Inlet Storage Limited v United Movers Limited [2021] NZDC 23513[1]

Sections 268 and 269 of the Property Act 2007 exempt tenants from liability for damage caused by a range of perils, including fire and flood, where the landlord has an insurance policy which covers the peril causal. If this is the case, the owner cannot be held liable for the costs of repairing the destruction or damage, nor for paying damages “in respect of” these. The District Court recently considered the application of these sections beyond leased premises to neighboring properties.

Background

Inlet owned commercial property in Takanini. In May 2019, he entered into an agreement to lease the property to United under which Inlet had to carry property damage insurance for fire, flood, explosion, lightning, storm, earthquake and volcanic activity. United was to cover the cost of the insurance premium and any policy excess. The insurance policy Inlet carried excluded losses caused by asbestos, but an endorsement provided for limited reinstatement of coverage, sub-limited to $25,000.

In December 2019, the property was destroyed by fire. Inlet claimed the fire was caused by United employees, an allegation United denied.

During the fire, it became apparent that there was asbestos in the roof of the property which was spreading by the wind to neighboring properties. This caused WorkSafe to issue a Notice of Prohibition under the Occupational Health and Safety Act, ordering Inlet to investigate, test and remove asbestos contamination from both the property and on neighboring properties. Inlet did so, at a claimed cost of approximately $266,500, which also included the costs of partially demolishing the property and creating access to the site. Inlet requested United’s recovery.

The dispute – liability under section 269

United sought to strike Inlet’s claim on the grounds that sections 268 and 269 of the Property Act exempted it from liability. The articles apply when the rented premises are destroyed or damaged by a peril against which the owner is required to insure, even if the damage is caused or favored by the negligence of the tenant or his representative. When the lessor is insured, the lessor cannot require the lessee:

  • Assume the cost of repairing the destruction or damage;

  • compensate the owner in the event of destruction or deterioration; or

  • Pay damages in respect of destruction or damage.

Since Inlet’s claim related to the destruction of leased premises by fire – an event for which it had insurance – United said that everything damage resulting from the fire fell under Article 269.

Inlet, however, argued that the cleanup costs were not damages”in the event of destruction or deterioration of the rented premises”. He also argued that the cost of removing asbestos from the surrounding area was not a type of loss contemplated by the parties in the lease agreement, but rather that the agreement provided only that Inlet would hold a insurance against damage to his own property.

The district court’s decision

The question for the district court was whether the exemption of liability claimed by United applied beyond the limits of the insured property and to damage caused to something other than the owner’s property.

The Court noted that the intent of the legislative reform behind the Property Act provisions was that the landlord should bear the risk, not the tenant. The intention was to assure tenants that they would not be sued if their negligent acts or omissions caused, say, a fire, since the landlord would be in a better position to assess other potential damages that might occur. He said the exemption provisions extend to both physical damage and consequential economic damage such as rental and expenses.

The Court found that United was not liable for the costs of the partial demolition and clearance of the property as they were damages”relationship[ing] outright to damage or destruction within the physical boundaries of Inlet’s property”.

United was also not responsible for the cost of work beyond the boundaries of the property. Cleanup and removal of debris from the fire was necessary because asbestos had spread from the roof of the Inlet property. The Court applied Galbraith v Alderson Logistics Limited [2013] NZHC 3102, a decision in which the tenant was exempted from costs arising from a hazardous spill. The Court said that the spread of asbestos was similar and therefore it was always damage resulting from an insured risk.

Although the cleanup and debris removal took place off the Inlet property, the Court held that these costs were also covered by Section 269, having been incurred as a result of (and therefore in respect of) physical damage. He said otherwise would create uncertainty, as United would not be liable for damages inside the property boundary, but would be liable if the damage extended to neighboring properties.

Moreover, it is unrealistic to expect a tenant to bear the risk when he is unaware of the danger – in this case, the presence of asbestos. The fact that Inlet only had insurance coverage for asbestos damage up to $25,000 did not limit United’s legal protection. Accordingly, the Court struck out this portion of Inlet’s claim.

However, there was evidence that some of the claimed costs related to the cleanup and removal of United’s assets, which United said fell within section 269. The Court declined to strike the claim for those costs, saying that factual and political issues could not be determined on a motion to strike out. In particular, it could be argued that any risk borne by Inlet did not extend to damage to United’s assets. To include such a risk, the Court said, would place an unrealistic burden on the landlord to understand the nature of the tenant’s assets, which would defeat the intended purposes of the legislative reform.

Commentary (Pauline Davies)

By extending tenant protection from lawsuits beyond the rented premises to damage to neighboring properties, the decision provides useful clarity on the scope of legal tenant protection.

The end result is good news for the rental liability insurer, but bad news for the lessor’s property damage insurer since the lessor’s subrogation right to recover cleaning costs outside the boundaries of the insured property is strongly restricted.

The decision has not been appealed and therefore comments from the High Court will have to wait for another day.

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