What does ‘untenantable’ mean?

By Ben France-Hudson*

Recent comments in legal publications suggest dissatisfaction with the courts’ approach to the test for untenantability under clause 26.1 of the ADLS Inc Deed of Lease (LawTalk 789, 17 February 2012, page 12).

There is limited judicial discussion of untenantability.

The current approach can be traced back to Justice Robertson in DFC New Zealand Ltd v Samson (1993) ANZ ConvR 481 where he suggested that untenantability involved a degree of permanence and was likely to be established where there was substantial interference with a tenant’s ability to enjoy, use and operate the premises. This has been approved in the different context of agreements for sale and purchase.

However, 2011 saw a rash of cases concerning the meaning of untenantability under the ADLS Inc lease.

In Russell v Robinson [2011] 2 NZLR 424 (April), the tenant’s painters caused a fire resulting in extensive damage.

Justice Priestley rejected the tenant’s argument that if they wished to remain in the premises it could not properly be described as “untenantable”. He noted that untenantable is an objective state to be determined on specific relevant facts. The focus of the inquiry must be on whether the premises are capable of being tenanted by the tenant who went into the premises for a specific purpose and term. Consequently, the tenant’s purpose is integral to the permitted use of the premises and, in turn, whether the premises have become untenantable.

However, this focus cannot be coloured by the subjective preference of either the landlord or the tenant.

In May, Justice Chisholm was required to consider the meaning of untenantablity in the context of a commercial building damaged as a result of the Christchurch earthquakes. 

GP 96 Ltd v FM Custodians Ltd (2011) 12 NZCPR 489 involved an application for an interim injunction by a tenant to prevent a mortgagee in possession from taking any further steps with regard to terminating the lease or demolishing the damaged building.

Justice Chisholm considered both DFC and Russell v Robinson. He noted that the meaning of untenantability requires an objective test which reflects that the clause is for the benefit of both parties.

Before untenantability can be established there needs to be some degree of permanence; something merely temporary will be insufficient. All relevant facts must be taken into account including the purpose and duration of the lease, the extent of the damage and the time that repairs will take. He noted that if untenantability is established the lease will automatically terminate.

The court considered that, on the facts, untenantability had not been established. The lease had 16 years left to run. Full repairs would take a period of 15 weeks. This did not indicate an element of permanence, but could more accurately be characterised as temporary.

The mortgagee in possession had argued that the existence of the restrictions imposed by the “red zone” should be considered in determining untenantability.

In considering what weight, if any, could be given to these facts, Justice Chisholm indicated that taking this into account would have significant implications for Christchurch and had the potential to lead to “commercial chaos”.

He was not prepared to consider the issue in the context of an application for an interim injunction. He did, however, note that even if the red zone was not to be lifted for another seven months, this would be unlikely to alter the degree of permanence in the context of a 16-year lease.

Finally, in August 2011 Justice Ellis considered the meaning of untenantable in New Lynn Compliance Centre Ltd v Birdwood Custodians Ltd (HC Auckland, CIV 2011-404-1551, 4 August 2011). This decision muddies the waters considerably.

The leased premises had been damaged by fire on 2 November 2008. The landlord purported to terminate the lease and brought proceedings to recover arrears in outgoings.

The tenant counter-claimed seeking damages for conversion of chattels that had remained at the premises following the fire.

Whether the tenant could succeed in conversion depended on whether they had been unlawfully denied entry to the premises from the time they had been advised the lease had been terminated. This required consideration of whether notice was required to terminate the lease, and what period of time following termination is allowed for the tenant to remove its chattels. Clause 26.1 of the ADLS Inc lease was crucial to these issues.

Justice Ellis focused on the distinction between clauses 26.1(a) and (b). In her view, cl 26.1(a) exists for the benefit of the tenant. Tenantability is a fundamental prerequisite from the tenant’s perspective, not from the landlord’s.

In reaching this view, the judge looked at the consequences of using a simple objective test for untenantability exercised by the landlord.

The District Court held that the lease had terminated the day of the fire. Coupled with cl 32.1, the consequence of this was that the tenant had only seven days to remove its chattels from the premises.

Justice Ellis thought that this was “unfair”, particularly given it was accepted that the landlord had initially expressed a view that the tenant might be able to stay on. Justice Ellis considered that this simply could not be right. Her Honour noted that, by contrast, cl 26.1(b) logically applies where the tenant remains in possession and the landlord wishes to terminate.

Consequently, she decided that cl 26.1(a) could not be interpreted so as to allow a landlord the choice about whether to terminate the lease or not. Any “choice” is reserved to the tenant about whether the premises remain tenantable.

It would be expected this choice would be exercised reasonably. If a tenant perversely chose to stay the landlord could always terminate under cl 26.1(b).

Of course, this analysis is in stark contrast to Russell where the tenant expressly wanted to retain the premises. Justice Priestley dismissed the contention that the clause is primarily for the benefit of a tenant, stressing that untenantability is an objective state to be determined on specific relevant facts.

Justice Ellis’s decision is difficult to reconcile with the line of authority and stretches the plain words of cl 26.1(a). However, it does demonstrate some of the practical problems with the test and with the structure of cl 26 more generally. In particular, there is a glaring problem regarding the consequences of a finding of untenantability.

Moreover, from a policy perspective Birdwood is very interesting.

Clause 26.1(b) is clearly drafted for the benefit of the landlord. Given the context, it is easy to see why Justice Ellis accepted that cl 26.1(a) is for the tenant’s benefit. However, the way in which cl 26.1(a) is currently drafted does not clearly express this policy. Indeed, the logical conclusion of Justice Ellis’s reasoning is that untenantability as a standard becomes irrelevant. The tenant would need to make a choice in any situation where there was destruction or damage to the premises, regardless of whether it happened to be untenantable.

On the current wording “untenantable” must mean something.

Conversely, it is difficult to articulate why the subjective view of the tenant should not be taken into account where the tenant is still interested in the premises on the original terms.

The landlord will still get what they bargained for, the building will be repaired, the tenant will meet its obligations and the landlord will still have the option to terminate under cl 26.1(b) if the damage is so bad as to require demolition or reconstruction. The current approach can be criticised on the basis that it is not obvious why the tenant should not also have the option to choose.

ADLS Inc says that it is currently reviewing its Deed of Lease, which is used extensively in the context of commercial renting.

It appears there is some validity to the dissatisfaction expressed regarding the test for untenantability. In particular, the cases can be read as suggesting that untenantability might not be a useful standard in this context. If, as seems appropriate, cl 26.1(a) is to operate primarily for the benefit of the tenant, this needs to be more clearly expressed.

However, on the current drafting, recourse to an objective interpretation is appropriate. There is nothing inherently objectionable in an objective test. The law is comfortable with this sort of test, particularly in relation to the interpretation of contracts. In addition, it is difficult to imagine an interpretation of untenantable that did not require consideration of the specific facts and circumstances of individual cases. Anything too rigid is likely to lead to other forms of injustice.

Suggestions such as incorporating time limits for repairs and modifying break-out clauses may make the question of tenantability easier to answer and will assist in allocating risk. They will not, however, solve the issue of how to deal with a tenant who wishes to retain possession. Assuming a test of untenantability is to be retained, careful thought should be given to the practical implications of an objective and factually specific test in this context and the specific policy at operation within the clause.

*Benjamin France-Hudson is a PhD candidate at Otago University. He is investigating the registration of interests in natural resources as a method of assisting regulation.

This article was published in LawTalk 794, 27 April 2012, page 6.