Holler v Osaki [2016] NZCA 130 – Liability for residential tenants clarified

Friday, April 22, 2016

The long awaited Court of Appeal decision on the liability of residential tenants has arrived – good news for tenants and their insurers, but not so good for insurers of landlords seeking to make recoveries.  What this case does is to provide a fresh perspective on the application of the Property Law Act 2007 (PLA) to the Residential Tenancies Act 1986 (RTA).

The case hinged on whether the exoneration clauses in Part 4 of the PLA (sections 268 and 269), previously thought to apply to commercial leases only, applied equally to residential tenancies. The sections effectively provide that where damage occurs (that is insured for by a landlord), that landlord cannot require the tenant to meet the costs of repair or damage.  The three exceptions are where the tenant causes damage intentionally, where the damage is a result of an imprisonable offence, or if the tenant acts or omits to act thereby preventing insurance funds arising from the damage being paid that would have otherwise been payable.

On the other hand, sections 40 and 41 of the RTA establish all-embracing obligations on residential tenants to pay the rent, use the property solely for residential purposes, to keep it tidy, and to notify the landlord of any damage or when repairs are needed. In liability terms, the tenant is legally responsible for intentional or careless damage whether by the tenant or the actions of other guests or permitted persons who are on the property.

Thus it fell to the Court of Appeal to determine if the PLA exoneration clauses could be read into the RTA and whether sections 268 and 269 could be used as a source of general principle in assessing tenant liabilities under the RTA. The critical section is section 142 of the RTA which states:

142 Effect of Property Law Act 2007

(1) Nothing in Part 4 of the Property Law Act 2007 applies to a tenancy to which this Act applies.

(2) However, the Tribunal, in exercising its jurisdiction in accordance with section 85 of this Act, may look to Part 4 of the Property Law Act 2007 as a source of the general principles of law relating to a matter provided for in that Part (which relates to leases of land).

The Court concluded that Parliament in enacting the PLA had not intended to adopt different positions for commercial and residential tenancies in relation to the exoneration provisions. They applied equally across the board.

The Court thus concluded that the text, policy and legislative history of section 142 of the RTA and the exoneration provisions of the PLA support the view that residential tenants are immune from a claim from a landlord where the damage or loss was caused intentionally or carelessly by the tenant or the tenant’s guests.

We believe this answer to be incorrect, as section 269(3) (paraphrased) specifically provides that where damage is caused intentionally, the tenant is not exonerated from liability.  Intentional damage was not argued in the appeal, with the sole focus being on careless.  Presumably this potential mistake will be rectified by recall.

Accordingly subrogated recovery claims against tenants under sections 40 and 41 of the RTA are going to be severely affected. The types of claim that may survive this decision are, for example, where the damage was caused intentionally (assuming a recall is made), an imprisonable offence, or where the tenant compromises the payment of insurance funds.

Before bringing any recovery action, a detailed assessment of the facts needs first be undertaken.

Amongst the difficulties of assessment are the perverse incentives created by a construction of legislation which makes tenants responsible for residentially tenanted properties, but not financially liable for a breach of their duties of responsibility.  Given that it is tenants who can control the manner in which tenanted properties are used, the decision of the Court of Appeal does seem to create a disjunction between ultimate financial responsibility for damage and the party with an ability to control whether damage occurs.

For further information, please contact our specialist insurance team.

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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