Unlawful dwelling case highlights the risks to landlords

Tenancy Tribunal ruling is a wake-up call as landlord tries to contract out of their responsibilities

As we face a year of unprecedented change, a small but highly important law change last year will have a major impact on landlords and Property Managers and we are not talking about Healthy Homes or insulation. Back in August 2019, we witnessed the passing of the Residential Tenancies Amendment Bill No 2. Although this bill is better known for changes to tenant liability following the Osaki case, the passing of this bill witnessed another significant change. It gave the Tenancy Tribunal jurisdiction to make rulings on any premises used as a place of residence including unlawful dwellings. Sleepouts, converted garages and additional dwellings on land without a separate title all fall into this category. There are many landlords who have extra dwellings such as self-contained sleepouts which will also likely have consent. However, can a landlord rent out a separate dwelling that is on a title with another property? And are landlords able to contract out of RTA?

If we follow the ruling made in a recent Tenancy Tribunal case, apparently the answer is no.

Lobarinas v Zhan: Trying to contract out of the RTA and what constitutes a tenant?

A great example of this change in legislation is the complex Tenancy Tribunal case of Lobarinas (Tenant)  v Zhan (Landlord) which took place in December 2019. This recent case highlights the significance in the changes of legislation and provides an excellent example of how a landlord attempting to contract out of the Residential Tenancies Act (RTA) simply backfired.

The background of this Tribunal case is as follows.

  • The landlord (Ms Zhan) rented out a separate dwelling which was attached to the main dwelling which Zhan lived in. This was not done under a Residential Tenancies Agreement but instead done as a House Sharing Agreement meaning that Ms Zhan was attempting to contract out of the RTA.
  • Zhan argued that the occupant (Mr Lobarinas) was not a tenant but instead a flatmate.
  • Zhan collected a bond but failed to lodge it with Tenancy Services.
  • Zhan gave 42 days notice to Lobarinas as her daughter was coming to reside at the premises over the Christmas period.
  • The extension to the dwelling was consented but not as a separate household or title.
  • Lobarinas lived in the separate dwelling without access to the main household. The dwelling also had a separate meter for electricity. 
  • Lobarinas argued that he was a tenant and not a housemate and the notice that the landlord gave him to vacate was incorrect.

The case brings a number of alleged breaches of the RTA and some interesting questions. Alleged breaches include renting out an unlawful dwelling, giving incorrect notice to vacate, failing to lodge the bond, a breach of quiet enjoyment and contracting out of the RTA. 

When is a household unit an unlawful dwelling?

This case becomes more interesting as it asks and establishes the following three key questions.

  • When does a person residing in property become a tenant?
  • What is an unlawful residential dwelling?
  • Can a landlord contract out of the RTA?

Lobarinas argued that he was induced to enter into a ‘House Sharing Agreement’ in an attempt by the landlord to contract out of the RTA. However, because Lobarinas lived in a separate household unit and there were no shared common facilities, he was a tenant and not a housemate. Therefore, the notice he had been issued to vacate was invalid and the normal provisions of the RTA applied.

The adjudicator agreed with Lobarinas and awarded damages against Zhan. Adjudicator Hogan correctly concluded the following breaches had occurred.

  • Lobarinas was, in fact, a tenant and not a housemate. This is because the premises was separate to the main dwelling. Lobarinas never had access to and could not share the facilities of the main dwelling. Therefore there were two separate dwellings on the one title.
  • The RTA defines residential premises as “any premises used or intended for occupation by any person as a place of residence, whether or not the occupation or intended occupation for residential purposes is or would be unlawful”. This was Mr Lobarinas’s home and as such, the RTA applied. 
  • Although the extension had consent, it did not consent as a separate dwelling. The title showed only one dwelling. Because of this, the adjudicator ruled that this was an unlawful residential premise.
It is essential that landlords have the correct consents in place before they rent out their properties. Tribunal has been given plenty of power.

