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When A Nightmare Breaks The Property Dream

Selecting the right tenants and insurance can help investors avoid some of the more serious pitfalls, writes Emily Walton, a partner at Wynn Williams

By: Emily Walton

30 June 2022

An investment property can be a valuable part of your portfolio, but the property dream can quickly become a nightmare if you don’t find the right tenants or have the right insurance.

It goes without saying that you need to insure your rental property. Since the Canterbury earthquakes, most insurance policies have a set sum insured rather than providing full replacement up to an agreed floor area.

Online calculators can help with setting your sum insured. If you choose to use an online calculator, keep a record of it, as under some policies being able to produce this is a precondition to accessing additional policy benefits.

Obtaining a quantity surveyor’s rebuild cost estimate may well provide greater peace of mind, particularly given house building costs have increased over 20 per cent in the last year. It would be prudent to check your sum insured against the current environment, and if necessary increase it at your next policy renewal.

It also pays to shop around. Some insurers now offer full replacement for perils other than natural disaster, which is a positive, especially when build costs are rocketing.

Historically, landlords’ insurers could claim repair or rebuild costs from tenants who damaged a rental property, carelessly, deliberately, or illegally. In 2016, the Court of Appeal found that tenants are exonerated from liability for careless damage, but may be liable for deliberate damage or damage resulting from illegal activities.

Tenancies Act

The Residential Tenancies Act was amended in 2019. Now, if your tenant or their guest damages your rental, you will usually be able to claim the cost of repair or rebuild under your rental property policy. Your insurer won’t be able to bring a recovery claim against the tenant for the amount it pays out. Under the amended act you can claim four weeks rent or your insurance excess (whichever is lower) from the tenant if the damage was caused by the tenants’ carelessness. Prudent landlords may require tenants to have contents insurance which usually includes a liability extension that would meet this claim.

However, if you or your insurer can prove the damage was intentional or caused by illegal activities, you/your insurer can sue your tenant to recover the full repair or rebuild costs.

Meth contamination is damage caused by illegal activity and is a common scourge for landlords these days. Meth decontamination costs of up to $30,000 are available under many rental property insurance policies. However, cover is dependent on you complying with your “landlord’s obligations” under the policy, so it is really important you and your property manager understand what’s required.

This typically includes:

  1. Exercising reasonable care in selecting tenants, obtaining references for each adult tenant and checking their credit and Tenancy Tribunal history where appropriate. Keeping a record of the pre-tenancy checks undertaken.
  2. Completing an internal and external inspection of the rental house at a minimum of three-monthly intervals and on every change of tenant. Keep photographs and a written record of each inspection.
  3. Apply to the Tenancy Tribunal for vacant possession of the property if the rent is 21 days in arrears if you become aware of any illegal activity by the occupants or if any deliberate damage is caused to the rental by an occupant.

Call To Test

If you suspect meth is being smoked or manufactured in your rental, you should get it tested. You need to give your tenant between 48 hours and 14 days’ notice that you require access to test for meth. Many insurers have approved testing providers, so it’s advisable to use one of these. The cost of testing is usually covered if the test is positive.

If the test shows levels higher than 1.5μg/100 cm2 you can lodge a claim with your insurer and work with them to arrange decontamination. Your insurer can then seek to recover the decontamination costs from your tenant. Usually this is only worthwhile if your tenant has means to pay because their contents insurance won’t cover claims arising out of illegal activity. You may also be able to claim exemplary damages of $1,800 from the tenant for the meth contamination.

Taking the right steps to protect yourself is the best way to ensure a positive property investment experience.

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