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More than leases bargained for
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American cowboy comedian Will Rogers once said: "The minute you read something that you can't understand, you can almost be sure that it was drawn up by a lawyer".
In the aftermath of the Christchurch earthquakes many building owners, tenants, developers, and even lawyers have turned to their leases in an attempt to figure out exactly what they happens in a disaster.
Inevitably, many have reached different conclusions, partly because of the significant variance in circumstance.
Some general principles normally apply in standard lease documents, such as “If a building is totally destroyed then the lease will terminate at the date of the destruction automatically”, and “If a building is partially damaged but still useable then the tenant can seek a partial reduction in rent”.
But what about a building that has damage that can easily be repaired but it cannot be accessed because of neighbouring buildings that have significant damage, or because of a "Red Zone"? It often depends on whether the displacement will be temporary or more permanent. One of the great difficulties is the uncertainty around how long a cordon will be in place.
Where leases become impossible to perform, or as us lawyers like to call it "frustrated", then a lease will also terminate.
Other questions arise in relation to buildings that have suffered significant damage.
Initially, building owners and tenants wanted to know if their leases had terminated. If they had terminated then the tenant had no further payments to make and did not have to worry about taking on another lease and still potentially being liable under the original lease. Building owners, tenants, and lawyers grappled with the meaning of "untenantability" and the clauses dealing with damage to buildings.
Interestingly, and perhaps contrary to popular opinion, the High Court in one case decided that in looking at whether or not a building is untenantable you have to look at not only the remaining term of the lease but also any rights of renewal. Take as an example a tenant with a 6 year lease with 3 remaining but two 6 year rights of renewal, and a building taking 6 months to repair. The decision as to whether or not the building was untenantable involved looking at whether or not 9 months was more than temporary displacement in the context of 15 years remaining rather than only 3 years.
Taking into account rights of renewal seems wrong, and it remains to be seen what approach future litigation and the Appeal Courts make of the point.
The case similarly indicated that the effect of the Red Zone was irrelevant, so that if damage to a building would only take 15 weeks to repair but the tenant would not be able to use the building for at least 7 months due to the effect of the Red Zone the Court would only have regard to the 15 week period. Ultimately these types of issues are going to turn on the wording contained in the relevant lease.
Disputes have also arisen about who owns a fit-out a tenant has paid for. Sometimes significant improvements have been done and the landlord has discounted the rent to the tenant as a consequence of the works performed. This has caused difficulties for insurance claims and business operations when the effect of the earthquakes was to terminate the lease and give full ownership of fit-out to the landlord.
The effect of the earthquakes has already led to lawyers looking at how leases can be better drafted to deal with unexpected circumstances.
Good leases now deal with all of the situations contemplated above and more. These new leases cannot only be more easily understood but better deal with the uncertainties our physical and legal environment.
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