This meant that Zhan’s attempt to contract out of the RTA had failed. For Ms Zhan to continue to rent out the separate dwelling in the future, she would have to obtain consent from the local council as there was a change of use to the premises. This is stipulated under section 115 of the Building Act

It could have been worse!

It could have been worse for Ms Zhan. The adjudicator could have issued a work order against the landlord to get consent but chose not to do so. This brings into play an entirely new section of the RTA. Section 78A is about orders that Tenancy Tribunal has the ability to make in regards to unlawful dwellings. A worst-case scenario here could have been that Zhan would have had to have paid rent back to the tenant and Tribunal could have issued a Work Order meaning that the landlord would have to go to the council to get the correct consent. They could have also had to pay significant money to the tenant in exemplary damages as the landlord had breached their responsibilities and had committed a prohibited transaction which is a breach of section 137 of the RTA.

This did not happen. The landlord only had to pay $2,055.44 which was made up of general damages for stress and quiet enjoyment, compensation for two invalid vacate notices and exemplary damages for failing to lodge the bond. 

What probably helped Ms Zhan was that Lobarinas indicated to the adjudicator that the premises were in fact very comfortable. The adjudicator explained to Ms Zhan that she could use a House Sharing Agreement but this meant that any occupant must have full access to the entire premises and not just the separate dwelling. As things stand, the premises could not be rented out again until consent had been issued.

Click here to view the case

Lessons to be learnt

In conclusion, there are multiple lessons for landlords and Property Managers when examining this case. If you have a converted sleepout or a separate dwelling that you want to rent out, you must ensure you do the following.

  • Make sure the premises have the correct consent and are on a separate title. Section 45.1(c) of the RTA states that the landlord must comply with all requirements in respect of buildings, health, and safety under any enactment so far as they apply to the premises. Therefore if the premises do not have consent the landlord is in breach of their responsibilities. Penalties for this are not insignificant and are only going to increase when proposed changes to the RTA are passed and become law.
  • You cannot contract out of the RTA. Section 11 of the RTA states any attempt to enter into an agreement between a landlord and a tenant that is inconsistent with the RTA will have no effect. Also, by writing clauses into a Tenancy Agreement that are classed as prohibited transactions, the landlord is potentially committing an unlawful act.
  • As there was a Tenancy Agreement in place the landlord had given incorrect notice to the tenant as the daughter to Ms Zhan was only temporarily staying at the premises. It was not their principal place of residence. They had also failed to lodge the bond within the appropriate timeframe. 
  • You can get a housemate but you cannot restrict them to a separate dwelling, they must have use of the entire premises.
  • If the landlord wants to put it on short term accommodation platforms such as Airbnb or Bookings.com, then they are free to do this as the RTA would not apply. However, expect local authorities to become more diligent with policing and taxing these accommodation providers as the increase in Airbnb is contributing to a shortage of stock.

So, can a landlord contract out of the RTA?

The simple answer is no. If you are going to rent out a dwelling, always ensure that you have the correct consents to do so. If you are unsure, do not rent it out without proof. Getting it wrong can be a costly mistake with dier consequences for both Property Managers and landlords.

I am often critical of the Tenancy Tribunal process and around inconsistencies that we see in some of the orders, but in this case, I think the adjudicator got this correct. This case is a great example of what can go wrong when you take short cuts. Don't get caught out.

Rising rents on the horizon as government policy kicks in

  • Rent increases inevitable as companies on charge the letting fee to landlords.
  • Criticism of companies who suggest increasing rents is unfair, we explain why.

Last week, one of Wellington’s largest Property Management companies made the headlines recommending to landlords that they increase rents by $6 a week to recover the cost of the letting fee as they are forced into on charging it to the landlord. Many criticised Oxygen Property Management for taking such an approach. However in our opinion, they were simply doing their job.

Is your company charging the landlord the letting fee?

