EXECUTION OF CONTRACTS BY TRUSTS AND TRUSTEES
September 12, 2014
EMPLOYEES VERSUS CONTRACTORS
November 7, 2014

“CLEAN AND TIDY” OBLIGATIONS IN LEASES

There has been an interesting discussion on a Lessees obligations to deliver up land in a clean and tidy state following the termination of a lease in the case of Auckland Waterfront Development Agency Limited v Mobil Oil NZ Limited.

That case involved a site which had been leased to oil companies from the 1920’s – 1930’s onwards.  Companies in the Mobil Group had leased the land since around the 1950’s.  The most recent leases had been entered into in the 1980’s and were short-term leases which expired in 1994.  From that date, the parties had been unable to agree on the terms of leases and Mobil had stayed on a holding-over basis until 2011.

When Mobil vacated, the Auckland Waterfront Development Agency Limited asserted that Mobil was required to address considerable contamination which had occurred over a long period of time, the cost of which was indicated to be around $10 million.

Mobil argued that much of the contamination had occurred with previous tenants and there was no expectation when the 1980’s leases were entered into that Mobil was taking on an obligation to clean up pre-existing contamination of the land.  Mobil argued that the lease obligation to deliver up the land in good order and clean and free from rubbish, weeds and growth to the reasonable satisfaction of the Lessor related only to the surface of the land and not to what was beneath the land.

The case identified two different lines of legal authority.  One line of legal authority was to the effect that where a tenant has an obligation to “keep” the land clean and tidy, the tenant also has an obligation to make sure the land is clean and tidy at the commencement of the tenancy and, if necessary, to make it so.  The fact that an earlier tenant has allowed premises to fall into disrepair or in breach of that requirement was not relevant as the tenant had accepted the obligation to “keep” the premises clean and tidy when entering into the lease.

For this particular site, the amount of work required to remove the contamination would have been a massive undertaking which would have extended over some period of time making the site unusable for some time at the commencement of the lease.  In that context, the Court declined to agree that the parties had intended to impose that obligation on the tenant and decided it was more likely that the clean and tidy obligation in this lease referred to only keep the surface of the land tidy.   The Court also found that the extent of remediation required would arguably go beyond just making good damage but would involve giving back the landlord something different from which was taken under the lease.  If that was intended, the lease would need to clearly state that obligation for betterment.

The second line of legal authority which was raised provided a general rule for construction of repair covenants in leases that unless there is some contrary indication in the contract or surrounding the factual context, a covenant to repair should be construed with reference to the age, character and locality of the premises at commencement.

That line of authority requires a Lessee to put the premises into the state of repair in which they would be found if they had been managed by a reasonably minded owner having regard to their character at the commencement of the lease term.

The Auckland Waterfront Development Agency Limited argued these cases related to premises and buildings rather than land and that the present case was different because at the end of the lease, Mobil was required to remove its fixtures and the land could be available for other purposes.  It was the oil contamination that was preventing that from happening.

The Court declined to agree that the tenant’s obligation should be assessed as against potential land use at the end of the lease.  The Court found that the tenant needs to be able to ascertain the scope of its clean and tidy obligations at the commencement of the lease and not as against some future and unforeseeable change in permitted land uses.  The Court found that the clean and tidy clause required Mobil to keep the land in a suitable condition for a Lessee of the class who would have been likely to occupy the land as at 1985 and deliver the land up in that condition.

The Court found that in 1985, the expected class of tenant would have been a heavy industrial user who would not have been concerned about contamination of subsoil.  There was no contemplation at that time that the land in question could be redeveloped for residential use.

What this case demonstrates is the importance for both landlords and tenants in understanding from the outset the tenant’s obligations to make good land and or premises at the termination of a lease.

This is not an area where landlord’s or tenants should make assumptions as to what standard form clauses might mean.  If the particular premises have issues of repair at the commencement of the lease, the parties should turn their minds towards the extent to which the tenant is required to retain the status quo or to which the tenant is required to repair and maintain the property to perhaps a better standard.

The current standard form Auckland District Law Society commercial lease requires the premises to be returned in the same condition as commencement.  The lease form also contains a Schedule in which the parties can address the current status of the property.  It appears that this Schedule often is not completed.  A bit of time and attention paid to these issues at the commencement of the lease could save a lot of cost and anxiety on termination and we recommend both landlords and tenants are clear as to their obligations and expectations at that time.