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.


Who’s Liable when the Tenant claims? Property Manager v Landlord

  • This month we ask for clarification on who Tribunal should hold responsible for breaches by the landlord

  • Potential increase in tenant claims could lead to millions being awarded in exemplary damages

Who’s liable? It is a very simple question when a tenant makes a claim to Tribunal, yet somehow, no one seems to be able to give a definitive answer. When a Tribunal makes a decision in favour of the tenant, and money has to be paid to the tenant in way of compensation or exemplary damages, who is responsible?

Expect to see more tenants taking their landlords and Property Managers to Tenancy Tribunal post 1st July. The question we are asking is if they are in breach, who should pay?

For years now, I have followed decisions that come out of Tenancy Tribunal. They make for great case studies to use in training Property Managers. We read the documents to assess how the adjudicators came to their conclusion and how they interpret the law. However, in the years that I have researched cases, it seems like it is a lottery as to who has to front up with the penalty. It is more relevant now than ever, especially after the Tenancy Compliance and Investigation Team (TCIT) have made it perfectly clear who they are going after. They are targeting the Property Management companies and are of the belief that they should pay.

With the 1st July 2019 deadline approaching for insulating your rental property, we are expecting to see some opportunistic tenants waiting to pray on unsuspecting or simply pure arrogant landlords who haven’t ensured their properties are compliant and insulated to the new standard.

Tribunal cases set for an increase?

This could lead to a surge in Tenancy Tribunal cases as tenants, quite rightly, exercise their rights. The carrot of being awarded $4,000 in exemplary damages is a substantial one and I would encourage tenants to do so if their rental property is non-compliant. It’s not as if landlords haven’t had time, they have had three years to get properties insulated and ready. Yet clearly, we are not going to have our entire rental stock ready by 1st July 2019. We predict as much as 10% of rental properties will not be insulated and this is approximately 60,000 houses. That is $240 million of potential exemplary damages.

So before this deadline hits, we want to get clarity as to who should pay and we have a few questions that need answering.

  • Who is liable - the landlord, the Property Management company, or is it both?
  • Are decisions assessed on a case by case scenario, allowing the adjudicator to make the call on the day?
  • What is the protocol that adjudicators follow in making these decisions?

Let’s start with the first question. Who is the landlord?

The best place to start is to look at some of the key sections and interpretations within the Residential Tenancies Act.

We should all know that the Property Manager acts as Agent for the Landlord, it should state this on the Tenancy Agreement. But, what does that mean?

Section 2 of the RTA defines the landlord as follows.

“in relation to any residential premises that are the subject of a tenancy agreement, means the grantor of a tenancy of the premises under the agreement; and, where appropriate, includes—

  • a prospective landlord; and
  • a former landlord; and
  • a lawful successor in title of a landlord to the premises; and
  • the personal representative of a deceased landlord; and
  • an agent of a landlord

So, by signing a Management Authority with the owner of the property, the Property Manager becomes the agent of the landlord. Therefore, according to the RTA, the Property Manager becomes the landlord.

Straightforward enough, but does that mean that the owner of the property has abdicated all care and responsibility to the agent? Of course not, they are the owner of the property and therefore they are a business owner making them the principal of the business. This means they have responsibilities not just under the RTA but under many pieces of legislation including the Health and Safety at Work Act.

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A principal of any business cannot abdicate full responsibility to a third party and ultimately, they are responsible for the performance and compliance of the property. In the case of a Property Management company, they physically cannot make a landlord comply, as many are finding out trying to get a small percentage of landlords to insulate their properties without success. Along with all the other day to day tasks that a Property Manager undertakes, they also act as an advisor and consultant to the owner of the property.

The issues we have faced with insulation is a prime example. Most landlords with properties under management would have arranged/agreed for their properties to be fully insulated and compliant by now. However, there is a small percentage of landlords who simply have ignored requests from Property Managers. Why should a Property Management company face exemplary damages of $4,000 when they have done everything in their power to get the landlord to comply?

I have never been convinced that it should be the Property Management company who carries the burden when a landlord ignores a recommendation and potentially exposes the agent to risk. Sometimes I feel as though there is a temptation for adjudicators to target Property Management companies as they are an easy target.

We see many different cases where adjudicators make decisions on who is liable for damages award to the tenant.

However, I do also understand why TCIT would target Property Management companies. It will make them think twice about managing non-compliant properties.

In order to help us get some clarity into where the liability falls we have reviewed two cases where the Property Management companies are held jointly liable but for two completely different reasons. We also highlight a third case where the landlord is liable and not the Property Management company, even though both are named on the application. This highlights the inconsistencies that can occur in Tribunal.

Case History: Mendez-Gray v Jennes and Realty Link Taupo T/A LJ Hooker

One of the main reasons I feel that this is a major issue that needs resolving is because of the mixed messages we get out of Tenancy Tribunal. This case in particular highlights what needs to be stated on the Tenancy Agreement to remove the liability of the Agent and put it firmly with the Principal.

In the height of the Methamphetamine scandal, one case stands up and needs further examination.

In August of 2016, LJ Hooker had to pay Elena Mendez-Gray the sum of $6,788.44. The background of the case was that the landlord had seemingly known that her property was likely to be contaminated with Methamphetamine but had not disclosed it to the Property Management company. Subsequently, the tenants found out that it was over the legal limit set at the time of 0.5 micrograms. The tenant’s won the claim.

