Buyers
of commercial property are becoming nervous about potential liability for
buildings assessed as earthquake-prone.
Selling and becoming the tenant in a sale and leaseback leaves the new
owner liable for structural repairs.
As commercial tenant following a sale and
leaseback, publisher APN was not liable for costs of earthquake-strengthening
in the Hawkes Bay office it previously owned.
Retaining possession as tenant in its existing office space created no
implied representation when selling about the buildings’ structural
integrity. Further, APN stated in the
information memorandum given to intending purchasers that no structural survey
had been made and that no undertaking was being given regarding structural
integrity.
Overton Holdings paid four million
dollars in 2007 to buy seven buildings in Karamu Road, Hastings, occupied by
APN’s newspaper publishing business. APN
remained in occupation, paying an annual rental of $340,000 on an eight year
lease.
Four years into the lease, the local
council advised Overton that four of the buildings were assessed as
earthquake-prone, being below the threshold of 33 per cent of new building
standards. In a flurry of correspondence
between Overton and APN, each claimed the other was liable to make good the
structural improvements.
The court was told APN vacated the site
progressively over the next three years, but paid full rental to the end of the
eight year lease. Overton sued for $1.6
million; the estimated cost of remediating the buildings to 67 per cent of new
building standards.
The Court of Appeal ruled APN not
liable. As a general rule, there is no
implied term or representation in commercial property deals that the property
sold or leased is fit for the use intended. Taking on a lease-back as part of the sale
process does not amount to an implied representation by the tenant that the
property is fit for use, the court ruled.
APN made no express representations about the buildings’ structural
integrity. Even if APN were liable, no
damages would be payable the court ruled.
Overton purchased seven buildings fitted out for use by a newspaper
publisher, buildings which would be functionally obselete and require
demolition when APN vacated. APN paid
rentals due to the end of its eight year lease leaving Overton with assets it
purchased in 2007: a group of buildings needing redevelopment at the end of the
eight-year APN lease in order to attract new tenants.
Overton
Holdings v. APN New Zealand – Court of Appeal (12.11.15)
16.004