Friday, 27th January 2023 was a day that few in Auckland will forget in a hurry. It is usually the start of an eagerly anticipated long weekend – an enjoyable break from the start-of-the-year work routine. But this year was different and one which saw rainfall records for January smashed in what NIWA has described as a one-in-200 year event.

The significant weather event of 27th January caused many commercial premises to flood, some with sewage-fouled floodwater. The responsibilities of landlords and tenants when commercial premises have been damaged will be covered in your lease agreement – either an agreement to lease or a deed of lease. It is worth pointing out that if you have signed an Auckland District Law Society agreement to lease but have not formalised the lease agreement in a deed of lease, the provisions of the agreement to lease and the most current form of the Auckland District Law Society deed of lease will bind both parties as if the deed of lease had been signed.

Landlords are required to keep and maintain insurance cover for the building risks set out in the First Schedule of the deed of lease. These risks are for damage and destruction to the building by fire, flood, explosion, lightning, storm, earthquake and volcanic activity and is either for full replacement and reinstatement or for a set sum of insurance. When the premises are damaged or destroyed by weather events such as flooding, the cost of repairs to the premises and to the landlord’s fixtures and fittings (for example, carpets), is covered under the landlord’s insurance cover. When a claim is made under the landlord’s insurance policy, the insurance excess amount up to a maximum of $2,000 can usually be on-charged to the tenant. Damage to the tenant’s property will be covered under the tenant’s own policy of insurance.

If the premises or any part of them are completely destroyed or damaged so that the tenant is not able to occupy or use the premises as intended, the lease will terminate with immediate effect from the date of the damage. However, if the premises can be accessed but the landlord decides within a period of three months from the date of the damage that the premises need to be demolished or reconstructed, the landlord can terminate the lease on one month's written notice to the tenant, with the rent and outgoings being discounted to a “fair proportion” from the date of the damage. This also applies where the premises have only been partially damaged or destroyed – a fair proportion of rent and outgoings is payable by the tenant from the date of the damage through to the completion of the repairs or reinstatement of the premises. Full rent and outgoings will kick back in after that point.

Unfortunately, the deed of lease does not clarify when premises are not able to be occupied or used as intended by the tenant, or, in other words, when the premises are untenantable. There are different factors that need to be taken into consideration when determining if the premises are untenantable or not – the actual damage suffered, the length of time to repair the damage (if the premises can be repaired), whether the tenant’s use and enjoyment of the premises has been substantially interfered with and the permanence of the damage – i.e. the portion of time the premises will be unusable versus the total lease period.

You may also recall that there was a lot of commentary during the Covid-19 lockdowns about what constituted a “fair proportion” of rent and outgoings. As every situation is different, it becomes a matter for negotiation between the parties as to what a fair proportion of rent and outgoings will be.

Whether you are a landlord or a tenant, please do not hesitate to contact the Commercial team at Schnauer and Co Limited if you have any questions.