The ins and outs of damage and destruction clauses in lease agreements

Bronwen Gora // Leasing // 22nd Mar 2022

Recent severe weather events across NSW and SE Queensland will have placed the responsibilities of landlords, tenants and lease contracts front of mind. Three weeks since the water receded in these communities the damage bill keeps climbing: the Insurance Council of Australia initially logged 107,844 claims totalling $1.62 billion, while NSW government data released in the first week of March revealed that of 4200 damage impact assessments throughout the region, 2195 homes and businesses had been deemed uninhabitable. Most recently the federal and NSW state governments announced a further $742 million for flood-affected communities, a sum which is to include support for business as well demolition costs of buildings beyond repair.

With climate-related weather events forecast to continue, commercial property observers advise staying across all details of damage and destruction clauses within leases. Most leases contain a “damage and destruction” clause as a matter of course. This clause outlines terms around circumstances where a leased property is destroyed, damaged or made inaccessible in the case of a fire, flood, accident or natural disaster.

A stock standard part of this clause is a term outlining that a tenant’s requirement to pay rent will be suspended (or abate) until such time as it is possible to use the premises once more as stated in the lease. In other words, no-one should pay rent for a commercial premises that remains structurally unsound from a natural disaster, filled with debris or otherwise unusable.

First steps

While insurers will always send out their own assessors, tenants are advised to photograph their rental premises and do so thoroughly. Aim to document exteriors as well as interiors, and any stock and equipment. “Although insurers may want to carry out their own assessment, this may be of assistance in case of dispute and as evidence to provide to anyone else, like your landlord, equipment supplier or other parties,” says Nadia Rawlings, a director of Bennett & Philp Lawyers in Brisbane.

Responsibilities

Landlords are responsible for carrying out an initial building assessment which covers the roof and all structural elements. They then need to notify the tenant of any intention to repair or condemn the building which would lead to the termination of the lease. As stated above tenants are entitled to a rent abatement unless they were involved in contributing or causing the damage.

If the only damage is to the fit out of a shop or workplace, then tenant is responsible for the cost of repair. Structural repairs however remain the responsibility of the landlord. At the same time, a landlord must inform their tenant of their intention, preferably in writing, to have structural damage repaired or if the building is to be condemned. If they fail to do so within a reasonable time, then the tenant can terminate their lease with penalty.

Who to call?

Before starting to mop up after a natural disaster lawyers advise tenants get in touch with their insurer. Procedures need to be followed to file claims and insurers may need to assess damage prior to any clean up. Aim to determine when assessors can attend, claim process periods, whether any payment or repairs will be carries out and when the insurer plans to next make contact.

Ms Rawlings points out that legal advice may be necessary in regard to leased equipment or equipment under finance. “In some cases you are responsible for loss or damage to the equipment under your insurance,” Ms Rawlings says. “In some other cases, the equipment lessor has been insuring the equipment and will provide a replacement. It is important to find out what your rights are and we recommend tenants do this in advance as damage and destruction can be a cause for immediate termination and request for payment of the total value of the equipment immediately.”

Also note that even if contract contains a “force majeure clause” – a measure aimed at protecting parties from legal obligations when subject to events outside of their control – that clause will still be bound by terms outlined in a lease.

Amanda Tolson, director with Clifford Gouldson Lawyers emphasises “the need for all parties to carry appropriate insurance for their circumstances, to minimise the financial loss associated with these types of events”.

“Leases will often specify that tenants take out a minimum level of insurance,” Ms Tolson says. “However, it is often prudent for tenants to look beyond the minimum requirements in the lease to ensure that they are properly covered.”

Clifford Gouldson Lawyers | Toowoomba Law Firm | Lawyers - Solicitors (cglaw.com.au)

Contact | Bennett and Philp Lawyers (bennettphilp.com.au)