Most landlords have loss of rent cover and, in a net lease situation, can recover the premiums from the tenant as an outgoing.
The lease will often specify the period of cover the landlord is to take out. The Auckland District Law Society Incorporated deed of lease form, for example, was amended earlier this year to give the parties the opportunity of electing a default 12 month period or agreeing a different cover period.
If, as is usual, the tenant is paying the premiums it may not want the loss of rent and outgoings cover extended beyond the 12 month period as this would ultimately be an additional expense for it. However, would this leave the tenant exposed if it (or those for whom it is responsible) caused damage resulting in a loss of rent and outgoings to the landlord beyond that 12 month period?
This was considered in Galbraith and RPG Trustees (2008) Limited v Alderson Logistics Limited  NZHC 3102.
Galbraith and RPG Trustees (2008) Limited v Alderson Logistics Limited
In that case, the tenant’s employee damaged the premises. It took 25 months to repair the damage, during which the premises were untenantable. The landlord had taken out only 12 months loss of rent cover. It sued the tenant for its lost rent and outgoings over the 13 months balance of that period.
The case involved an analysis of the interplay of sections 268, 269, and 271 of the Property Law Act 2007 (‘PLA’), and the various relevant provisions in the deed of lease.
The tenant’s position was that section 269(1) of the PLA exonerated it from having to indemnify the landlord for its uninsured loss of rent. In short, that section provides that the lessor must not require the lessee to:
The landlord argued that section 269(1) does not apply to the consequential uninsured losses of rent and outgoings but, even if the section does apply, the parties had contracted out of it by section 271 of the PLA.
Did section 269(1) apply to the landlord’s claim?
The judge considered whether, as a matter of interpretation, the compensation sought for the consequential loss of rent and outgoings for the 13 month balance period fell within section 269(1)(c) as ‘damages in respect of the damage’. The tenant asserted it did—that the concept of damages was broad enough to apply to the consequential loss of rent and recovery of outgoings.
The landlord, on the other hand, submitted that the mischief the section was directed at was the insurer’s right of subrogation to claim against the lessee for damage to the building. Therefore, it asserted, the damages referred to in section 269(1)(c) should be read narrowly to refer only to the cost of the damages to the building (and not extend to consequential losses such as loss of rent).
The judge considered that the ‘damage’ referred to in sections 269(1)(a) and (b) is physical damage. By contrast, however, section 269(1)(c) encompasses both physical damage and also damages (being losses that may be sued for at law). Accordingly, as section 269(1)(c) included damages such as lost rent and outgoings, the landlord was prevented from recovering its lost rent and outgoings from the tenant.
Can the parties contract out by section 271 PLA?
The next question was whether the parties could be regarded as having contracted out under section 271 PLA. That section allows the tenant to expressly acknowledge that the landlord has not insured, or has not fully insured, the premises or land. If the tenant has so acknowledged, the landlord and tenant may expressly agree that the tenant will meet the cost of making good any damage.
The judge considered that section 271 only refers to insurance against damage, and not against consequential loss flowing from the damage (such as loss of rent). He accepted this is somewhat of an anomaly, given that section 269 extends to consequential damage.
The case illustrates that, even if the parties have agreed that the landlord is only to take out loss of rent cover for a limited period (say, 12 months), section 269 PLA (if it applies) operates to prevent the landlord from recovering any loss of rent and outgoings beyond that period. Unfortunately too for landlords, that the parties cannot expressly agree otherwise as the mechanism in section 271 is not available to require the tenant to meet consequential loss (only direct loss).
This would appear to go a step further than the purpose of the insurance provisions in the PLA which was that the tenant shouldn’t have to pay twice – firstly for the cost of the insurance and again for the loss. In Galbraith the tenant wasn’t asked to pay twice, as it had only paid for 12 month loss of rent cover.
Landlords should turn their minds to a realistic but generous period for rebuilding in the event of damage or destruction and ensure their business interruption policy covers this. All the better if they can pass the cost of this onto the tenant as an outgoing.
This article was authored by Michelle Hill, a Senior Associate in the property team of the Auckland office.