Winners and Pitfalls Leasing Issues 2014

Winners and Pitfalls –
Leasing issues 2014
Nick Wilson and Michael Wood
What we will cover today
Current issues applying to leasing including:
• Contamination and Remediation
• Earthquake Strengthening and Seismic Rating
• Insurance
• Any other topics or matters keeping you up all night…
Contamination and
Auckland Waterfront Development Agency Ltd v Mobil Oil
New Zealand Ltd
AWDAL v Mobil
• Commercial lease at Auckland’s waterfront tank farm
• Used for oil storage facilities
• First leases to oil companies 1920
• 1920s-30s other Exxon Mobil Group entities lease sites
• Mobil’s first leases 1950s-60s
• Expired and new leases in 80s – short term periodic.
Termination rights. These expired in 1994.
• AWDA attempted to negotiate new terms with specific
decontamination requirement – Mobil refused and held over until
AWDAL v Mobil
Tenant’s Obligation (under most recent (1985) lease):
• During lease: To keep the land “in good order and clean
and free from rubbish and weeds and growth; and
• Upon expiry: to deliver up the land “in such good and
tenantable repair and condition and clean and tidy to the
reasonable satisfaction of the lessor”
• Issue: Does this clause require the Tenant to
AWDAL v Mobil
AWDAL v Mobil
Court to decide what did the parties intend in agreeing the
“Clean and tidy” clause?
1. Natural and ordinary meaning of clause
AWDA: must be returned in an “undamaged state” so any
contamination must be removed
Mobil: no obligation to rid land of all historic subsurface
contamination. Surface appearance only.
Court: natural and ordinary meaning not so apparent - need to look
at broader context to determine meaning of clause
AWDAL v Mobil
2. Pre-contract negotiations
“admissable to establish the parties’ knowledge of
circumstances, providing the
setting in
which they used
the relevant words in the contract,
including the genesis of
the transaction, the background,
the context, the market in which they are operating, and
the subject matter”
AWDAL v Mobil
3. Post Contract conduct
“If the Court can be confident from their subsequent
conduct what both parties intended their words to
mean and the words are capable of bearing that meaning,
would be inappropriate to presume that they meant
something else”
Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007]
4. Other relevant facts
The Court noted:
(a) Much of contamination had already occurred at the time of
Mobil’s original lease – unusual for a tenant to agree to be
responsible for remedying damage caused by another
(b) Original leases – no obligation to decontaminate – to change
this policy, it would expect it to be clear and unambiguously
(c) 1980s leases were short term – shorter the term, the less likely
an onerous and expensive repair obligation would have been
AWDAL v Mobil
5. Doctrine of “waste”
- the temporary use of the land did not (without the
consent of the lessor) entitle a tenant to damage or alter the
lessor’s interest in the land
6. Obligation to “keep” the land clean and tidy
- infers obligation to make sure that the land is clean and
tidy on commencement and if necessary to make it so
- the fact an earlier tenant allowed the premises to fall into
disrepair is irrelevant
AWDAL v Mobil
7. Mobil’s (and other Exxon Mobil entities) long term occupancy
8. Anstruther authorities
Rule: covenant to repair should be construed with reference to the
age, character and locality of the premises (at commencement)
9. Implied term requiring steps to prevent contamination and
remove hydrocarbons
AWDAL v Mobil
• Mobil wins. AWDA’s claim fails in entirety and costs awarded
against it.
• Lessons:
- Be clear and unequivocal
- Be mindful of make good at lease renewal/redocumentation
- Difficult to imply meaning to clause signed some time ago
worth a try…
- Don’t remain silent on key points – mutual conduct can be
to intention of the parties
- Your conduct/actions can prejudice/benefit your position
Earthquake Prone Buildings
and implications to leasing
• What is the regime now?
• The new Bill
• Risks for Landlords and Tenants
Earthquake Prone Buildings
• Building Act 2004
• Definition of Earthquake Prone Building
Earthquake Prone Buildings
• Territorial Authority policies
Policies generally set out that a TA:
– will check the accuracy of its legacy files by a field search;
– will initially assess pre-1976 buildings within a certain timeframe.
