Tenancy law reform is on the way. This shouldn’t come as a surprise to anyone. The Government has been talking about reforming tenancy law as part of its mission to address housing market problems since it took office last year. And there has been increasing agitation from tenants and their advocates about the rental market.

While the Government has been open about the type of tenancy reform proposals it is keen on, many landlords have been worried about exactly what form they might take. This uncertainty was exacerbated earlier this year with the release of tenant lobby group, Renters United’s manifesto to “fix renting” in New Zealand.

Now, the Government’s tenancy reform proposals are finally on the table in the form of a discussion document on reforming the Residential Tenancies Act (RTA). So what do the proposed changes mean for landlords? In this article, we take a look at the proposals, find out how they could impact on the rental market and discuss how landlords might start preparing for the future.

Reform Proposals

Driven by the goal of modernising the 30+ year old RTA, the Government is suggesting a sweeping overhaul of the legislation. The suite of suggested changes cover termination provisions, tenancy agreements, tenant and landlord obligations, the setting of rents, property modifications, pets and enforcement.

A number of the changes have garnered considerable attention. These include a proposal to limit rent increases to once a year and to put a stop to the practice of “rent bidding”. But for landlords it is some of the other proposals that are of most concern.

Changes to termination provisions are one of them. The Government wants to put an end to the ability of landlords to make use of “no cause” tenancy terminations. It also wants to increase the amount of notice a landlord must give tenants to terminate a tenancy (from 42 days to 90 days).

But, in order to deal with problem tenants, landlords will still be able to end tenancies where tenants are not meeting their obligations and other specific situations.

Also of particular interest to landlords are the proposals around tenancy agreements. The Government has long been keen on increasing security of tenure for tenants.

To this end, it is suggested that tenants should have the right to extend fixed-term tenancy agreements and that a minimum length should be specified for fixed-term agreements. Even more controversial is the proposal that all tenancies should be open-ended and only able to be terminated by landlords when certain criteria applies.

In line with the Government’s aim to enable tenants to better make their rental property a home, the planned reforms would give tenants greater leeway to keep pets and make minor alterations to the property.

Additionally, the Government wants to introduce further controls for boarding houses and to discuss whether the existing obligations for tenants and landlords remain fit for purpose. Public consultation on the proposed reforms is now underway. But it is expected that any changes to the RTA will not come into force until 2020.

Unintended Consequences

Property industry experts are warning the reforms are likely to have unintended consequences, chief among them an exodus of landlords from the rental market, and higher rents.

NZ Property Investors’ Federation (NZPIF) executive officer Andrew King says some of the changes proposed could result in landlords having less control of their rental properties. For him, the proposal to increase the tenancy termination notice period to 90 days in all circumstances, including the sale of a property, is a particular concern.

‘If landlords feel they have lost too much control over their properties, many will exit the rental market which will only make the existing shortage of rental properties worse’ ANDREW KING

“That change will mean problem tenancies are significantly harder to deal with. But it also makes it much harder to sell a property as the pool of buyers is diminished and the value of the property is potentially diminished.”

If landlords feel they have lost too much control over their properties, many will exit the rental market which will only make the existing shortage of rental properties worse, he says.

“Feedback from our members indicates not many are planning to sell because of these changes but lots are not planning to buy. And that’s a problem – we need people buying to replace the stock that goes from the rental market each year. We fear that stock won’t be replaced and the supply will decline further.”

It’s likely to be smaller investors with one or two properties who will get out because the costs and administration will be too much for them. But veteran landlord Peter Lewis says such investors make up a big part of the market so their departure will impact on the supply of low cost rental stock.

“Yet the demand will still be there. So rents will go up and you will have a lot more people turning up at Housing NZ wanting social housing and HNZ won’t be able to cater for that shortfall. The Government may end up back-pedalling on the proposed reforms when reality strikes.”

Not all industry experts see the proposals in black and white terms. Property Institute chief executive Ashley Church argues that New Zealand has changed, with home ownership statistics dropping dramatically over the last 30 years.

“Renting used to be a transitory thing, but now many people are renting for life. So their rental property should be able to be a home. We need to talk about what that means and how to address that change. As it stands, the RTA is not fit for purpose.”

He says that, on the face of it, many of the proposed reforms – like limiting rent increases and ending rent bidding - don’t seem unreasonable and shouldn’t lead to an increase in rents.

“The impact of enforcing a 90-day notice period in property sale situations and the pet provision do concern me, but the devil will be in the detail. It depends on how discussion over the proposed reforms goes and then how they are instituted and enforced in reality.”

Another issue that could arise from ending “no cause” terminations is that tenants are more likely to end up with a black mark on their tenancy record, Church adds. “Landlords will have to state reasons for ending the tenancy, which doesn’t happen now. That’s not a reality that will work in favour of tenants.”

