CBD fires …. Issues for landlords and tenants

After two well-publicised fires in the CBD in the last 6 months it is timely to consider how a building fire may impact on the rights and obligations of landlords and tenants.

Most leases contain a 'Damage & Destruction' clause – a clause which sets out the rights and obligations of the landlord and the tenant if the premises are damaged or destroyed. For the purpose of this discussion, we will assume that the damage was not caused by the landlord or the tenant.

A Damage & Destruction clause should address the immediate impact of the damage.

The rent and outgoings (if any) payable by the tenant will usually be reduced in proportion to the damage, from the time the damage occurred until the damage is repaired (or the lease terminated). Fair enough. It would be unreasonable to expect a tenant to continue to pay rent for premises they cannot use or can only use part of. The clause should include a mechanism to determine disputes about the amount of the reduction – the simplest and easiest mechanism is to adopt the mechanism used for determining disputes about market rent.

The tenant's obligations to repair and maintain the premises while they are damaged should also be addressed. Again, fair enough, but often this issue is not expressly addressed. A tenant should not be expected to repair and maintain premises which have been damaged other than by the tenant's wrongdoing. This is particularly so where the damage leaves the premises unsafe, insecure and/or not weatherproof. If you are a tenant, this is an issue you should raise with your lawyer and, if it is not adequately addressed in the clause, you should discuss with your lawyer whether you should request an amendment to the clause.

After dealing with the immediate impact of the damage, a Damage & Destruction clause should then address whether, and if so how, the damage is to be repaired.

In most cases a landlord will be entitled to decide whether or not the premises are repaired. Again, fair enough. The landlord owns the premises and should be entitled to make a decision whether or not to repair the premises. However, there are some circumstances where it may be fair that the landlord is obliged to repair the premises. For example, a tenant whose use is very particular to the premises and cannot easily relocate (eg, a child care centre). In those cases, a tenant may want to ensure that the landlord is obliged to repair the premises.

A landlord who is entitled to make the decision whether or not to repair the damage, should be obliged to notify the tenant of that decision within a reasonable time. Obviously, if the landlord decides not to repair the damage (or to repair the damage in such a way that the premises can no longer be used by the tenant), the lease should come to an end.

Lastly, a Damage & Destruction clause should deal with the scenario where the landlord who is obliged to (or who chooses to) repair a premises fails to do so.

Often the lease provides that if the landlord fails to reinstate the premises within a given time, either party is entitled to terminate the lease. A tenant's lawyer may consider insisting on the clause specifying a particular period of time. However, I am of the view that to fix a time period is counter-productive – surely the nature and extent of the damage determines the length of time required to repair it? For that reason a better approach may be to allow the landlord a reasonable time to repair the damage, having regard to the extent and nature of the damage, and also include a maximum period of time. That way, for example, if the damage is minimal and can reasonably be fixed within 1 month, then should the landlord fail to comply, the tenant is not required to wait out the full period before being entitled to terminate the lease.

While the above points are a good starting point for considering a Damage & Destruction clause, the bottom line is that the landlord and the tenant should each seek legal advice and give careful consideration as to what rights and obligations should apply in each particular circumstance.

Who knows, your careful consideration of the Damage & Destruction clause in your lease might even prevent traffic chaos in the CBD's Macquarie Street!

If you have a question about a Damage & Destruction clause or leases generally please contact the Property Unit at Brown Wright Stein Lawyers.

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Jacqueline Leske