Is a commercial lessee liable to pay for a new building and the lessor’s financial loss when their goods catch fire and destroy the building they lease?
The decision of the Supreme Court of NSW in 167 Prospect Highway Pty Ltd v Polyaire Pty Ltd [2025] NSWSC 1144 (Ward P) 2 October 2025 provides the answer.
Key Points
- The tenant’s obligation to keep the premises in good condition and repair does not normally extend to reinstatement of the premises / structural repair.
- But the tenant’s indemnity for act, omission or neglect does extend to reinstatement of the premises and payment of damages for loss of rent, outgoing and other costs.
- In Polyaire, the fire was caused by or contributed to by the tenant’s act or omission in the way it used the premises, specifically in the way it stored its goods.
- The tenant was ordered to pay $15,180,146.68 plus interest and costs to the landlord.
What caused the fire?
The tenant (Polyaire) leased a warehouse unit (Unit 2) from the landlord (167 Prospect Highway) being Unit 2, 167 Prospect Highway, Seven Hills. The lease was for a term of six years ending on 31 July 2020. The premises were used for its air conditioning and refrigerator business.
The premises leased included an open area between the warehouse and Unit 17 adjoining. Unit 17 was leased to an unrelated company.
The tenant stored Y-fitting air splitters in the open air on the land between the warehouses. The goods were in rows covered in a transparent plastic wrap with corrugated cardboard layers placed between each row.
On a sunny Saturday, in the early afternoon on 3 November 2018, a fire originated in the goods stored on the land which spread and destroyed both warehouses (Unit 2 and Unit 17). 100 firefighters attended at the scene.
The fire was caused by rainwater pooled on top of the plastic wrap forming an “aqua lens” which concentrated sunlight (heat) onto the corrugated cardboard (the fuel). This in combination with a wind that blew through the gaps in the plastic wrap (providing oxygen) resulted in the fire.
Was the lessee liable to reinstate the warehouse and for loss of rent?
The landlord contended that the tenant’s liability was founded in these clauses of the lease:
Clause 7.1 (the repair/maintenance obligation)
7.1 The Lessee must during the term of this Lease:
(a) keep and maintain the Premises … in the same condition and state of repair as they were at the commencement of this lease … except for fair wear and tear.
The Court found that:
“the obligation to keep in repair and to maintain the Premises under cl 7.1 is an ongoing obligation during the term of the Lease points against the clause extending to complete reconstruction of the structure on the Premises.” [at 73]
The Court concluded that the repair/maintenance obligation did not extend to the complete reconstruction of the warehouse structure on the premises.
But did a cl 7.2 exception apply to make the lessee liable?
Clause 7.2 (the exceptions to cl 7.1)
7.2
- Despite clause 7.1 the Lessee need not:
(i) make structural repairs to the Premises; or
(ii) replace items of a capital nature,
unless they arise because of any act, omission or breach of this lease by the Lessee or its employees or agents or unless they are required because of the Lessee’s use of the Premises; and - The Lessee is not responsible for repairs required as a result of natural disasters, deliberate damage or accident, such as fire, flood, storm, earthquake, explosion, which are beyond the Lessee’s responsibility or control, unless:
(i) the damage occurred as a result of or was substantially contributed to by the Lessee’s act or omission; …
Assuming for these purposes that cl 7.1 extended to reconstruction, the Court considered whether the storage of the pallets was an ‘act, omission or breach’ by the lessee:
“the storage of the pallets (packaged and in the location as they were) was both a material and, if it be necessary, proximate cause of the fire. That is because it was the place and manner of storage that made it possible for the creation of the aqua lens, on which the elements operated to produce ignition of the cardboard layers in the pallets; and hence a material cause of the fire itself. Further, it was integral to the causation of the fire and hence an effective or proximate cause.” [at 80]
The Court found that for the purposes of cl 7.2(a):
“the use of the Premises by the defendant gave rise to the need for the repairs/replacement.” [at 84]
“The placement of the pallets in the open yard area was a “use” of the Premises and an integral part (by reason of the form of the packaging) of the causal chain that led to the fire.” [at 85]
“Thus, had I been satisfied that the keep in repair and maintenance obligation in cl 7.1 extended to reconstruction, I would have concluded that the cl 7.2(a) exception to the exemption therefrom did not apply.” [at 86]
The Court found for the purposes of cl 7.2(b):
“in my opinion, cl 7.2(b)(i) is satisfied, such that the exemption for responsibility under cl 7.1 for repairs required as a result of an accidental fire beyond the defendant’s responsibility or control would not apply. … (assuming such liability is to be found elsewhere in the Lease – such as in cl 10.3).” [at 92]
Clauses 7.1 and 7.2 are covenants commonly found in commercial leases.
