Tuesday, May 22, 2012

A year of living dangerously: part 3


Over the last few months we've been reviewing the Residential Tenancies Act 2010, since it has now been in operation for a little over a year.*

In part 1 of our discussion, we talked about the need for strong renting laws. We noted that our new law hasn't radically altered the nature of a tenancy, or substantially changed the relationship between landlords and tenants. It was really just a much-needed tidy up of the old law (the Residential Tenancies Act 1987 - now repealed).

In part 2, we spent a few moments talking about some of the good things to come out of the new law. We observed that our two favourite changes are only useful when tenancies are coming to an end.

Now it's time for part 3, wherein we let fly at some of the more frustrating parts of the new law...


 What's not to like?

There are three things in the new Residential Tenancies Act that are posing major problems for tenants.


1. Tenants in rent arrears can 'pay and stay' - or can they?

A fantastic new initiative could have ensured that tenants who fall into arrears - for whatever reason - could be assured of saving their tenancy by paying up, or entering into a payment plan to pay up over time. Under the new law, payment of arrears can put a stop to a landlord's Tribunal application for termination orders, and can render a vacant possession order (or even a warrant for possession) ineffective. Unfortunately, there's a catch...

There's a catch because landlords and the Real Estate Institute of NSW made a big fuss about this initiative while the laws were being drafted. According to its critics, the provision would have tempted too many tenants to hold out on paying rent until the eleventh hour - or encouraged a 'payment on the courthouse steps' mentality. The provisions were amended before the law was passed.

As it now stands, tenants who pay their arrears can put a stop to their landlords attempts to evict them - but only if they have not "frequently failed to pay rent owing". Now, this might seem reasonable at first glance, given that it is intended to stop an anticipated flood of tenants taking advantage of the law by refusing to pay their rent on time... but on closer inspection, it's a real mess.

The problem is that there's no easy way to decide what "frequently failed to pay" means. Tenants want it to mean one thing, and landlords want it to mean another. Given that it's landlords taking tenants to the Tribunal over rent arrears, what landlords want it to mean is kind of important, even if they turn out to be wrong...

In order to explain this, we need to go back to the value that this initiative provides - the certainty of outcomes, for all concerned, in rent arrears disputes. Tenants don't want to pay arrears when they are faced with eviction - they'd rather hang onto whatever money they have available, because moving house is expensive. Of course, arrears do have to be paid at some point, but handing over a lump sum while you're on your way to start up a new tenancy is usually not the preferred option. Landlords, on the other hand, are reticent to cease hostilities and allow tenancies to continue without some show of liquidity from the tenant. Indeed, even then, many landlords would rather take the money and end the tenancy anyway, because they might think a tenant who falls into arrears every once in awhile is a little too 'risky'.

The 'pay and stay' provisions should have cut through all of this, by taking the decision out of everybody's hands. Payment of rent means continuation of tenancy. Simple.

But instead, we're right back to where we started. Tenants who are in arrears can't be sure that they haven't "frequently failed to pay rent owing", so they're not always inclined to pay once eviction proceedings are underway. Landlords, for their part, are pursuing evictions even after arrears have been paid.

But it gets worse - under the old law, arrears that had long since been settled were off limits for landlords, because you can't get a fix for a breach that has already been remedied. Under the new law, landlords are arguing that the words "frequently failed to pay rent owing" enables them to bring up old instances of arrears as a means to terminate a tenancy for minor arrears in the present. This is hardly in keeping with the principle of 'pay and stay'.

2. Tenants can end a tenancy early and pay a fixed 'break-fee' - or can they?

Similarly, the landlord and real estate lobby ran interference on a provision that would have given tenants some certainty as to their costs when ending a fixed-term tenancy early.

When tenants broke a tenancy agreement under the old law, landlords were entitled to compensation for their loss of guaranteed rental income (up until the end of the lease, or a new tenant was found, whichever was the earlier), as well as any unavoidable cost associated with reletting the property. This presented two problems for tenants.

