Frank Newman: Recovering the cost of tenant damage

In April last year the Court of Appeal ruled (in Holler and Rouse v Osaki) that a tenant did not have to pay for damage where the cause was not done intentionally. The facts of that case go something like this.

Mr Holler and Ms Rouse rented a house rented to Mr Osaki and his family. The house was insured with AMI. It seems Mrs Osaki was a bit of an absent minded cook as she left a pot of oil on full heat, which caused a fire and over $216k worth of damage.

The landlord claimed the full cost less the excess from AMI, which was not a problem. The problems started when AMI sought recovery of their loss from the tenant, which lawyers refer to as their right of subrogation - a fancy term meaning they pursue the person who actually caused the damage. They therefore started proceedings against the tenants to recover their loss.

The Osaki family however got a smart lawyer who argued that sections 268 and 269 of the Property Law Act (PLA) gave them protection under the landlord’s insurance policy. Section 268 lists the situations where S269 applies. It specifically mentions fire, and says S269 applies, "even though an event that gives rise to the destruction or damage is caused or contributed to by the negligence of the lessee…"

Section 269 says where any one of the situations noted in S268 apply then,

"the lessor must not require the lessee —

(a) to meet the cost of making good the destruction or damage; or

(b) to indemnify the lessor against the cost of making good the destruction or damage; or

(c) to pay damages in respect of the destruction or damage."

It continues to say that this exoneration does not apply if the damage was intentional or the result of a criminal offence.

AMI tried to argue that sections 268 and 269 did not apply to residential tenancies. They said the Residential Tenancies Act (RTA) applied - in particular the part where tenants agree that they will not intentionally or carelessly damage the property. They argued because Mrs Osaki was careless and the tenant was therefore liable for the $216k damage.

The Court of Appeal disagreed, ruling the PLA applied to commercial and residential tenancies, and because Mrs Osaki did not intend to damage the property, and cooking is not a criminal offence, the tenants were not liable. 

In this case the Landlord was largely unaffected because they were covered by their policy with AMI. Understandably insurance companies are not happy about the decision because it limits their right to pursue the tenant for damage to situations where the act was intentional or arose from an unlawful activity.

The effect of the Osaki case has gone beyond the parties involved. In a case before the Tenancy Tribunal the adjudicator found a tenant was not liable for damage caused by their dog – even though the tenancy agreement specified no pets were allowed! The adjudicator took a leaf out of the Osaki decision and said the damage to a rental property was due to carelessness, not deliberate or criminal behaviour, so the tenant did not have to pay for the damage - they were protected by the landlord’s insurance. 

That ruling has since been overturned by the District Court. The judge ruled the adjudicator was wrong to conclude that the damage was not intentional. The judge accepted the landlord’s view that the tenant’s actions were intentional and deliberate. 

While the District Court brought some sanity back to the interpretation of the Osaki case, it does show that when things get a little complex common sense gets lost. 

The Minister of Housing, Nick Smith, says the Osaki decision has caused him to look at an amendment to the RTA. 

He said, "The issue is tenant damage to a property through carelessness or negligence. The latest court rulings mean landlords cannot recover the costs of this damage where they have insurance, including for their costs such as the excess…My concern about this new interpretation is that it will add to the overall costs of the residential sector, driving up insurance costs and rents…However, we do not wish to return to the situation where tenants may be sued by their landlord's insurance company for hundreds of thousands of dollars, such as with an accidental house fire."

The Minister says he is considering a proposal where, "…tenants would be liable for damage caused by carelessness or negligence up to the value of their landlord's insurance excess but not exceeding four weeks' rent, which is aligned with the standard tenancy bond."

Let's hope Dr Smith is able to bring some clarity to this issue quicker and more effectively than the time it has taken him to introduce changes to the RMA!