Earthquake-prone Buildings

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1 Earthquake-prone Buildings Information on policy changes and their impact on commercial buildings. Over the past 3 years Canterbury s lawyers and agents have developed a great deal of on-the-ground expertise when it comes to earthquake strengthening issues. The rest of the country will shortly be forced to catch up as the Government moves to push through its proposed Building (Earthquake-prone Buildings) Amendment Bill. It is estimated that more than 25,000 earthquake-prone buildings remain throughout New Zealand. David Fitchett Call: david.fitchett@cavell.co.nz David is a specialist property solicitor who has extensive experience in dealing with earthquake-prone commercial buildings and leasing issues. For more information contact David or any member of our specialist roperty Team. Under current legislation each territorial authority has been able to set their own policy in relation to earthquake-prone buildings. This has led to a piece-meal approach where different standards and timeframes apply to different regions. An example of this was the Christchurch City Council s unsuccessful attempt to require local building owners to bring their commercial buildings up to 67%NBS (New Building Standards), even though this was at odds with the rest of the country where it was only required that their buildings met a minimum of 34%NBS. The Building (Earthquake-prone Buildings) Amendment Bill aims to remove the current inconsistencies so that building owners, their tenants and the public clearly know what is required. The Bill is currently sitting with a select committee that is due to hear public submissions shortly. While the make-up of the Bill may be tweaked, the following is currently proposed: The earthquake-prone building policy will continue to apply to all commercial buildings, farm buildings (other than the residential farmhouse), residential apartments and units that comprise 2 or more levels and 3 or more units (residential buildings are otherwise excluded), motels and accommodation (regardless of whether they are singlestory or not), fences, bridges, schools, churches, museums, sport grounds and community facilities. It will be clarified that an earthquake prone building is a building which does not meet at least 34%NBS. A public register of earthquake-prone buildings will be created and maintained.

2 The Bill allows for part of a building only to be declared earthquake-prone e.g. it may be agreed that the building s bones are structurally sound, but there are concerns about unreinforced masonry sitting on the building s exterior. The Bill will require the Ministry of Business, Innovation and Employment (MBIE) to develop a uniform procedure for seismic strengthening assessments. This will hopefully reduce the current problem where different DEEs (Detailed Engineering Evaluations) for the same building can vary wildly in their conclusions because each engineer has applied a slightly different methodology. Territorial Authorities will be required to undertake seismic assessments within 5 years of the Bill coming into force. The Authority must then provide the building s owner with a report detailing the work required to bring the building up to 34%NBS, and setting out when that work must be completed by. In general any required work will have to be carried out or the building demolished within 15 years of the issue of the Territorial Authority s report (i.e. 20 years after the Bill is passed). Heritage building owners will be able to extend this timeframe out to 25 years from the report s issue. Territorial Authorities will however be able to dictate a shorter timeframe for priority buildings. Exactly what is a priority building is still being fleshed out, but it is envisioned that it would include buildings along critical transport routes, essential buildings (e.g. hospitals, schools or civil defence meeting points), and buildings that have unreinforced masonry or other falling hazards such as parapets or verandahs that extend over footpaths. Unreinforced masonry has been identified as an area of major concern. Leaving aside the CTV and GC sites, 70% of people who died in the February earthquake were located outside buildings and were hit by falling debris when the building partially collapsed. Building owners will be able to apply for an exemption from the requirement to carry out works. An exemption would likely only be granted if the effect of the building failing would be minimal (e.g. a farm building with little passing traffic). Furthermore, if an exemption was granted then the building would need to display a notice stating that it is earthquake-prone. Territorial Authorities will be given a number of expanded powers including the ability to physically prevent people from accessing earthquake-prone buildings, and the ability to apply to the Courts to carry out work at the building owner s cost. Should building owners consider strengthening their buildings to the higher level of 67%NBS? Although building owners will only be required by law to ensure their building meet at least 34%NBS, there may be some very good reasons for strengthening a building to a higher standard. There are several possible benefits from strengthening the building to the higher benchmark of 67%NBS:

