Report: Residential Tenancies Act 2010

01/03/2012

The Residential Tenancies Act 2010 (the Act) commenced on January 31st 2011. It has now been in operation for a little over a year, and it is timely to consider what is working, and what needs to be improved.

The Tenants’ Union of NSW is the peak body representing the interests of tenants in New South Wales. We are a resourcing body for the statewide network of Tenants Advice and Advocacy Services (TAASs), and a Community Legal Centre with a specialist legal practice in residential tenancy law.

This report reflects our own experiences with the Act, and the experiences of advocates in the TAASs, who last year provided in total more than 32,000 individual advice and advocacy services to tenants.

Summary of comments

The Act has not effected a significant rebalancing of the landlord-tenant relationship. However, it is, generally speaking, an improvement on the Residential Tenancies Act 1987. It improves on the 1987 Act in three respects:

It provides solutions to problems that were not addressed by the 1987 Act: in particular, through new provisions relating to domestic violence, co-tenancies, and residential tenancy databases.
It provides fairer solutions than the 1987 Act to a number of incidental problems in tenancy law and practice: for example, the new provisions about termination by tenants after receiving a termination notice, and during fixed terms.
It is more user-friendly, and written in plainer English than the 1987 Act. However, there are still some problems with navigation, as not all relevant remedies are found where they might be expected.

Not all aspects of the Act, however, are an improvement on the 1987 Act, and a number of its new provisions present problems. In particular:

The changed provisions in relation to landlords’ termination notices without grounds undermine tenants’ rights and appear to have given rise to disturbing new practices.
Last-minute changes to the new provisions in relation to termination proceedings on grounds of rent arrears and ‘break fees’ have undermined the provisions.

Of these problems, the problem of landlords’ termination notices without grounds is the most fundamental. It ensures that tenants nearly always consider the prospect of exercising their legal rights with utmost caution, and is in direct contrast to the idea of achieving a genuine balance between landlords and tenants.

General comment on tenancy law reform: the question of ‘balance’.

Tenancy law reform is often addressed as a question of ‘balancing’ the interests of landlords and tenants.

When considering this question, it must be remembered that landlords and tenants participate in the housing system in very different ways. From the outset, a structural imbalance exists, to the advantage of landlords over tenants.

A tenancy does not operate on a level playing field. When entering into a residential tenancy agreement, a landlord and tenant do not bargain as equals. Landlords offer tenancies on a ‘take it or leave it’ basis, and will check up on a prospective tenant’s credentials before offering a tenancy. Tenants, by contrast, have no sound way of looking into the background of a potential new landlord – and even if they did, most would not be in a position to use it to vet landlords.

Once a tenancy is established, landlords feel little need to compete with other landlords. Tenants, on the other hand, are not in a position to ‘take their business elsewhere’, because moving is almost always both costly and disruptive. A landlord may threaten to end a tenancy if it suits them. Tenants are unable to do likewise, other than at their own significant expense.

Striking a balance between landlords and tenants, then, must always involve the consolidation of legal rights and protections for tenants.

It provides solutions to problems that were not addressed by the 1987 Act: in particular, through new provisions relating to domestic violence, co-tenancies, and residential tenancy databases.
It provides fairer solutions than the 1987 Act to a number of incidental problems in tenancy law and practice: for example, the new provisions about termination by tenants after receiving a termination notice, and during fixed terms.
It is more user-friendly, and written in plainer English than the 1987 Act. However, there are still some problems with navigation, as not all relevant remedies are found where they might be expected.

Not all aspects of the Act, however, are an improvement on the 1987 Act, and a number of its new provisions present problems. In particular:

The changed provisions in relation to landlords’ termination notices without grounds undermine tenants’ rights and appear to have given rise to disturbing new practices.
Last-minute changes to the new provisions in relation to termination proceedings on grounds of rent arrears and ‘break fees’ have undermined the provisions.

What’s working

The Act includes some innovations that are working well.

Tenant may vacate before date required in termination notice

Section 110 of the Act enables a tenant to return the property to the landlord just as soon as a notice of termination has been issued. Where a tenant has given notice to the landlord, or where the landlord has terminated the tenancy at the end of a fixed term-agreement, the tenant’s liability to pay rent remains until the date required in the termination notice. But, when a landlord gives notice to end a periodic tenancy, the tenant is no longer liable to pay rent once the property is returned to the landlord.

