In the aftermath of Queensland's recent flood crisis, it is important for both landlords and tenants to carefully consider their rights and obligations under their leases for properties that have been affected by flooding.
There are many issues to consider, and this guide outlines the essential steps landlords and tenants should take to ensure their interests are protected.
Issues for both landlords and tenants
Check your lease for rent abatement and termination rights
Generally, most commercial and retail leases (including HopgoodGanim's standard lease documentation) provide for the following options.
- 1. Abatement of rent for damage or destruction
If the leased premises is damaged by floods so that the tenant's use of it is wholly or substantially reduced, then the rent and other amounts payable under the lease (such as the outgoings and any promotion levy), as well as any covenants to repair and maintain the premises, are reduced in proportion to the nature and extent of the damage sustained. This reduction will continue until such time as the premises has been restored to its pre-flood state or the lease is otherwise terminated.
- 2. If the landlord does not fix the damage, the tenant can terminate
If the landlord does not restore the premises within a reasonable time after the damage occurs, the tenant may serve a notice on the landlord. If the landlord does not, within a reasonable time after receiving the tenant’s notice, restore the premises, the tenant may terminate the lease by issuing a further written notice to the landlord. Generally, where a lease is terminated in these circumstances, neither party will have any claim against the other arising from the termination. A reasonable time is dependent on the circumstances of each case, including the nature and extent of the damage caused by the flooding.
Some leases (again, including HopgoodGanim's standard lease documentation) will also provide that if the premises are wholly destroyed or otherwise rendered inaccessible or unfit for occupation, then the landlord may also terminate the lease by issuing a written notice to the tenant.
Generally, a lease will not impose a positive obligation on the landlord to restore the premises.
Of course, the positions set out above will not reflect all leases (or for that matter, HopgoodGanim leases which have been relevantly amended), and it is critical that both landlords and tenants check their lease documents to confirm the rights and obligations of the parties, the relevant time periods for giving any required notices, and any relevant details. Our Commercial Property team is happy to assist landlords and tenants with their leases in this regard.
Other provisions of leases may also be applicable in the circumstances, such as those dealing with tenant's indemnities, insurance and the tenant's general obligation to repair and maintain the premises (although these repair and maintenance provisions usually exclude damage from floods or other natural disasters).
It is critical that after flooding, both landlords and tenants carefully consider all the terms of their lease documents, as each lease is potentially different and each leased premises faces its own set of circumstances.
The Property Law Act may assist tenants
If your lease does not deal with abatement of rent in the event of flooding, then section 105 of the Property Law Act 1974 (Qld) will likely apply, as this section is an implied lease term (subject to any exclusion of implied terms in the lease itself).
Section 105 provides that if all or part of the leased premises is destroyed or damaged by fire, flood, storm or tempest (such that the leased premises is unfit for the tenant’s use and occupation), then the rent is abated proportionately.
Further, section 105 provides that:
- the lease provisions relating to remedies for recovery of rent shall also be suspended until the leased premises is made fit again for occupation; and
- the tenant’s obligations to repair, maintain and to make good the leased premises at the end of the lease, do not extend to repairing damage from fire, flood, storm or tempest.
Section 105 will most likely not apply in the case of a licence to occupy (that does not otherwise contain an abatement clause), as opposed to a lease. The challenge in those circumstances for a licensee will be to argue that the licence itself, in fact amounts to a lease at law, and therefore section 105 will apply. If the licence is in fact only a licence at law, the implied term in section 105 will not apply.
Check your lease for time limits
In particular, landlords and tenants need to be aware of, and strictly comply with all relevant time limits in the lease (be sure to diarise the time limits) for the service of notices concerning the repair, abatement and termination provisions under the lease, if applicable. Any such service of notices will need to comply with the notice requirements of the lease, and it is recommended that both landlords and tenants engage a solicitor to give any notice to ensure compliance.
Check your insurance rights
Again, both landlords and tenants should check their lease documents to confirm their insurance obligations.
If you have not done so already, contact your insurer and advise them of your situation and any damage suffered. Enquire as to the terms of your policy and what steps you will need to take to make a claim. You should obtain a claim reference number from your insurer for subsequent communications.
Your insurer may require you to follow a specific process before engaging any contractors for repair works. You may need to notify your insurer of the contractor's details before authorising the contractor to carry out any repairs.
