Untenantability in Commercial Leasing: What happens when a leased commercial property cannot be occupied?

A leased commercial property was badly damaged in a storm which caused flooding inside and partially destroyed the roof. 

The tenant leased the property to run a retail business and was three years into a five-year lease period.  After the storm the tenant was unable to enter the premises to run their business because of the significant damage.  The landlord’s insurer informed the tenant that repairs would take around 12 months, during which time the property could not be occupied. 

The tenant sought legal advice because they thought that the property was untenantable so the lease should terminate and they should no longer have to pay rent. 

What is untenantable?

“Untenantable” refers to a situation where a leased property cannot be occupied or used by the tenant as intended by the lease. However there is no specific legal definition of this in the standard Deed of Lease. 

Cases sometimes end up in the hands of the Court to determine, if parties cannot agree as to whether a property is untenantable or not.    

Determining if a property is untenantable usually involves considering:

• The permanence of damage;
• Whether there has been interference with the tenant's ability to enjoy, use and operate the property; and
• How long repairs will take. 

The length of time that the property cannot be accessed and the length of the lease are relevant in determining the “permanence” of the damage.

Generally if the property will be unusable for a substantial portion of the total lease period then it is more likely that the property will be untenantable. 

In one case, 10 months out of a four-year term was found to be a sufficient length of time to be considered untenantable.  However, in another case, 15 weeks of a 10-year term was found not to be long enough and therefore that property was not untenantable.

In the situation referred to above, the property would likely be untenantable because of the level of damage, the tenant being unable to access the property at all to run their business, and the length of the repairs in the context of the total lease period. 

What if the property is untenantable?

The standard Deed of Lease used in many commercial property leases has a clause about what happens if there is “total destruction” of the property which renders it untenantable.  In that event, the lease term ends immediately on the date of the destruction event.  There are also clauses around “partial destruction”.

The Deed also provides for what happens if the premises can be accessed, but need to be demolished or reconstructed, in which case the landlord may, within three months of the damage, give one months' written notice to terminate the lease, and a fair portion of the rent will cease to be payable from the date of the damage.

However not all commercial property leases use the standard Deed of Lease, and some lease arrangements are unclear because the original lease has expired or there is a lack of signed paperwork.  This can make working out what happens much more complex if the property is damaged and potentially untenantable. 

Before signing any lease document, it is important to ensure that it contains suitable provisions to cover what happens if the premises are damaged or destroyed.   

If you find yourself in a situation where your leased premises are seriously damaged (whether you are the landlord or the tenant) you should seek legal advice right away to understand your options.

Claire Tyler
Commercial Lawyer
Wellington