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A recent decision of the High Court Earthquake List in Christchurch has considered the interests of a tenant under its landlord's insurance policy.1

The tenant, JRF, leased premises from 134, the landlord.  The tenant paid significant sums towards an extensive renovation of the premises (the improvements) in return for a rent reduction.  The landlord and tenant agreed in the agreement to lease that the landlord would own all of the improvements, and the tenant would receive no compensation for the improvements on expiry or termination of the lease.

The building was damaged in the Canterbury earthquakes and subsequently demolished.  The landlord terminated the lease pursuant to the lease provisions for total destruction.

The landlord's insurance policy noted the tenant's interest in the improvements, as follows:

"It is hereby noted and agreed that this building is owned by [134] and that [JRF is] the tenant.  It is hereby noted and agreed that [JRF] as the tenant [has] paid for and done substantial renovations of this building and their interest as such is insured under this policy." 

The tenant claimed that because of the noted interest, it could claim a share of the insurance proceeds despite the terms of the agreement to lease.

The Court held that noting a tenant's interest on the landlord's policy does not automatically mean the tenant has an insurable interest to which the policy responds.  It is necessary for a tenant to establish an actual interest and to ascribe a value to that interest.  Here, the Court decided that the lease didn't prevent the tenant receiving a portion of the insurance proceeds to compensate it for the loss of the value of the remaining lease term (with rent reduction). 

The Court decided that as the tenant paying for the improvements had secured its reduced rental, its loss of that benefit of the remaining term of the lease (through termination for destruction as a result of an insured peril) was an interest, to which the landlord's policy should respond.

The Court found the tenant's loss was best measured by the amount a prospective purchaser had agreed to pay for the balance of the lease term before the building was demolished.

In this case, the dispute arose as the landlord was not reinstating the premises.  Where premises are reinstated, both parties' interests will usually be aligned.  Where premises are not reinstated, the interests of the parties likely diverge and the question over what is the tenant's actual interest in the insured property arises.  This case shows that if the tenant does have an insurable interest, insurance proceeds (if no reinstatement) may be apportioned between landlord and tenant.  The value of the tenant's apportionment will be an amount equal to the tenant's interest in the remainder of the lease term.

Further, if a tenant's interest is to be noted on a landlord's policy it should be stated as clearly and accurately as possible.  The actual interest, and, given it may otherwise survive termination of the lease for destruction, how and when that interest will operate, should also be clearly documented in the lease.

1 One Three Four Limited v JRF Holdings Limited, Heath J, High Court, Christchurch, 1 May 2013, CIV-2012-409-504.

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