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

Sections 268 and 269 of the Property Law Act 2007 exonerate tenants of property from liability for damage caused by a range of perils, including fire and flood, where the landlord has an insurance policy that covers the causative peril. Where that is the case, the tenant cannot be required to meet the costs of making good the destruction or damage, or to pay damages “in respect of” the same. The District Court recently considered the application of these sections beyond the leased premises to neighbouring properties.

Background

Inlet owned a commercial property at Takanini. In May 2019, it entered into an agreement to lease the property to United under which Inlet was required to take out material damage insurance cover for fire, flood, explosion, lightning, storm, earthquake, and volcanic activity. United was to meet the cost of the insurance premium and any policy excess. The insurance policy procured by Inlet excluded losses caused by asbestos, but an endorsement provided a limited write-back of the cover, sub-limited to $25,000.

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

During the fire, it became apparent that there was asbestos in the roof of the property which was being spread by the wind to neighbouring properties. This caused WorkSafe to issue a prohibition notice under the Health and Safety at Work Act, directing Inlet to investigate, test and remove asbestos contamination at both the property and neighbouring properties. Inlet did so, at a claimed cost of about $266,500, which also included the costs of partial demolition of the property and creation of site access. Inlet sought recovery from United.

The dispute – liability under section 269

United applied to strike out Inlet’s claim on the basis that sections 268 and 269 of the Property Law Act exonerated it from any liability. The sections apply where leased premises are destroyed or damaged by a peril which the landlord is required to insure against, even where the damage is caused by or contributed to by the negligence of the tenant or its agent. Where the landlord is insured, the landlord cannot require the tenant to:

Meet the costs of making good the destruction or damage;
Indemnify the landlord in respect of the destruction or damage; or
Pay damages in respect of the destruction or damage.

Because Inlet’s claim involved the destruction of leased premises by fire – an event in respect of which it had insurance – United said that all damage arising from the fire fell within section 269.

Inlet, however, argued that the clean-up costs were not damages “in respect of the destruction of or damage to the leased premises”. It also argued that the cost of removing asbestos from the surrounding area was not a type of loss contemplated by the parties in the agreement to lease, but rather the agreement only contemplated that Inlet would hold insurance against damage to its own property.

The District Court decision

The issue for the District Court was whether the exoneration of liability claimed by United applied beyond the boundary of the insured property, and to damage to something other than the landlord’s property.

The Court noted that the intention of the legislative reform behind the provisions of the Property Law Act was that the landlord should bear the risk, not the tenant. The intention was to provide certainty to tenants that they would not be sued if their negligent acts or omissions caused, say, a fire, given that the landlord would be better positioned to assess other potential damages that may arise. It said that the exoneration provisions extend to both physical damage and consequential economic damages such as rental and outgoings.

The Court found that United was not liable for costs of the partial demolition and access clearance at the property as these were damages “relat[ing] squarely to damage or destruction within the physical boundary of Inlet’s property”.

United was also not liable for the cost of works beyond the property boundary. The clean-up and fire debris removal were needed because asbestos had spread from the roof of Inlet’s property. The Court applied Galbraith v Alderson Logistics Limited [2013] NZHC 3102, a decision in which the tenant was exonerated for costs arising from a hazardous spill. The Court said that the spread of asbestos was similar and therefore was still damage arising out of an insured peril.

Despite the clean-up and debris removal being outside Inlet’s property, the Court said that these costs were also covered by section 269, having been incurred as a result of (and therefore in respect of) the physical damage. It said that to hold otherwise would create uncertainty, because United would not be liable for damage within the property boundary but would be liable if the damage extended into neighbouring properties.

Further, it is unrealistic to expect a tenant to bear the risk when it has no knowledge of the peril – 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 statutory protection. Accordingly, the Court struck out that part of Inlet’s claim.

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

Comment (Pauline Davies)

By extending the tenant’s protection from suit beyond the leased premises to damage to neighbouring properties, the decision provides useful clarification of the scope of the tenant’s statutory protection.

The end result is good news for the tenants’ liability insurer, but bad news for the landlord’s material damage insurer since the landlord’s insurer’s subrogation right to recover clean-up costs outside the boundary of the insured property is severely restricted.

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