You should take dated photographic evidence, including photographs and video of the damage, noting the date of inundation and the date(s) of any repair works. You should also prepare a detailed list of damaged property, items and stock. This evidence may prove critical in supporting claims.
You should keep records of all costs incurred in the clean-up and retain copies of all invoices and receipts.
Disputes with insurers may arise as to whether an existing policy does cover flood damage. Disputes over terminology and definitions, such as whether "storm and tempest" cover could apply, or whether "river" as opposed to "riverine" or "creek" flooding, or "overflow of water" are covered, are foreseeable in the weeks and months ahead (and are likely already arising). If an insurer rejects a claim for damage, we suggest you contact us to discuss a way forward. For example, you may be able to lodge a formal complaint with the Australian Financial Complaints Authority (AFCA).
Frustration of the lease may apply
Frustration of a contract (a lease) occurs where a supervening event occurs without fault of either party, which significantly renders the contractual rights and obligations of the parties different from what was contemplated at the time of the contract's execution.
There may be some limited scope to apply the doctrine of frustration to leases due to the recent flooding. In our opinion however, these cases will be very rare. Any such application will be determined by factors such as the nature of the lease (and in particular, whether flood damage was contemplated in the lease itself, as is often the case) and the length of time of non-occupation, compared to the total term of the lease.
If you would like further advice on the possible frustration of your lease in the circumstances, please contact us.
Specific issues to consider for landlords
Abatement of rent
Generally, the onus will be on tenants to prove that premises are unfit for occupation in support of a claim for rent abatement. As such, landlords should continue to issue rent invoices until an abatement notice is received. In past disputes considering abatement, the Courts have taken into account landlords providing temporary arrangements to alleviate a tenant's inability to use the whole of the affected premises, but a landlord is not obliged to provide temporary or alternative premises unless required under the lease.
Keep good records
Keep documentary evidence of the timing of inundation and when the premises are operational again (either fully or partially).
Do not admit liability
If a claim for abatement is received from a tenant, any admission of liability by the landlord could affect its insurance claim for the abated rent. As such, until confirmation is obtained from the landlord's insurers to the contrary, any response to any claim from a tenant should not admit liability and should be referred to the landlord's insurers.
Take control of the repair works
Landlords need to arrange their own staff and contractors to check and action issues such as safety, structural integrity and electrical compliance. Generally, landlords would be liable to rectify structural issues, capital items and anything else owned or supplied by the landlord, such as walls, floors, the roof, and electrical and air conditioning equipment. If, on the other hand, the tenant constructed its own fit out, then generally the tenant would be responsible for rectifying its own property. Each case will depend on its own facts and circumstances, including the terms of the relevant lease.
Repair works should be carried out quickly and properly
Given the common lease provisions for abatement and the tenant's right to terminate, the obvious recommendation for a landlord who wants the lease to continue is to:
- promptly take control of the property and situation;
- have any damage the landlord is responsible to rectify, repaired and certified (where necessary) as soon as possible;
- notify the tenant/s when the repair works are completed and relevant services are reinstated, so as to cease any abatement; and
- record documentary evidence that the landlord has tried to reinstate the premises within a reasonable time.
Specific issues to consider for tenants
Keep an open dialogue with the landlord
Tenants should contact the landlord or property agent regularly and request updates on:
- when the premises is likely to be re-opened;
- the status of the landlord’s repair works;
- when essential services (such as electricity, air conditioning and gas) will be up and running; and
- the status and timing of inspections and approvals for reoccupation by fire services and any other relevant government authority.
Abatement of rent
The tenant should inspect the premises thoroughly with its contractors and consultants and prepare necessary reports and surveys (if appropriate in the circumstances and available under the lease) to support a claim for abatement and/or termination. The advice above, regarding documentary evidence for the timing of inundation and when the premises are operational again, will be important in this regard.
Repair works
Tenants need to check their lease documents to confirm what repair works they may be liable for under the lease. For example, if the tenant constructed its own fit-out and/or signage, then the tenant is generally responsible for rectifying its own property.
This guide is not intended as comprehensive legal advice, as the unique circumstances of each property and the applicable lease documents will be the key determining factors in each case. As such, it is critical that both landlords and tenants review their lease documents as soon as possible and if there is any concern or doubt, seek legal advice.
For more information on lease issues following the Queensland floods, please contact HopgoodGanim's Commercial Property team.