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Hosting Airbnb at rentals deem a breach of RTA

Tuesday, March 07, 2017

Airbnb is one of those Eureka! ideas that make you kick yourself for not having thought of it first.  It makes complete sense, why have a spare room sitting around doing nothing when you can make a good side income out of it?  After all, we live in a sharing economy that is increasingly divorced from traditional economic models and embraces social entrepreneurship.  And in that spirit, we cannot fault tenants for hosting Airbnb guests in rental properties especially if these arrangements put tenants in a more advantageous financial position to service the rent.  That said, it is worth taking pause and consider the impact on you as a landlord when your property is being used as an Airbnb.  The recent Tribunal order* concerning the legality of Airbnb sublet serves to illustrate some of the issues: 

THE FACTS

The case concerns a fully furnished Wellington rental property that was leased out to the tenants by Nice Place Property Management Limited (NPPM) on a fixed term tenancy (4 months).  The tenancy agreement ("the Agreement") expressly prohibits the tenants from subletting or assigning the tenancy without the landlords' written consent.  After having purchased their own property, the tenants requested and was denied, early termination (by a month).  To alleviate the financial burden of servicing both the mortgage and the rent, the tenants leased the entire property (including chattels) to Airbnb guests without the landlord's knowledge nor permission.  The Airbnb guests had sole and exclusive use of the property during their stay all the while the tenants continued to pay the rent to the landlord.  

THE ISSUES

With respect to the matter of the rental property being used as an Airbnb, the adjudicator considered the following issues: 

  • Were the tenants subleasing the property?
  • If so, was it a breach of the Act or the Tenancy Agreement?
  • If so, what loss has the landlord suffered? 
  • ...[W]hat compensation should be payable?
  • ...[S]hould exemplary damages be awarded? 
THE LAW
  • Section 44 of the Residential Tenancies Act ("the Act") provides that a tenant may sublet and assign a property unless expressly prohibited.  
  • Clause 8 of the Agreement specifically provides that "The tenant shall not assign or sublet the tenancy without the landlord's written consent." 
THE ANALYSIS

1. Were the tenants subleasing the property? 

In arriving at the affirmative, the adjudicator looked at various dictionary definitions of 'sublease' as well as the Tribunal decision of Wilkie v Stevens DC may 1993 and concludes the following elements as sufficient to satisfy the definite of subleasing: 

  • That the tenant accommodated people in the Property they were renting, and 
  • Received consideration by way of rent for the accommodation arrangement; and 
  • Their 'guests' had exclusive use of the property; and
  • The tenants were still liable under the Tenancy Agreement while those guests were staying at the property.  
It is worth noting that there the wording of the order would suggest a different determination if the tenant only uses part of the property (e.g. one room), as opposed to the whole, to host Airbnb guests. 

2. Was the subleasing of the property through Airbnb a breach of the Act or the Tenancy Agreement? 

Yes.  The adjudicator was satisfied that Clause 8 of the Agreement constitutes a specific prohibition to sublease the property without the landlord's permission for the purpose of s44(1) of the Act.  

3. What loss has the landlord suffered? 

The landlord purported to have suffered loss in several ways, though the order focuses on that of mental distress.  In scoping the level of distress suffered, the adjudicator relied heavily on the owners' impact statement.  The statement contains several elements of interest: 

  • The anxiety and distressed caused by having the property leased out to parties unknown to the owner as well as downstream security concerns;
  • Potential of the owner's insurance coverage being voided as Airbnb falls outside the scope of a normal rental insurance policy;  
  • Damages to the property which took some days for the landlords to restore back to original condition; 
  • The disruptions to the landlords' plans upon discovery of the property being used as Airbnb (including early termination which they had previously and rightly declined as well as disruption to travel schedules) 
4. What compensation should be payable? 

The landlord submitted that the compensation should be the income the tenants received from Airbnb.  The adjudicator chose instead to focus on the impact of the breach and was quick to point out that mental distress is an intangible loss which cannot be definitively quantified by monetary compensation.  He referred instead to the general banding used for fair and objective measures: 

  • $100-450 for breaches at the lower end of the scale constituting nothing lost in monetary terms but the party may still have had to put up with the inconvenience, annoyance, frustration or disappointment caused by the breach; 
  • $450-$1,000 for breaches that intrude further into the party's life putting the party under greater degree of inconvenience and the mental distress will have probably increased to worry, stress, tension or anxiety; 
  • $1,000-$2,000 for major breaches at the higher end of the scale where the party may have experienced all or some hardship, insecurity, humiliation, intimidation, aggravation and fear.

In referencing the general banding, the adjudicated determined that compensation in this instance should be $1,000 to the landlord.  

5. Should exemplary damage be awarded? 

Subleasing when it is expressly prohibited is an unlawful act by virtue of s44(2A) of the Act to which exemplary damages (of up to $1,000) could be awarded against the tenant.  In this case, the landlord had applied for it.  The adjudicator reiterates in the order that the purpose of exemplary damage is for deterrence rather than for compensation for loss suffered.  He considers that an exemplary damage must be awarded in this instance for the following reasons: 

  • That the tenants deliberately and intentionally hosted Airbnb guests at the rental property contrary to the Agreement; 
  • That information is readily available online advising tenants to not use rental properties as Airbnbs without the permission of their landlords; 
  • That the tenants had not consulted the landlord before using the property as Airbnb; and
  • That it is reasonable to assume a landlord would not approve of a furnished property being used as Airbnb.

However, the appropriate amount of exemplary damages arrived at was insignificant ($300) because of the following mitigating factors:

  • That the tenants had shown genuine remorse; 
  • That the tenants had not previously committed a tenancy offense;
  • That the tenants had ceased all Airbnb activities immediately upon discovering the breach; 
  • That the breach is largely a result of ignorance of the law and its interaction with the Agreement rather than an intentional act (note subtly between intentionally breaching the Agreement vs intentionally using the rental as Airbnb); and
  • That the tenants are unlikely to re-offend 

RESPONSE 

NPPM is understandably critical of the quantum of exemplary damage.  Director Keith Powell has been quoted as saying, "If tenants are knowingly putting the accommodation in the hands of groups that have not signed the Tenancy Agreement, and making a profit, then I don’t think a $300 fine is going to stop anyone."

CASE OBSERVATIONS

Some salient points that are helpful for landlords going forward: 

Airbnb

  1. Be wary of the increasing popularity of Airbnb and that the service does not prohibit tenants from using rental properties to host guests; 
  2. Until tested, it is inconclusive at this stage whether hosting a part of the, rather than the whole, property is considered as subletting for the purpose of s44; 
  3. There could be serious insurance implications for landlords, especially in the post-Holler era, for the rental property to be sublet out to third parties through services such as Airbnb; 
  4. Even if you had given consent for your tenant to host Airbnb guests using your property, you should always ask to review specific hosting terms/rules especially if the property is also under body corporate rules; 
  5. If you give your consent to an Airbnb sublet then it would be wise to have your consent and attached terms and conditions recorded in writing as a variation of your tenancy agreement.  
Tribunal application techniques

  1. In cases where an unlawful act has been committed, the landlord would be ill-advised to not apply for exemplary damage on top of compensation; and 
  2. Impact statements are instructive especially in cases where the nature of loss cannot be definitively quantified. 

 

* The redacted copy of the order has been kindly supplied by Nice Place Property Management Limited, a party to the dispute, with the proviso that parties' names are not made public until such time that the order is archived on Tenancy Tribunal database.  In any event, specific names are not material to this commentary.   


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