Osaki sucks for Landlords

This Osaki case is no end of trouble.  If you've not heard of it, if you are a landlord you probably soon will.  The Osaki's burnt down the rental property they lived in when they left an unattended pot of oil on the stove.  They didn't have insurance cover themselves.  They then refused to be held responsible for their careless negligence, stating they should have advantage of the landlords insurance cover.  The landlords insurance company took them to court, and, unbelievably and against all understanding of all that is fair and right in the world, lost.

I think however there have been a few assumptions made in the decision which need to be addressed, and also there is a huge gap that the Tribunal has not recognised.

First the assumptions.  Reading the Court of Appeal decision, paragraph 36 states that the tenants effectively pay the insurance premium for residential landlords through rent.  I guess the judge in this case had never heard of negative gearing?  Or thinks all landlords live off the proceeds of rent and don’t have other jobs which keep everything afloat.  For investors like me who realise some years will be losses and some will be profits, I am often forking out in the loss years to cover expenses.  All sorts of things can change, such as Government policy changing deductibles (e.g. loss of depreciation), increases in expenses like rates, insurance or interest rates; or doing a lot of maintenance like painting.  It’s pretty hard to say with conviction that the insurance premium is always covered by the rent, even if nothing else is.

In Paragraph 53 they say that the cost of insurance is factored into market rent.  Umm, I’m pretty sure I’ve never heard a residential tenant offer rent for a property based on the landlords outgoings.  Rather, it’s determined by what the landlord next door is charging – and they may choose not to have insurance, and may have owned the property for 50 years, so are not worried about their mortgage repayments or insurance premiums, unlike their neighbour.   The decision then goes on to say that if the premises doesn’t attract a sufficient return then it will not be on the residential tenancy market.  Yep, property is such a liquid asset.  Oh wait, no it isn’t.  But the landlord who can’t get enough rent to cover their outgoings can always sell it at a profit to cover their debts on the property, can’t they.  Oh wait, that also is not always the case.  If it were, developers would never go broke.  So what are they thinking of here?

Landlords certainly suffer because of a lot of assumptions.

The huge gap in the decision now:

The Osaki case talks about insured peril, like fire and flood.  As far as I’m aware all insurance policies cover fire, it’s the mainstay of policies, which is why the Osaki’s had the benefit of the landlords insurance cover, as they had cover for that peril of fire.  I am yet to see a peril identified in an insurance policy as ‘4 year old spilling drink on the carpet and nobody bothering to clean it up’.  I am yet to get clarification on the definition of ‘insured peril’, and I think it is particularly relevant for most landlords who suffer losses from careless and negligent tenants.  While I’m not keen to see long lists of what is and isn’t included in a policy, I’d like a peril to be a bit more defined than ‘accidental damage’.

As for the excess, I note commercial leases, which are based on the Property Law Act, of which the Osaki decision draws, require tenants to pay the insurance excess, as this is the amount that the landlord is not insured.  As Housing New Zealand is not insured, they can pursue their tenants for the entire cost of damage, all landlords should be able to claim the excess on their insurance policy as an amount they don’t have insurance for.  I don’t see what the difference is between having no cover whatsoever, and having cover for amounts over the excess eg $550 of damage.  The first $550 in either case should be the tenants cost to bear.

The Osaki decision also makes reference to Acts of Parliament correcting judge made law.  When will we see an amendment to the Residential Tenancies Act to correct this particular judge made law?

It is costing the insurance industry and landlords millions of dollars and there is no personal responsibility by tenants for careless or unintentional damage anymore, no matter how sever.

I welcome your comments on this post, and urge you to discuss it with your MP.