But in this case, the lessor inserted clause 12.1(a)(ii) which specifically required reinstatement of the warehouse:
Clause 12.1 (Reinstatement obligation)
12.1 The Lessee must:
(a) before (but not later than) the expiration or sooner determination of the said term:
(i) yield up the Premises in a clean and tidy condition and in the same condition and state of repair as existed at the commencement of the term … except for fair wear and tear;
(ii) where all or part of the Premises comprised a warehouse as at the commencement of this Lease …, then the Lessee must reinstate that part of the Premises to its original form as at the commencement of this Lease or earlier occupation of the Premises unless otherwise agreed to in writing by the Lessor;
The Court found:
“Had the parties intended the reinstatement obligation to be that of repair, there would have been no need to use the word “reinstatement”. I consider that the concept of “reinstatement” goes beyond repair and does encompass reconstruction of the warehouse. The fact that the parties have carefully identified the warehouse as the subject of the reinstatement obligation indicates that it is to be treated in a category of its own.
I have concluded that cl 12.1(a)(ii), by requiring reinstatement (separately from the obligation to yield up that appears in cl 12.2(i)), operates to vary or negative the s 84(1)(b) implied covenant (even if that were not otherwise excluded by cl 7.2(b)).” [at 110]
It was the Indemnity provision in clause 10.3 that founded the lessee’s liability for reinstatement of both Init 2 and unit 17.
Clause 10.3 (Indemnity)
10.3
The Lessee indemnifies the Lessor from and against any liability, loss, damage, expense, costs or claim suffered or incurred by the Lessor whether by act, omission or neglect of the Lessee or the Lessee’s contractors, sub-Lessees, licensees, agents, employees or invitees, including to a third party, during or after the term of this lease, in respect of or arising from:
(a) loss, damage or injury to property or person caused or contributed to by the act, omission, neglect or default of the Lessee;
…
(c) the overflow, leakage or escape of water, gas, electricity, fire, or other materials or substances in or from the Premises, caused or contributed to by the Lessee;
(d) loss, damage or injury to property or person, caused or contributed to by the Lessee arising out of use of the Premises; …
The quantum of lost rental/outgoings claim
The dispute was whether, but for the fire, the lessee would have exercised its option for a further lease of Unit 2, and Blessington would have exercised its option for a further lease of Unit 17.
The Court found that both options would have been exercised but for the intervention of the fire.
For Unit 2, the loss of rent and outgoings totalled $2,581,367.39 and re-leasing costs of $6,397.50. For Unit 17, the loss of rent and outgoings totalled $476,528 and new lease costs of $16,321.
The damages totalled $15,180,146.68 (including GST).
Orders were made for that amount, plus interest (at the rate specified in the lease) plus legal costs.
Comments
The decision turned on causation.
The lessee’s counsel (N Hutley SC with DS Weinberger) described the ‘act or omission’ which ‘caused’ the loss as “an extraordinary collocation of events or circumstances” for which the lessee was not liable.
This is, akin to liability for spontaneous combustion for which negligence must be proven.
The Honourable Justice Ward said this was not a claim for negligence:
“the plaintiff expressly disavowed any allegation of negligence by the defendant in relation to the act of placing the pallets in that location and storing them there” [at 33]
It was a claim for breach of lease, and that the loss was a result of an ‘acts or omission, neglect or default’ by the lessee which formed a chain of events:
“[there was a] chain of events which led to the fire, including the placement of the goods (packaged with corrugated cardboard layers and a transparent plastic wrap) in the outdoor storage yard … Alternatively, … its goods, containing combustible material, [were not stored] away from the heat of the sun’s rays. … [which] resulted in the presence of all three necessary ingredients for fire ignition (heat, oxygen and fuel).” [at 114]
It seems inevitable that the decision will be appealed.