No two commercial leases are exactly the same. Therefore, this commentary is intended to do no more than provide a general overview of the rights and obligations of landlords and tenants in situations where premises are damaged. For this reason, all examples of terms in leases relating to damage referred to in this article are those that are implied under the Property Law Act 2007 (PLA) and the express terms in the Auckland District Law Society Deed of Lease Sixth Edition 2012 (5) (ADLS Lease) which is the most commonly used lease. If readers need specific advice about the meaning and effect of the terms in their leases that deal with damage to their premises then they should seek the guidance of a lawyer.

Commercial leases have express or implied terms incorporated into them setting out the rights and obligations of parties in cases where properties sustain damage.

The express terms in commercial leases are invariably tailored to suit the type of premises being leased (for example, office, retail, industrial) and the commercial arrangements agreed to by the parties.

If certain terms of a lease are not spelled out then they are implied by sections of the Property Law Act 2007 (PLA), which applies to every lease of land entered into since January 1, 2008.

Commercial Leases And Property Damage

When commercial premises are damaged, the party who is responsible for repairing damage to leased premises and for paying for those repairs is determined by the terms in the lease and the law governing the relationship between landlord and tenant. These terms cover a range of commonly encountered situations where damage to premises is attributable to:

1 the landlord’s failure to maintain and keep the exterior of the premises and building services provided to the tenant for the general use and enjoyment of the building

2 the tenant’s failure to maintain and repair the leased premises

3 work done by the tenant in the exercise of its obligation to reinstate the premises to the condition that they were in at the start of the lease

4 an event such as a fire or natural disaster

5 events that result in the total or partial destruction of premises.

‘The extent of a landlord’s obligation to maintain and repair leased premises must be expressly written into the terms of the lease’

Landlord’s Maintenance And Repair Obligations

The extent of a landlord’s obligation to maintain and repair leased premises must be expressly written into the terms of the lease. It is not uncommon for the term to require the landlord to (a) keep and maintain the exterior of the premises in good order, (b) ensure that they are weatherproof, and (c) maintain building services (such as air conditioning, lifts and heating) and carparks (for example, clause 11.1 in the ADLS lease).

If landlords retain control of parts of premises, such as passages and stairs, then they are usually required to ensure that those parts do not cause damage to other parts of the premises that are leased to tenants.

Tenants can alert landlords of the need to repair damage to premises by sending a notice advising the landlord of the need to carry out repairs. If, after receiving the notice, the landlord does not make the repairs within a reasonable time, the landlord may be liable to pay the cost of any damage to the tenant’s property (caused for example, by water ingress resulting from the landlord’s failure to repair damage to the roof). Note that if a landlord fails to conduct repairs within a reasonable time then the tenant can repair the damage and bill the landlord for the costs, or deduct the costs from the rent.

The terms of many leases limit the extent of the landlord’s liability to pay repair and maintenance costs. These leases may for example, allow some of landlords’ maintenance and repair costs to be recovered from tenants if they are outgoings under the lease (these costs may also be covered by a service maintenance contract, the cost of which landlords can pass on to tenants).

However, if an item in the list of outgoings (for example, heating) needs to be replaced, then the lease may require the landlord to pay the cost of replacing that item.

Tenant’s Maintenance And Repair Obligations

The tenant’s obligation to maintain and repair leased premises is either expressly written into the lease or implied by statute (section 219 and clause 13, Part 3, Schedule 3 PLA).

The extent of that obligation will vary from lease to lease. However, the implied term requires tenants to ensure that the leased premises are kept in the state of repair that they were in at the start of the lease and to yield up the premises in that condition at the end of the lease (section 219, and clause 13, part 3, schedule 3 PLA). The implied term can be replaced by an express term which enables the parties to determine the scope of the tenant’s maintenance and repair obligations (for example, clause 8.1(a) ADLS lease). Specific maintenance and repairs obligations can include:

a repairing damage to the point where the item repaired appears not to have been damaged

b painting and decorating

c replacing broken items such as light fittings and light bulbs

d cleaning and if necessary, replacing floor coverings

e keeping grounds and yards in a tidy condition and

f ensuring that stormwater drains, downpipes and guttering are unobstructed.

It is worth noting that as a general rule tenants are not required to fix damage to the premises caused by fair wear and tear.

The landlord has an implied power to enter the premises at all reasonable times to view the state of repair, and for the purpose of carrying out repairs or complying with the requirements of a statute, bylaw or a notice from a local body (clause 11, part 2, schedule 3 PLA). The landlord’s right to inspect and repair can also be an express term of the lease (for example, clauses 13.1 and 14.1 ADLS lease).