To expect a company not to try and recoup losses that their clients may face due to landlords absorbing the letting fee is utterly naive and delusional. If you believe that a landlord is not going to recover the costs from tenants then you are simply in denial or have no understanding about how business works. Recently, Prime Minister Jacinda Arden stated that she ‘hopes’ rents wont increase as a result of the letting fee being passed onto landlords. Surely this Government must have foreseen that rent increases were an inevitable consequence following their hard stance on property investors. This has left the door ajar for National to land some blows as they blame Government policy for increasing rents. They have a point, but lets not forget that National’s record on housing and in particular state housing, was far from satisfactory.

When the price of crude oil sky rocketed in recent months, you didn’t see petrol companies absorb the cost, they simply passed it on to the consumer at the pump with petrol prices hitting nearly $2.50 a litre in some parts of New Zealand. As the price of crude oil dropped, so did the prices at the pump. Why would being a landlord be any different?

The reality is that when people make decisions and especially when it comes to money and housing, the vast majority will put their own interests first. Being a landlord is no exception. They are not social housing providers.

It is not our job to house state tenants

The Property Management industry has faced one of its toughest years and has come under intense scrutiny. Many referring them as leeches, sucking extra rent out of tenants by issuing rent increases way above market rent and booting tenants out so they can claim another fee. Utter rubbish!!!

If I started a Property Management company and ran an advertising campaign telling landlords that ‘We will keep rents affordable for tenants’ I would not expect to be in business for very long. Landlords want to earn a rent to reflect the capital value of their asset. This doesn’t make them greedy, they are just trying to make their investment work. If you took two Property Management companies offering the same service for the same fee yet one says that they will earn them an extra $20 a week in rent, nearly every landlord will pick that agent.

This is the simple reality of business that many tenant groups and their supporters don’t acknowledge. Instead, many of them would rather have a rental sector owned and controlled by the state and a housing policy akin to Eastern Europe in the 1960’s. I have seen this first hand after attending two Renters United meetings, one of which was their high profile ‘Fix Renting’ launch. On both of these occasions, they have had a guest speaker or members challenge property ownership rights saying that they are unfair.

Oxygen's approach a breath of fresh air

In regards to the letter by Oxygen Property Management that sparked headlines last week, Oxygen has done what any good business operation should have done. They have researched all the options, talked to their landlords and have come up with simple solution that will ensure that their main priority, their landlords, are not out of pocket whilst protecting their own business interests. This is something that many media commentators fail to understand.

A good Property Management company does have an obligation to look after their tenants and I would be one of the first to acknowledge that too many in our industry do not do enough. Yes, it makes good business sense to look after your tenant but not to the detriment of your landlord. This doesn’t mean that you do what the landlord wants every time and simply ignore the tenant. If the a tenant makes a reasonable request for a repair and the landlord disagrees, you would strongly recommend to the landlord that they have the repair done as they may face sanctions if they neglect their responsibilities under the Residential Tenancies Act.

This again is something that some commentators either don’t understand or do not realise. Although we have a relationship with both tenant and landlord, we ultimately are employed by the landlord.

It is the landlord who hires and you and the landlord who fires you if you do not deliver results and provide value for money. All that Oxygen have done is look at the average length of a tenancy and worked out what rents will have to go up by to ensure what needs to be done to recover the letting fee. They feel as though they have come up with the best solutions for their landlords. They have been transparent, open and honest without trying to put unnecessary spin on the announcement. In my opinion, they should be applauded for their approach.

Most companies make their move with regards to the letting fee

The announcement to bring forward the date of the letting fee ban to the 12th of December took many companies by surprise. Now, as reality has set in, the industry has finally made its move with many companies now writing to their landlords explaining that they have to on charge the fee as they simply cannot absorb it.

It has been like sitting at a table of a high stake poker game. Companies big and small have been waiting to see what cards have been dealt, trying to work out what each other company may or may not do. Do I raise, call or fold?

At some point though, you have to make a call and most companies have now done this after careful consideration. Quinovic were the first to make the headlines with their ‘Tenant Fee’ being on charged to landlords but many companies had already made their move prior to this.

Some companies will undoubtedly try to absorb it to give them a market advantage but this would mean they would likely have to ‘trim fat’ out of their business. Maybe outsourcing automated tasks overseas where labour costs are cheap or compromising service levels by reducing what they offer or by overloading staff with more properties.

