Proposed Earthquake Strengthening Requirements

Raises the bar for potential investors in commercial buildings

New Zealand cities and towns typically include many older style commercial buildings, which have long been popular with property investors. In the wake of likely new building standards to be imposed following the Christchurch earthquakes, we consider some of the issues to help you make a wise investment.

The catastrophic collapse of buildings in the Christchurch earthquakes triggered a Commission of Inquiry into why these collapses occurred. Following the release of the Commission’s recommendations, the government proposes to amend the Building Act 2004 to provide for nationwide compulsory earthquake strengthening of all commercial buildings. This will have far-reaching consequences for building owners and tenants, and could potentially alter the appearance of our towns and cities everywhere. Assuming that the government’s proposals will become law, we set out below some key points.

Assessment

Every local authority will be required to assess all non-residential and multi-storey residential buildings for earthquake weakness within five years of the law coming into force. Priority will be given to buildings with likely falling hazards or on main transport routes. All buildings deemed earthquake-prone will be recorded on a public register. Owners of earthquake-prone buildings will then have 15 years to either strengthen or demolish the building. It appears that owners of listed heritage buildings will still need to comply with the strengthening requirements but they may be able to seek an extension of time in which to comply.

The 33% threshold

An earthquake-prone building is one that is 33% or less of the strength of a building designed to the new building standard. The standard varies for every building, depending on its use and location. To avoid demolition, earthquake-prone buildings must be strengthened to at least 34% of the applicable new building standard. Owners must also bear in mind, however, that many insurers may require strengthening to as much as 67% of the new building standard otherwise owners may face extreme premium increases or no replacement insurance cover. Strengthening will likely involve significant engineering and construction expense. Buildings may also have to be upgraded to meet current fire safety requirements and possibly even disability access requirements. There may also be building heritage factors to consider. The cost implications of strengthening works are therefore huge.

OSH factors

Marketability is another issue. Both owners and tenants must comply with occupational health and safety (OSH) legislation to ensure that their employees and patrons are safe. Landlords and tenants have a personal responsibility to identify all possible causes of harm and take steps to reduce those risks. Tenants may therefore require owners to strengthen to higher standards and within tighter timelines than the law requires.

Undertake good due diligence

Anyone considering purchasing, leasing or occupying commercial property must be aware of the likely upcoming requirements. A detailed investigation of the building should be undertaken at the due diligence stage for buying or leasing so that any strengthening works are known. The degree of works required will undoubtedly have an impact on the building’s value, insurability and the bank’s willingness to lend.

Commercial leases

Leases need specific clauses to deal with earthquake strengthening issues. These clauses may include who will undertake the works and when, rights of access to carry out works and rent concessions during the works period. Tenants need to consider whether their business can operate during strengthening. Owners and tenants should agree from the outset the percentage to which the owner will strengthen the building as it may have a direct effect on the tenant’s operating expenses, particularly in relation to payment of insurance premiums. It may also impact on a tenant’s ability to attract and retain key staff. Any contribution from the tenant to the cost of works must be negotiated before the start of the lease. Owners may also want to reserve the right to terminate the lease should they consider the cost of works un-economic. Purchase agreements also require specialist clauses to protect buyers.

These proposed new provisions are far-reaching and will have considerable impact on any property investments. As buyers, owners and tenants, it’s vital that you get specialist advice before you sign any agreement for sale and purchase, or sign any commercial property leases.