There are a number of remedies available to landlords in cases where tenants have breached their maintenance and repairs obligations. Possible remedies include:

a an action for damages
b cancelling the lease (after sending a notice to the tenant requiring the tenant to repair the damage within a reasonable time and advising them of the consequences if they fail to carry out the repairs (section 246, PLA).

Note that landlords should seek legal advice before deciding to take any action against a tenant.

Damage Resulting From Reinstatement Of Premises

Leases contain an express or implied term which requires tenants, who have, with the consent of the landlord (section 218(1) PLA and clause 5, Part 2, Schedule 3, PLA and clause 20.1 ADLS lease), made modifications to premises to reinstate them back to the condition they were in at the start of the lease. The reinstatement process is likely to involve the removal of the tenant’s chattels and fixtures (for example, trade or ornamental fixtures) and any other fixtures that the tenant is permitted by an express term in the lease to remove (see section 266 (1)-(2) PLA).

When tenants remove chattels and fixtures, they must:

a do so in a manner that causes as little damage as possible to the premises
b make good any damage caused and
c compensate the landlord for any damage not made good, and for any other losses caused (for example, section 266(3) PLA and clauses 20.1 and 20.4 ALDS lease).

Note that landlords should prepare a premises condition report. This report, which should be appended to the lease, provides evidence of the condition of the premises at the start of the lease and will help to resolve any arguments with tenants about the nature and extent of their reinstatement obligations (for example, ADLS lease clause 8.1(a)).

Damage By Fire, Flood Or Natural Disaster

It is not uncommon for terms in leases relating to insurance to require:

a The landlord to have comprehensive insurance cover that is sufficient to cover the cost of replacing premises damaged by events such as fire, flood or natural disasters, or repairing damage to the premises.

b The tenant to make a contribution to the insurance as a portion of the rent or as a service charge and to pay the cost of excess on insurance claims.

If the landlord has insured, or covenanted to insure the premises against the risk of being damaged by a fire, flood, explosion, natural disaster, or any other peril against which the landlord has insured, the tenant is exonerated from liability for negligence even if the destruction or damage to the premises has been caused or contributed to by the tenant or an agent of the tenant (sections 268 and 269 PLA).

The landlord can, however:

a terminate the lease, on reasonable notice to the tenant, if the tenant’s negligence impacts on the landlord’s ability to obtain or retain insurance;

b recover increased insurance premium costs from the tenant that result from the tenant’s negligence (section 270 PLA).

Section 269(3) of the PLA provides that the tenant or the tenant’s agent is not exonerated from liability in cases where they have:
• intentionally damaged the premises;
• damaged the premises by an act or omission that constitutes an imprisonable offence.

The tenant is not, however excused from liability, if the act or omission of the tenant or the tenant’s agent prevents the landlord from recovering insurance that would otherwise have been recoverable (section 269(3)(c) PLA).

If the landlord has either not insured, or fully insured the premises against destruction or damage caused by fire, flooding or any other peril, the tenant can expressly acknowledge this fact in an instrument and agree that the tenant will either pay the cost of making good the destruction or damage or indemnify the landlord, to the extent that the landlord is uninsured, against the cost of making good the damage (section 271 PLA).

On a more general note, it is also worth pointing out that the express terms of a lease often determine:

a whether the party responsible for insuring the premises against damage is the landlord or the tenant or whether one of them is required to insure on their own behalf and on behalf of the other party

b the specific risks against which the premises are insured and the extent to which the premises and its components are insured against those risks. Therefore, it is essential for landlords to have a clear understanding as to whether the insurance covers a particular kind of damage and whether the costs of repairing that damage can be recovered from the tenant.

Other Damage Issues Total Or Partial Destruction Of Premises

Premises are untenantable if they are totally destroyed or damaged to the point where they cannot be enjoyed, used or operated by the tenant. In such a case the landlord will send a notice of termination to the tenant and the lease will be terminated from the date that the premises were rendered untenantable. In such circumstances the tenant will be entitled by either an express or implied term in the lease to an abatement of rent (clause 4, part 2, schedule 3 PLA and clause 26.1 ADLS lease).

Partial Destruction Of Premises

Where premises, or any part of the leased premises are damaged but not to the point where they are untenantable, the landlord may be required by the lease to spend all of the money received from the insurer on repairing the damaged premises (for example, clause 27.1 ADLS lease). In such a case the tenant will be entitled to an abatement of rent until the premises are able to be occupied by the tenant (clause 4, Part 2, Schedule 3 PLA and clauses 27.1-27.3 ADLS lease).