Adjudicator D Malcolm ordered both the landlord and LJ Hooker to pay the tenant.

However, in the order, Adjudicator Malcolm exonerates LJ Hooker of any wrongdoing. What LJ Hooker did wrong was that they declared themselves as the landlord on the Tenancy Agreement and not the agent for the landlord. The adjudicator then goes on to state that in common law, where a contract names the agent and discloses the principal, there is a prima facie rule or presumption that only the principal can sue and be sued. However, due to the fact that LJ Hooker did not disclose that they were acting as an agent for the landlord, this made them jointly liable.

Case History: Lovell v At Homes Rentals Ltd and Turner

In this case, At Homes Rentals Ltd and Turner had to pay Lovell $3,870.44 in exemplary damages and compensation for a number of breaches of the RTA.

The case was held in Tauranga in April 2018 and the adjudicator was J Smith. In the order, adjudicator Smith gives a lengthy summary on who is the actual landlord and who should the damages be awarded against.

In his summary, the adjudicator states that in common law the primary rule is that an agent who acts purely as an intermediary for a principal is not a party to the contract between the principal and the other party. In this situation, the agent cannot sue or be sued on the contract.

However, the adjudicator then quotes a section from the book Residential Tenancies: The Law and Practice by David Grinlinton.

“Often real estate agents manage the landlord's property, and in such case, proceedings would normally be taken in the name of the landlord rather than the agent. However, where an agent's name appears on the tenancy agreement as the landlord, the agent may be jointly and severally liable with the landlord, and proceedings may be brought directly against the agent. Such liability may be avoided by including the words "as agent for" or "on behalf of" (the landlord)".

The adjudicator then goes on to explain the definition of a landlord as stated in section 2 of the RTA. In the definition, we stated earlier the words ‘where appropriate’ appear. Smith argues that ‘where appropriate’ was specifically written to suit residential tenancy cases. So, where an agent signs a tenancy agreement for the owner and is fully engaged in the day to day management of the tenancy, the agent will usually be a landlord for the purposes of the RTA, particularly where the agent’s action or inaction is part of the tenant’s claim. In these circumstances, the agent may sue, and be sued by the tenant.

Clear as mud!!

Case History: Knowles v Blue Ribbon Realty Ltd and Jordan

In December 2018, the tenant of a Te Awamutu property won compensation as the landlord had failed to maintain the property as it was cold, damp and suffered from a mould issue. The carpet was rotting due to water damage and the tenant also provided evidence of gaps in the ceiling, letting in daylight.

Adjudicator Lang awarded $2,250 to be paid to the tenant by the owners of the property Magda and Brett Jordan and not Blue Ribbon Realty Ltd. In the final statement, Adjudicator Lang states that the party who is liable for maintenance failures is the owner of the property. Therefore they have to pay the sum award and not the agent.

Consistency and clarity required

This is no criticism about how adjudicators interpret cases, they will each have their own views and clearly, they will not always agree. However, from a Property Managers point of view, it is an area that certainly needs clarification so everyone knows where the liability falls moving forward. This surely is not too much to ask.

If a Property Management company faces exemplary damages of $4,000 post 1st July and that company has done everything in its power to get the landlord to comply, it could be a worthy exercise as an industry to invest in a bloody good lawyer. They could then to argue in an Appeal to the District Court that Tenancy Tribunal is wrong and all exemplary damages and compensation should be awarded against the principal. Even if the appeal failed, at least we would know where we stand.

Principal Tribunal Adjudicator Melissa Poole. It would be great to get clarification from her as to who is ultimately liable.

This is highly unlikely to happen but it is one way we could move forward and it would finally clarify who pays. No doubt, post 1st July we will find out how Tenancy Tribunal will rule and whether they will be consistent.

What we would recommend

I may not be a lawyer, but when you have researched a topic for a number of years, you do get to grasp a good basic understanding of how the RTA works. This, however, is an area I am still trying to find an answer to. I've even asked adjudicators after attending Tenancy Tribunal hearings if they can clarify who is liable. Hopefully, we can get clarity before the 1st of July kicks in.

What I believe should happen is as follows.

  • The common rules of basic law apply. The agent should be exempt from being sued by the tenant as they are acting as the agent. They are not the principal.
  • If the Property Management company is negligent in how they have operated, then this becomes a matter between the principal (the landlord) and the agent (Property Management company). The principal can then lodge a claim against the agent, ideally, through the Real Estate Authority.
  • The Property Managers will have to be licensed to represent the landlord as an agent.
  • Tougher penalties are required for exemplary damages. Penalties have remained the same for nearly a decade. Our opinion is that damages should be on a percentage of the annualized rent. This is much fairer as landlords who receive low rent income in places such as Invercargill face the same penalties as landlords who receive higher income in places such as Wellington and Auckland.
  • Tenant’s should also face a wider range of exemplary damages. There is nothing in the RTA that allows landlords to seek exemplary damages for willful damage to property or for serious breaches of the RTA such as assault. This should be included as it could be argued that the tenants have committed a criminal act.

As ever this is just an opinion piece and we welcome your feedback. Thanks for reading.

Regards

 

David Faulkner