Got insurance for your rental…it might not be a good thing!
Since the Osaki case was heard and decided (Court of Appeal, Holler & Rouse v Osaki & Anor NZCA 130 [15 April 2016]) it has turned the liability that tenants are exposed to for damage to leased property in New Zealand on its head.
The case concerned the total destruction by fire of leased premises through the negligent act of the tenant, Mr. Osaki, who left a pot boiling on the stove.
The court of first instance found the tenant liable and the insurer pursued him through exercise of its right of subrogation.
The Court of Appeal (COA) overturned the verdict, noting that the Law of Property Act (LPA) clearly envisaged that the landlord’s insurance cover, where extant, should provide protection to the tenant in such circumstances and whilst the act was quite clear in respect of this issue, it was, pre-Osaki, in conflict with the Residential Tenancies Act (RTA) and this became the essence of the issue for the COA.
The former quite specifically states that total destruction through Force Majeure acts or similar must be covered by landlord’s insurance (the exoneration section). The latter states that the tenant is liable for the rectification cost of accidental damage to the leased premises. The question of landlord insurance was moot.
The LPA wording though related to commercial premises, leaving the court to decide if parliament ever intended the RTA to be in conflict with it and for that part of the act not to apply to residential tenancies. It determined that it did not intend that and therefore that ‘exoneration’ section of the act also applied to residential tenancies.
The applicability of this ruling to instances of repeated, or multiple damage was not clearly articulated in the judgement but the practice note issued by the tenancies tribunal to clarify the matter did make it clear, or at least, clearer.
Deliberate or negligent acts would render the tenant liable for the cost of repair to damaged premises, they would however be exonerated if the damage constituted ‘fair wear and tear’ or was ‘careless or accidental’.
The decisions not surprisingly, tend to hinge around what may be ‘careless or accidental’ verses what might be termed ‘deliberate or negligent’. Despite the tenancy tribunal issuing a practice note which clearly states that if the damage was caused intentionally then the benefit of the landlord’s insurance cover was not available, adjudicators up and down the country have been interpreting both it and the case outcome, incorrectly.
The relevant sections of the LPA state that Section 1 (the section that exonerates the tenant from liability for damage to the leased premises if insurance is in place) does not apply if Section 3 applies;
Section 3 and sub section 3a, says that if the damage is deliberate section 1 doesn’t apply
Section 3b says that if the damage is caused through an act or omission of the lessee or its agent, ‘agent’ meaning anyone the lessee is responsible for, child, visitor etc. (i.e. letting your dog chew on the carpet or letting your child draw on the walls is an omission and both are ‘agents’ of the lessee) then section 1 doesn’t apply.
Now let’s consider what might reasonably be called ‘careless’ or ‘accidental’.
Where a tin of paint gets knocked over and ruins a carpet, or a hammer head flies off and breaks a sliding door’s glazing, or a hot pan scorches a kitchen bench, these are clearly ‘accidents’.
They are not deliberate, yes, technically they are within the ambit of 3b as an ‘act or omission’ but read in the overall context (subtext here being ‘negligence’) they are not sufficiently wilful, in my view to trigger liability and section 1 will apply. I don’t see it as a particularly difficult determination.
Quite how an adjudicator can consider this following real-life case as ‘accidental’, I really don’t know.
Playdough with food dye in it, ground into the lounge carpet in several rooms which can’t be removed. Felt tip pen doodles on multiple walls of the house put there by children of around 3 years’ of age, which require the paint to be stripped and the walls re-painted.
The adjudicator determined the landlord was not entitled to recover the costs of the rectification work as the damage was considered to fall within the ‘exoneration’ ambit of the Osaki ruling.
Luckily this ‘view’ (arguably only to the most myopic) has been resolved by an appeal to the district court against a similar adjudication ruling in Tekoa Trust v Amanda Stewart  NZDC 25578, published 30 March 2017.
The tenant, despite a clear ‘no dogs’ rule in the tenancy agreement, had allowed her dog to urinate repeatedly on carpets throughout the house. The carpets needed to be replaced at a cost of almost $4,000. Despite that, the adjudicator ruled that the damage was not deliberate and found against the landlord and required him to utilise the insurance cover in place to remedy the damage.
The appeal to the district court resulted in that decision being overturned. The court found it very difficult to understand how the adjudicator could consider that damage ‘accidental’ and not deliberate. It did put some definition around the word ‘deliberate’ but really only articulated what the vast majority of people would consider that it meant in the everyday, ordinary use of the word.
Whether it was left-wing leanings, ignorance or laziness cannot be determined, but it is incredulous that anyone could consider damage to that extent to be accidental.
Courts generally require contract wording to be given the everyday, ‘man on the Clapham omnibus’ meaning. It should not therefore be difficult for adjudicators to look at the wording and make sensible interpretations and decisions accordingly.
The incumbent government has taken on board criticism levied in respect of this ruling but it is not the ruling itself that is the problem, it is the subsequent interpretation, or mis-interpretation that has generated the criticism.
It now intends to modify the act but I don’t believe that the changes proposed in the current bill are necessary.
The current LPA and its exoneration provisions should work nicely now that its conflict with the RTA is resolved.
It is clearly a reaction to the ‘quelle horreur’ determinations that are being made and doesn’t require re-legislating, just a bit of education and practical application by adjudicators.
Helpfully, as a decision rendered in a court higher than the tenancy tribunal, the ‘Stewart’ ruling now has precedent and must be followed.
It should bring a degree of clarity to adjudications of this nature or at the very least, give hope of appeal to a higher court where the initial application is refused.