Much of South-East Queensland and now Northern New South Wales have been impacted by a severe weather event in the past week, causing significant damage to property, including commercial premises. In this alert, we answer your questions about each party's rights and responsibilities if commercial premises are damaged by extreme weather events.
Most leases contain what is known as a “damage and destruction” clause, which covers the circumstances where the leased premises are destroyed, damaged or inaccessible by an extreme weather event. While each clause will have its own particular drafting, all clauses generally have as a basic term that the tenant's obligation to pay the rent and other money payable under the lease, and to keep the premises in repair, will be suspended (or abate) until such time as the premises can be accessed and used for the permitted use under the lease.
The amount of the abatement will usually depend on the degree to which the tenant's premises are affected by the relevant event. For example, if a commercial office of 500 square metres has only 50 square metres that are unable to be used, it might be appropriate for the tenant to receive a 10% rent abatement until such time as that part of the premises may be used again. Conversely, if the whole of the premises are unfit for occupation or are inaccessible, 100% of the rent would abate. A dispute resolution mechanism may need to be utilised if the parties cannot agree on the extent to which the premises are affected.
Some damage and destruction clauses specify that the abatement will only commence on the date that the tenant notifies the landlord of the damage or destruction. It is therefore very important that tenants give any required notice promptly and strictly in accordance with the notice provisions in the lease.
Another usual feature of damage and destruction clauses is that one or both parties may have an opportunity to terminate the lease as the result of the damage or destruction. For landlords, this right to terminate may be enlivened if the landlord considers it undesirable to reinstate the premises. For tenants, generally the termination right will only arise where the tenant has given notice to the landlord of the destruction or damage and the landlord has not substantially commenced reinstatement of the premises within a reasonable time after the tenant's notice. This could mean months between the date of damage and the date of termination, so tenants should look at commencing that period of time by giving any required notice as soon as possible. There is no compensation or damages payable by either party for termination under the damage and destruction clause in a lease.
So which party is responsible for reinstatement? Generally, the landlord is the party who is responsible for reinstatement of damaged or destroyed premises, but many (if not most) commercial leases will specifically say that the landlord is not obliged to reinstate. Leases may also state that the landlord is not obliged to reinstate the premises to their former specification and can make such changes to the premises as the landlord sees fit. Again, the terms of each particular clause will differ in this respect so it is important to carefully review the terms of your lease. Where the landlord elects not to reinstate, the termination provisions will be utilised to bring the lease to an end.
Yet again, this highlights the need for all parties to carry appropriate insurance for their circumstances, to minimise the financial loss associated with these types of events. Leases will often specify that tenants take out a minimum level of insurance, however will often be prudent for tenants to look beyond the minimum requirements in the lease to ensure that they are properly covered.
Affected landlords and tenants alike should familiarise themselves with the damage and destruction clauses in their leases, as strict time limits may apply for notification of damage, repair obligations and termination rights. Failure to comply with those time limits may leave a landlord or tenant in an even worse situation than they are now.
Our thoughts are with all of those affected by the recent and ongoing weather events and we send them our best wishes with the upcoming recovery.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