3 The Royal Commission appointed to investigate the collapse of the CTV and GC buildings in the February earthquake found there was a marked benefit in personal safety in bringing a building up to 34%NBS, but minimal extra benefit to people above this. There is however a marked benefit in protecting the building if its strength is increased from 34%NBS to 67%NBS. Leaving the human element aside, a building which has already been strengthened to a higher level will theoretically be able to be repaired quicker and cheaper, and therefore be able to provide an income stream again sooner. Banks already view buildings which have a lower %NBS as an increased risk. As a consequence offers of finance for weaker buildings may have higher funding costs or more stringent security conditions attached. If insurance is even available for a low %NBS building, the associated premiums will almost certainly be higher. Feedback received by the roperty Council indicates that premiums will in some cases be increased by % if the building sits below 67%NBS. Improving a building s %NBS should improve or at least maintain the building s value. We are aware that valuers are already factoring in the low %NBS to offset expected future strengthening costs and tenantability issues. If tenants have another option (and they soon will with new buildings coming on board at 100%NBS) then some tenants simply will not look at a building which sits below 67%NBS. There are however potential downsides to strengthening a building to a level that is higher than legally required: The cost of carrying out additional strengthening could be significant, and might not be limited to the actual engineering and construction works required for the strengthening. If the strengthening works are such that the owner will need to apply for a building consent, the Territorial Authority could ask the building s owner to upgrade their fire protection and disability access at the same time. In particular if the works would constitute a change of use pursuant to section 115 of the Building Act 2004, then the local Council could require that the building as a whole is upgraded to 100%NBS. An example of such a change of use would be converting a residential use to a commercial use, or altering a space used for storage to a retail space. The Royal Commission recommended an exemption from these requirements where a consent was sought for strengthening works. The current Building (Earthquake-prone Buildings) Amendment Bill is however currently silent as to whether such an exemption will be included. It is not currently planned to allow earthquake strengthening works to be tax deductible or depreciable. The Government has however promised that it will at least consider such financial incentives, so this will hopefully change as the Bill evolves in its select committee stage.

4 It is likely that the extra strengthening works will be more intrusive and this could mean it will take longer to strengthen a building to a higher standard, reducing the building owner s cash flow in the meantime. Matters to consider when leasing earthquake-prone buildings Just because a building has been assessed as earthquake-prone does not mean that it is automatically unsafe to occupy. Building owners may have up to 15 years to complete earthquakestrengthening works, and the building can be sold or leased in the interim provided the parties expectations are clearly set out. Access for works ADLS Lease: The latest form of ADLS Deed of Lease allows a landlord to require their tenant to vacate all or part of the premises upon reasonable notice if a landlord needs to carry out works. A fair proportion of the tenant s rent and outgoings would be abated until access is restored, but the tenant would not otherwise receive compensation even though they might face significant relocation costs. roperty Council Lease: Alternatively the current versions of the roperty Council office or retail leases give a landlord a right to enter the premises to carry out repairs, but do not give a landlord an ability to require that the tenant vacates. An appropriate clause should be inserted. Recovery of costs: Market Rent reviews: The building s %NBS should be taken into account when negotiating a lease s rent review ratchets because the building s %NBS is likely to be taken into account when it comes time to determine its market rental. If the building s strengthening is improved, the lease s ratchet clause should allow the building s market value to increase by a fair amount. Improvements Rent: Improvements rent has always been somewhat difficult to implement and justify. Tenants don t understand it and they don t like it. The improvements rent clause was removed from the latest ADLS form because it was feared that landlords would use this clause to pass on an unfair proportion of the strengthening costs to their tenants. The opposing argument is that improvements rent would only apply until the next rent review, at which time the building s increased value should result in a rental that justifies the expenses the landlord put into the strengthening. Such an outcome wouldn t be achieved however if the works did not adequately increase the market rent, or if it had been agreed that the potential increase following a scheduled market review will be capped at a certain amount.

