Damage to a property is probably a landlord’s worst nightmare, even with insurance on side. But a recent tenancy case (Holler and Rouse versus Osaki) in the New Zealand Court of Appeal has lead to a landmark new ruling with regards to who stumps up the cash when damage occurs in a rental home - which has left some property owners less than impressed.  

What happened?

Kenji and Teiko Osaki were pursued by their landlord’s insurance company for the cost of a house fire, after a pot was left unattended on a stove in 2009. And while the Residential Tenancies Act states tenants can be made to pay for damage caused by neglect or deliberate behaviour, the Property Law Act says they are not liable for damage from "perils" beyond their control such as fire, storm, earthquake or volcanic eruption.

And now it appears ‘carelessness’ can be added to the list of exceptions, after the Tenancy Tribunal released a practice note that went into effect from the 1st of August, 2016.

Point 4, under ‘Applications by landlords for damages’, states;

“If the landlord has insurance for the event that caused the damage in question, the tenant is exonerated from paying for the damage caused by his or her carelessness, or that of any person on the premises with the tenant’s permission.”

So what does this mean for landlords?

Unfortunately, plenty. Of course if a property owner does not have insurance, then the tenant can be held liable. But this does not help those who do take the proper precautions and are then responsible for paying excess (previously at the cost of the tenant who caused the damage), and higher insurance premiums.

In this news article, a Christchurch property manager said he was already experiencing negative fallout from the new rules, having lost two applications in just a few days where he was seeking orders for tenants to pay landlords’ insurance excesses after damage.  

From carpets covered in drink stains and cigarette burns, damaged walls, and ignored plumbing leaks which led to water damage, the property manager said that the Tenancy Tribunal admitted that the Appeal Court ruling was the reason for exonerating the tenants for what happened at the property.

Read more: Tenant not paying rent? The right way to deal with late rental payments

How has it affected the rental market?

But where does carelessness and honest accidents end, and deliberate damage begin? It seems the line is rather blurry and this is sure to have landlords, and insurance companies, treading extremely carefully - perhaps at the detriment of good tenants.

Spokespeople for the insurance industry and tenancy rights groups have noted that they don’t think tenants will abuse the new set of protocols, however it really is a wait-and-see game, as representatives from many property management and landlord organisations aren’t so convinced.

APIA president Andrew Bruce said this to media;

"To give tenants exclusive possession (and therefore full control of how the properties are being used) but not financially disincentivise them when they fail to be responsible, is tantamount to arming a child with a live wire and a lighter and shrugging your shoulders when the bomb goes off.”

In order to keep you and your property covered, it might be worth a chat to your insurance company and a local property management expert who can guide you in the right direction when it comes to keeping your investment home out of harm’s way. Yes, accidents happen, but preparing for them can mean it isn’t such a disaster when they do occur.  

The tribunal's new directions on damages are:

* Landlords must establish the damage is more than wear and tear

* Tenants must prove it was unintentional

* If landlords have insurance, and the damage is unintentional, the tenant or any guest is exonerated

* If damage is deliberate, the tenant is not covered and compensation can be awarded to the landlord.

* Tenants are also not covered if the damage was due to a crime or an act of omission which makes it impossible for the landlord to be paid out.

* Tenants are exonerated from damage costs in case of fire, flood, explosion, lightning, storm, earthquake or volcanic activity. This can include plugs left in sinks, cooking fires and fireworks.

* Tenants cannot be made through their tenancy agreement to pay insurance excesses

* Landlords cannot hand out 14-day notices to repair damage; such claims must go to the tribunal.

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