In order to avoid lower returns some landlords may bypass property management companies and self manage.

Online self management tools such as MyRent may see an increase in users. There will always be that human element to the business and if you cannot handle conflict and the ongoing changes to legislation, Property Management is still the best solution.

Letting fee is only part of the issue of the issue for rising rents

From what we have seen across the industry, there has been a level of ‘acceptance’ by landlords that they will have to pay the fee, though many now want their rents reviewed and increased to compensate. This is just a small part of the added costs our Coalition Government is putting on landlords.

Back in February this year, we wrote a blog warning New Zealand that everyone will have to pay for the ‘Utopian vision’ that the Government has for our country.

“Removing the speculators’ tax loophole will save taxpayers around $150 million a year once fully implemented. Total savings in the first ten years will be $1.2 billion. Labour will use this money to help 600,000 families heat and insulate their homes to modern standards.

— Labour policy on their website with regards to ring fencing losses before the 2017 election

In this article we highlighted the extra costs landlords would face which included cost of compliance with the Healthy Homes Guarantee Bill.

There is a realistic risk of a reduced rental stock in New Zealand and this will drive up rents even further. The brilliant Chief Economist of BNZ Tony Alexander, recently summed up our concerns in an interview with NZME property website OneRoof.co.nz.

Alexander identifies that the Government is creating diminishing returns due to increased costs around compliance and reducing deductibility for expenses. As it gets more and more expensive to own a rental property, investors are forced to increase rents to compensate the added costs.

Alexander also states that if there is a reduced rental pool, landlords will have a much larger pool of tenants to choose from and will become more careful around who they pick.

This will be exasperated if rental reforms are pushed through and the banning of 90 day ‘no cause eviction’ is implemented. Then, not only will you have a reduced rental stock, you will have Property Managers and landlords taking real care in who they put into a property as getting this wrong could be disastrous as the ability to remove a tenant will become far more labour intensive with added risk of litigation by the tenant and lengthy delays in Tenancy Tribunal.

It is ironic yet also somewhat predictable, that the policies created by the Government could end up hurting the people they were designed to help the most. The poor and vulnerable.

In our opinion, the best thing the Government can do is remove their policy to ring fence losses that a rental property will generate. This means that if a landlord runs a rental property at a loss in the financial year, as many small investors do, they can offset that loss against their own personal income. So, if your rental property runs at a net loss of say $10,000, you offset that against your wages, giving you a tax rebate because you would have paid too much tax. Our coalition friends, want to remove this. The result of this means that as landlords are forced into investing more money into their rental property, the ability to offset the losses will be removed exasperating the problem.

Of the thousand of properties that we see, the average property to landlord ration is about 1.4 properties per landlord. About 90% of landlords in New Zealand own one or two properties.

Naturally, this all adds to the expense of owning a rental property. This policy was aimed at high stake speculators but in fact the people who it hurts the most are ‘Mum and Dad’ investors who own no more than one or two properties and these make up about 90% of all landlords in New Zealand.

One senses that this Government is trying to ‘bully’ landlords away from property and release more stock to first home buyers, in an attempt lower house prices. However, this may well backfire as rents look set to increase further which is not good for the economy long term as there will be less disposable income. Government should revaluate what they are trying to achieve as New Zealand, like any other capitalist country, needs a strong private rental sector.

As we stated back in our article in February, everyone will have to pay more. Landlords will pay more in expenses and operating costs, tenants will pay more in rent increases and the taxpayer will pay more in subsidising housing benefits.

In conclusion, many of the reforms such as healthy homes, we have always supported yet some of the policies are starting to impact negatively as rents start to increase meaning a tougher times for landlords and tenants. In my opinion, this Government is trying to do too much too soon. Slow down and listen to people at the coalface as to what the likely impact of their policies will be. You can always ignore them and hope that things work out fine. However, ‘hope’ is not a strategy I would like to see any minister take, let alone our leader.