The first was a commonly held misconception, particular to landlords and real estate agents, that covering temporary rental losses meant a tenant must continue to pay the rent until a new tenant was found, even after they'd vacated the property. The reality is that landlords (or anyone, for that matter) can only recover a loss once it has crystallised - that is, once they had relet the property and could firmly establish how much they were out of pocket.

The second problem was that, in order to avoid paying for losses that a landlord was not entitled to recover, tenants would have to play amateur detective – scrutinising the landlord’s every move to ensure they were reletting the property as quickly and cost-effectively as they could. Such situations rarely end without a dispute over the tenant's liabilities.

The proposed solution – a fixed ‘break-fee’ on abandonment – was a sensible trade-off. It would afford tenants certainty of their costs when breaking a lease. At four- or six- weeks rent, the fee would no doubt result in a windfall for landlords, who could easily rent their properties out again within that time. The Tenants’ Union has expressed reservations about the level at which the break fee has been set, but, in principle, the idea of a fixed break-fee on abandonment has some merit.

The break-fee solution did not make it into the new law in place of the old scheme, because it was seen to undermine the sanctity of contract. Landlords just could not fathom how a tenant should be "allowed" to break a legally binding residential tenancy agreement. It didn't seem to matter that this provision was intended to deal with the consequences of a broken agreement, not to enable or encourage tenancy agreements to be disregarded.


Instead, both schemes were included. The apparent intention of allowing landlords to choose between one scheme and the other does not appear to have been realised – at least not without complications. This means even less certainty, and more complex litigation for tenants who need to end a tenancy before their fixed-term is up.


3. Landlords can end tenancies without a reason, and without regard to the circumstances of the case.

Under the old law, a tenant who had received a “without grounds” notice of termination could make a case in the Tribunal that their tenancy should not be terminated. In such matters, the Tribunal was bound to consider the circumstance of the case – weighing up things like the age and health of the tenant, with the needs of the landlord to recover the property.

The rationale for this was explained in the seminal case of Roads and Traffic Authority v Joy Swain and Terrence Gold and Residential Tenancy Tribunal of New South Wales [1997] NSWSC 181: in the interests of balance, the Tribunal should weigh up the potential hardship of both the tenant and the landlord before proceeding to make orders. It was also suggested that a landlord should not use a “no grounds” notice when another, more appropriate notice could be used instead.

In practice, the Tribunal rarely declined to terminate a tenancy on the basis of a “circumstances of the case” argument. But the mere fact that such arguments could be raised had two positive effects for tenants:

    •    It probably discouraged some landlords from commencing termination proceedings that were motivated for bad reasons (for example, retaliation or discrimination), because of the prospect of these motives being uncovered by the Tribunal in its examination of the circumstances of the case.

    •    Where landlords did use “no-grounds” notices of termination, and tenants facing genuine hardship or circumstances that would make it difficult to relocate, the ability to raise those circumstances in the Tribunal would often lead to sensible agreements – sometimes by way of resolving issues and allowing the tenancy to continue, and other times negotiating extra time or obtaining assistance for the tenant to relocate.

Under the new law, a notice of termination without grounds is impossible to challenge. The Tribunal's discretion to consider the circumstances of the case has been removed, and landlords are using no-grounds notices with impunity. They are using them in different ways than under the old law, too... often combining them with some other notice, as they do offer a solid back-stop in case the tenant is able to defeat the alternative.

This is the single most disappointing change from the old law to the new. We say that the rights of landlords and tenants have not been significantly altered by the introduction of the Residential Tenancies Act 2010, but the relative strength of each party within the relationship has changed. By giving landlords the ultimate last word on everything (which is what a termination-without-grounds that can't be challenged really is), tenants are forced to consider exercising their legal rights with extreme caution.


*The Tenants' Union of NSW has recently released a report on the Residential Tenancies Act 2010. You can find it here.

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