Cancellation of Leases due to "Untenantability"
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Apr 2011The recent High Court decision of Russell v Robinson (delivered 1 April 2011) has considered cancellation of commercial leases due to untenantability.
In Russell v Robinson the tenant had a four year lease and on the first day of the term a fire caused substantial damage to the premises so that the roof and ceiling needed to be demolished and rebuilt, electrical systems repaired, water and electricity connected and other remedial work was required, requiring building consent. It was estimated that the work would take 9 to 10 months to complete. The High Court upheld the District Court's decision in favour of the landlord to terminate the lease on the basis that the premises were "untenantable".
The standard ADLS commercial lease which was used in the above case provides that the lease will automatically terminate if the building or part thereof is so damaged as to render the premises "untenantable".
This has led to a debate on what constitutes untenantable. How this is defined will have a major impact on many businesses in Christchurch following the recent earthquakes as it will determine whether tenants or landlords are entitled to treat their lease as being at an end.
The case affirmed the tests set in previous cases on the meaning of "untenantable". In determining untenantability the courts held that the test was an objective one to be determined on the specific relevant facts. To establish untenantability you must establish that:
- due to the damage, the premises are unfit for occupation by the tenant for the intended purpose; and
- there is a degree of permanence of damage.
Damage which is merely transitory or temporary will not make a building untenantable. Whether the damage is transitory or temporary will be a question of degree and parties need to consider the time required to make the premises tenantable versus the remaining term of the lease. In this case the estimated 10 months to repair in light of a 4 year term was sufficient to establish a degree of permanence.
In this case, it was the tenant who wished to remain in the premises and it was the landlord who insisted the lease had been cancelled. However the principles of the case are equally applicable to tenants who wish to terminate. The tenant argued that if a tenant wished to continue leasing damaged premises then the premises could not be described as untenantable. The courts rejected this argument on the basis that the test of whether premises are untenantable is an objective one to be established on the facts, and cannot be coloured by the subjective preferences of either the landlord or tenant.
Tenants and landlords need to be aware that if they wrongly assert that their lease has been cancelled they could be liable to the other party for damages. Each case will turn on its own facts and therefore landlords and tenants should seek legal advice early before taking action.
Prepared by Alexandra Isherwood
