Assessing the Seismic Risk of Commercial Buildings

Buildings below 34% NBS are considered to be Earthquake Prone. These buildings will need to be upgraded within the timeframe applying in the Seismic Risk area in which it is located. For example, in a high risk area this means within 7 ½ years of receiving an earthquake prone building notice from the Council. However, this does not mean that the building cannot be occupied. A building with a rating of between 34% and 67% is an Earthquake Risk property and is considered to be high to medium risk Above 67% is considered by many, including Lenders, as an acceptable seismic risk or low-risk. The % NBS can also impact on the use of a building. For instance, a hospital requires a higher NBS rating as it needs to remain operational in an earthquake so patients can be effectively evacuated.

Landlords and Tenants

As part of the lease negotiations, Landlord’s sometimes provide a Tenant with a report which indicates what the building’s NBS rating is. That way both parties are aware of how the building is likely to perform in an earthquake. This is also important to both landlords and tenants to meet their health and safety obligations. An issue that has arisen of late is that over the time of the Lease the building NBS rating may change. For example, a further event occurs or the way in which the NBS is calculated by engineers is modified. When this happens then the Landlord and Tenant are faced with a difficult situation. This is when seismic clauses, if any, in a Lease will become relevant.

Lease Provisions

Some Leases will contain a warranty from the Landlord that the building meets a certain NBS rating. This can be of use to a Tenant in satisfying its health and safety obligations. A breach of a seismic warranty does give rise to a damages claim. The Tenant may be able to cancel if the warranty is expressed as an essential term of the Lease. These clauses need to be carefully worded to meet the Tenants requirements. Building owners will also need to consider these clauses very carefully. There is a risk that a building previously assessed as above 68% falls below this mark in subsequent reviews due to a differing engineering assessment or due to future changes to the building code.

An alternative approach would be for the Lease to specify an agreed process that will be followed if the NBS rating changes during the term of the Lease. This would include specifying a minimum NBS rating that is acceptable to the Tenant for its particular use of the building and setting out the agreed process if the building drops below that level. Issues to consider would include who arranges and pays for any new seismic reports, whether the Landlord is required or has an option to carry out the upgrade work, if any mitigation would be acceptable to the Tenant, what the acceptable timeframes for upgrading work would be, whether rent is abated, if the Tenant would be required to vacate and in particular whether there are any termination rights. By considering these issues upfront the parties will be clear on expectations should this situation arise.

MBIE

The Ministry of Business Innovation & Employment (MBIE) has recently issued guidance to assist building owners and tenants in making decisions regarding the occupancy of buildings. Despite evidence of tenants, including, government departments, vacating buildings following findings of low % NBS in the Wellington area, MBIE cautions against such action unless it is warranted in the circumstances. Among its arguments are that the life safety risk is still low and large earthquakes are rare. In their view to vacate a building where the %NBS is less than 34% it should be evident that exposure of people to the buildings vulnerabilities presents an increased life safety risk. If the new rating is above 34% then the parties need to weigh up life safety risk and consequences of the closure of the building. The guidance encourages careful consideration of all of the circumstances including if it is possible to mitigate and reduce life safety e.g. limited access to certain areas until repaired and staged strengthening works. MBIE emphasis that the % NBS measures the worst performing elements of the building i.e. the critical structural weaknesses. The guidance encourages building owners and Tenants to conduct an overall assessment of the situation and do their due diligence, rather than focusing specifically on the %NBS criteria.

Health and Safety

Both the Landlord and Tenants have obligations under the Health & Safety at Work Act 2015. Both have a duty to ensure so far as reasonably practicable, the health and safety of workers and other people affected by work in a building used as a workplace. While the assessment of risk promoted by MBIE has merit, it is arguable that it does not give enough weight to Landlord and Tenant health and safety obligations. There is anecdotal evidence that in some markets the % NBS of a building is one area that Company Directors are not willing to leave themselves exposed to any health and safety obligation risk so that they are favouring leasing buildings that are 100% NBS.

Conclusion

Seismic risk assessments are complex to navigate, requiring an informed balancing of legal obligations as against the commercial reality for Tenant and Landlord. At Cavell Leitch we have considerable experience in advising clients in this area and we have a strong network of professionals to call on for support. We would be very happy to assist you with any queries you may have in this area.