Balance Needed

In recent years, tenants have become far more vocal in claiming their rights and the current Government is sympathetic to that. But the industry experts we spoke to do emphasise there needs to be a balanced approach to tenancy reform.

King says the current system can’t be replaced with a system that is completely biased towards tenants. “There are rights and obligations for both landlords and tenants and the law needs to recognise and work for both. If one or the other has preference the law won’t work, balance is needed.”

The fact that landlords are effectively handing over a valuable asset to people they don’t know is often overlooked. Likewise, these days there’s a lot of misinformation about landlords in circulation.

This is unhelpful, King says. “There’s actually a lot of common ground between landlords and tenants. So the proposed reforms need to be worked through properly – with balance, reason, and no preconceived ideas. That’s why we are focused on being part of the discussion on how to improve the rental industry.”

Assuming the proposed reforms become law, landlords will have to step up their due diligence on, and vetting of, tenants. But the relationship dynamic and communication expectations between landlords and tenants will have to change too.

Real-IQ director David Faulkner says while some landlords are jumping up and down about the looming changes, those who are good landlords should be okay.

“There will be more things they will have to do and more costs which they haven’t had before, but the sector needs to tidy up because the country is evolving. The rental system isn’t broken as tenant groups say, but it does need to be modernised. And tenants and landlords needs to think about how they can work together on that.”

Landlords will need to be prepared to be more tenant-friendly and talk to their tenants, he says. “From the start of the tenancy, they have to clearly set out their requirements and expectations. As in any relationship, communication is key and the parties involved need to be prepared to work together long term.”

Many landlords will be doing this already, in Church’s view. That’s because most are decent people who want what is best for their tenants, he says.

“But, as with tenants, there are some bad eggs out there and these proposals are due to those bad eggs. Good landlords should just keep on doing what they are doing. So they need to ensure they are reasonable and upfront, talk to their tenants, do due diligence when getting new tenants, and negotiate fairly.”

While the experts think the proposed reforms will be toned down over the parliamentary process, they all urge landlords to get involved in the discussion. Landlords need to make sure their voice is heard, Church says. “They have to do their best to ensure that balance is achieved and that it can then be maintained.”

Healthy Homes

Landlords are also now one step closer to knowing the minimum standards their rental properties will have to meet, under the Healthy Homes Guarantee Act, with the release of the Government’s proposals for them.

The standards will set minimum requirements for heating, insulation, ventilation, moisture and drainage, and draught stopping in rental properties. A new Government consultation paper suggests options for each category.

The paper addresses whether landlords should be required to provide heating in their properties and, if so, what type of heating and where.

Another set of proposals look at what an appropriate level of insulation is and how the condition of the insulation should be assessed.

There are also proposals around ensuring adequate air flow, better moisture regulation and what measures landlords should take to stop draughts.

Housing Minister Phil Twyford says these measures will help boost the quality of rental homes. “They can also improve the energy efficiency of homes, and reduce the costs to maintain and keep them warm and dry, benefitting both tenants and landlords.”

Consultation on the proposed minimum standards runs until October 22 and the regulations containing the Healthy Homes standards must be in place by July 1, 2019.

Alternative Suggestions

Part of achieving balance in the reform involves offering alternative suggestions – and the experts have many.

‘The rental system isn’t broken as tenant groups say, but it does need to be modernised’ DAVID FAULKNER

King says the problems caused by bad tenants have to be addressed. Around 80% of Tenancy Tribunal time is taken up with tenants not paying rent, so the NZPIF believes there needs to be stronger rules around rental payments to dissuade tenants from not paying.

“This could involve the ability to charge interest on outstanding rent, the ability to charge tenants’ credit cards or exemplary damages if they don’t pay their rent, and faster access to the Tribunal for rent arrears cases. We would also like to see changes which make tenants responsible for the damage they cause.”

Faulkner also thinks a different approach to rental arrears would be of benefit. “Once a tenant is 28 days in arrears the landlord should be able to automatically take repossession of the property without having to go to the Tribunal,” he says.

“If a tenant puts in a cross claim the case should then go to the Tribunal. But if it is solely a question of rent arrears it is black and white. Most Tribunal cases are about rent arrears so dealing with them in this way would free up the Tribunal adjudicators for other more complex cases.”

For Lewis, the introduction of another tenancy agreement option in the German style would give tenants greater security of tenure. Tenants could sign up to tenancies of five or ten years duration, but they would be responsible for payment of the property overheads (like rates and insurance cover) on top of rent, he says.

“At the start of the tenancy, they would fit out the interior of the property with their own fixtures and fittings. Then at the end of the tenancy they would remove it all and return the interior of the property to the condition it was on the day they started their tenancy.”

That would give tenants the ability to do such things as decorate their rental as and how they like and keep pets without any reference to their landlord. But they would also be obligated to take care of all internal repairs and maintenance.