability to use the entire property and to specify the reduced amount of rent to be paid. If a tenant is required to make full payment of rental during a period of possible rental abatement, the payment should be made under protest with the tenant’s rights to seek abatement at a later time clearly reserved.
If a landlord wishes to exercise its right to terminate a lease due to the undesirability or impracticability of repair or reconstruction, the landlord must act reasonably in forming that opinion. For example, a court would be unlikely to allow a landlord to terminate a long term lease in a situation where the damage sustained to the premises was relatively minor.
It is wise to seek legal advice if commercial premises leased or owned by you are damaged to such an extent, and in such a manner, as to give rise to a rental abatement or possible termination of the lease.
Phone: 61 7 3004 3502
Please click here to view a PDF version of this Newsletter.
To see the contact details of the entire TressCox Property & Planning Team, please click here.