5 Sinking fund: It may be appropriate that a sinking fund is instead established to fund future strengthening works. The current version of the roperty Council Office lease for example requires that a tenant pay an amount of up to 5% of all outgoings into a sinking fund. The ADLS lease does not contain such a clause. A sinking fund may however be unpopular with tenants who feel their contribution to such a fund does not result in an equivalent return on their investment. Insurance As a result of the recent large increases in annual insurance premiums, we are seeing a trend of tenants attempting to cap their exposure to insurance premiums and/or excess. Consideration should be given as to whether the building s low %NBS may impact on the landlord or the tenant s ability to secure adequate chattel and/or business interruption insurance. This could in turn affect either party s ability to arrange finance and perform their obligations under the lease. Will building insurance even be available? The latest version of the ADLS lease states that a landlord will not be in breach of the lease if the stated cover is unavailable despite the landlord s reasonable endeavors. The standard wording of the lease doesn t however give the landlord an opportunity to opt out of insuring the building simply because the cost of insurance becomes uneconomic. It may be prudent to amend the lease s standard terms so that the landlord can choose either full replacement or indemnity cover at the landlord s election. Seismic warranties The standard roperty Council office and retail lease forms now require a landlord to provide a warranty as to the seismic rating of the building as at the commencement date. We would advise caution for a couple of reasons: As discussed above the quality and type of seismic assessment tools used by different structural engineers can vary to the point where two different engineers may come to a completely different conclusion as to the building s %NBS. The Building (Earthquake-prone Buildings) Amendment Bill hopes to alleviate this issue to a certain extent by establishing a uniform procedure for engineering evaluations. Secondly, the landlord is of course unlikely to have expertise themselves, and would be relying on the conclusions of an engineer. It may therefore be inappropriate to expect a landlord to warrant the accuracy of a report which had been prepared by someone else. The tenant should be encouraged to satisfy themselves as to the content of the engineering report. A landlord could alternatively make the building available so that the tenant can obtain their own evaluation.

6 Health and Safety legislation A building owner is deemed to be a controller of a place of work under the Health and Safety in Employment (HSE) Act 1992, and an owner will therefore have an obligation to take all practicable steps to prevent harm to occupiers, their invitees and all those in the vicinity of the building. There has been some uncertainty as to whether the HSE Act imposed tougher obligations than the Building Act which requires only that building meet 34%NBS. In January 2014 Worksafe New Zealand issued their position statement on earthquake-related hazards which contained the following key points: A building owner who complies with the Building Act is not required to meet a higher standard in relation to the structural integrity of the building in order to comply with the HSE Act e.g. an owner who complies with the 15 year timeframe to strengthen an earthquake prone building will not face prosecution under the HSE Act. Building owners are however obligated under the HSE Act to identify potential risks caused by non-structural components of buildings (such as ceilings, verandahs or glass that could fall and injure persons) and then immediately take all practicable steps to manage such hazards, rather than be able to wait the 15 years allowable under the Building Act. Neighbouring buildings A prudent building owner or tenant should consider whether a neighbouring building could react to an earthquake in a way that would damage or restrict access to your building. We have all heard stories of properties that came through the Christchurch earthquakes unscathed, but were then damaged or left inaccessible because a neighbouring building had collapsed or was at risk of collapsing. Demolition as an alternative to strengthening Sometimes it may not make sense to strengthen a building. Under an ADLS lease a landlord would have an option to terminate the lease if the strengthening cost would be unreasonable. A landlord may wish to amend this clause so that the landlord can determine if the works are economic in the landlord s sole opinion. This would avoid a debate as to whether the cost was reasonable or not. The roperty Council lease does not contain such a right to terminate, and a clause should be included where the landlord would prefer to demolish the building rather than strengthen. Cavell Leitch s property team has the skills and experience to expertly guide you and is happy to provide advice to building owners, tenants and agents about earthquake strengthening issues. Disclaimer: The content of this document is general in nature and is not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.