This may be graduated based on various risk factors (within 1 to
30 years, 2.6 year average);
– may require further and detailed assessments of pre-1976
buildings (within 1 to 25 years, 2.5 year average);
– TAs will discuss the strengthening or demolition options if your
building is earthquake prone;
– TAs will issue a section 124 notice once a building is found to be
earthquake-prone (1 to 70 years, 17 year average); and
In all cases, timeframes are graduated on various risk factors
What are territorial authorities’ current
powers and obligations in relation to
earthquake-prone buildings?
• TA earthquake-prone building policies are not directly
• Rather, policies are statements of how a TA will behave
in relation to earthquake-prone buildings
• A TA can’t use a policy to require strengthening beyond
34% of NBS
(Insurance Council of New Zealand v Christchurch City
Council [2013] NZHC 51)
What are territorial authorities’ current
powers and obligations in relation to
earthquake-prone buildings?
• If a TA considers a building to be earthquake-prone, it may use its
powers under section 124 BA to:
– put up a hoarding or fence to prevent people from approaching
the building nearer than is safe (subsection (1)(a));
– attach a prominent notice warning people not to approach the
building (subsection (1)(b)); and
– importantly, require work to be carried out on the building to
“reduce or remove the danger”. Strengthening above 34% of
NBS could be required if that is the only practicable method of
strengthening your building (subsection (1)(c))
• Prohibition on use or occupation of building where s124 notice (s128
• TAs may also use alternative powers under sections 112 and 115
Case law
• Judicial review: The Insurance Council of NZ Incorporated v CCC &
– TA’s may not use section 124 notices to require building works
to exceed level above 34% of NBS
• Lambton Quay Properties Nominee Ltd v Wellington City Council
– Dealt with issue of demolition of EPB which was a historic
– Court should consider:
– Is there any reasonable alternative to total demolition?
– Risk to public safety and surrounding buildings if building
remains as is
– Tension between RMA and BA
Building (Earthquake-prone
Buildings) Amendment Bill
• Royal Commission and MBIE Proposals
• Currently at Select Committee (subject to change)
– EPBs remain < 34% NBS
– No more individual TA policies
– 5 years for all EPB’s to be identified
– consistent national methodology
Building (Earthquake-prone
Buildings) Amendment Bill - contd
– Register of information on seismic capacity of buildings
– Another 15 years to carry out strengthening work or have
buildings demolished (unless priority building (earlier) or
Category 1 Heritage Building (later – up to 25 years))
– Priority buildings to be defined in Regs but include buildings that
could collapse and impede transport route or those which are
significant to public safety
Building (Earthquake-prone
Buildings) Amendment Bill
– Exemptions can be applied for if meet criteria in Regs
– Specific seismic work notice section - removed from s124 which
also deals with dangerous, affected and insanitary buildings
31 March 2015 for Select Committee Report – watch this space
Risk for landlord and tenants
• Due diligence
• Seismic warranties/premises condition report
• Value
• Costs
• Access for strengthening/option to terminate
Risk for landlord and tenants contd
• Insurance
• Tenantability
• Improvement rent
• Health and safety
Insurance obligations under Leases
Insurance obligations under
• General Position – tenant to repair to the state as at
• Weight of liability with the tenant
• Conflicting case law
Marlborough Properties Ltd v Marlborough
Fibreglass Ltd
Leisure Centre Limited v Babytown Ltd
Insurance obligations under
• This conflict is addressed by:
(a) the landlord insuring and indemnifying the tenant
the costs of reinstatement works (approach under
ADLS lease); or
(b) joint insurance policy (not common)
Insurance obligations under
• Pre and post 1 January 2008 Leases
• Property Law Act 2007 – s269-271
Exoneration of Lessee – s269
Rights of Lessor if Lessee
Insurance obligations under
• Sheehan v Watson - Protection applies to Lessee’s agents
(employees) as well
• Court imposed a purposive approach though section
dealing with indemnity does not refer to Lessee’s agent
• While meaning of text of statute appears plain when read in
isolation, it needs to be cross checked against purpose
• Consequential losses - Galbraith - there is no reason to
distinguish between insurance for physical damage and
insurance for business loss
Insurance obligations under
• Joint ownership of policy
- One Three Four Ltd v J R F Holdings Ltd
- Benefit to tenant to jointly insure
- consider if the tenant is to receive part of insurance
proceeds how the shortfall to rebuild will be funded
You can contract out…
• Contracting out (s271) – express acknowledgement that
landlord has not insured or fully insured and can agree
that the tenant will meet the cost of making good
Questions and discussion