This is appropriate, as it aids in achieving balance. It serves two useful functions.

Tenants are able to commence relocation as soon as a new property becomes available to them, without having to balance two lots of rent for any period of time.
Landlords are likely to recover possession in a more timely way, because the removal of the ‘double-up’ rent burden means tenants are less likely to overstay notices of termination due to difficulties in securing a new tenancy.

Termination of fixed-term agreements

Section 100 of the Act recognises that, from time to time, tenants will need to end a tenancy during a fixed-term.

If a tenant accepts accommodation from a social housing provider or requires a place in an aged care facility during a fixed-term tenancy, they may end their agreement by giving 14 days notice to the landlord. Their remaining liability will be limited to that notice period.

This scheme is working extremely well; relieving those affected tenants of a significant financial burden at a time of transition into what should be an affordable and/or supportive housing environment. It also means that those on waiting lists for social housing or aged care facilities no longer hesitate to enter into fixed-term tenancies.

It works so well that the scheme should be extended to apply to periodic tenancies as well. Tenants who continue on after a fixed-term has expired must give 21 days notice to end their tenancy without grounds.

Section 100 also allows a tenant to give 14 days notice, and end the tenancy, if the landlord decides to sell the property during the fixed-term – provided the sale was not contemplated or discussed at the commencement of the tenancy. This is a welcome improvement to the law, and we understand that tenants are very pleased with this change. Landlords may still, of course, make decisions about the sale of their property at any time. But, just as a landlord may review their commitment to a residential tenancy agreement and opt for sale during the fixed-term, tenants may now also choose whether to stay or go when the landlord starts making preparations for sale.

Payment of water usage costs

Under the 1987 Act, bond disputes at the end of a tenancy often included a claim for water arrears, and the law did little to assist parties in finding solutions. Section 39 of the Act now provides a clear set of guidelines around how and when water usage charges may be claimed. Disputes are now more easily resolved, if not avoided.

But one provision in section 39 has not been in effect over the Act’s first year in operation. The provision at section 39(1)(b) requires landlords to fit properties with “water efficiency measures” (as prescribed in clause 11 of theResidential Tenancies Regulation 2010) before water usage costs can be claimed. Many properties required retro-fitting in order to comply with these measures, so the provision was given a 12-month lead-in time. It has now commenced, and we will be monitoring its impact to see what affect, if any, it has on the nature of disputes about water usage charges.

Fee-free rent payment method

Section 35 of the Act requires landlords to give tenants a method of paying the rent for which they incur no cost. The 1987 Act had no such requirement, and many tenants were given only one option – pay rent using a collection company, who would charge tenants a fee on each occasion that a rent payment was made. The restriction of this practice is most welcome.

In response, however, some real estate agents are requiring tenants to enter into “authority to debit” arrangements, wherein they gain direct access to the tenant’s bank account. Such arrangements are prone to misuse, and should be prohibited.

Landlord accountability

Section 27 of the Act requires landlords to provide contact details to their tenants, regardless of whether a real estate agent is engaged. This is useful in resolving disagreements between tenants and real estate agents, particularly where the agent is acting without specific instructions from the landlord.

What’s not working

There are a number of provisions in the Act that are presenting difficulties.

Landlords’ termination notices without grounds

Section 85 of the Act allows landlords to end tenancies without grounds, and specifies that the Tribunal must make an order terminating the tenancy if the tenant overstays the relevant notice of termination. Unlike under the equivalent provisions of the 1987 Act, the circumstances of the case can now be considered only in determining when possession is to be returned, not whether the tenancy is to be terminated at all.

Under the 1987 Act, 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 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 they 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.

This is no longer possible. Tenants are no longer entitled to raise the circumstances of the case before the Tribunal, and landlords can give a termination notice without the need to disclose a reason, or take into account the circumstances of those who have made the property their home.

We have already referred to the implications of this change on the balance between landlords and tenants. “Without grounds” termination notices are now effectively a trump card held by landlords.

The TAASs report that ‘without grounds’ termination notices seem to be used more widely now than they were under the old Act: in an increasing number of cases, these termination notices have been given in conjunction with breach termination notices, and in two cases a rent increase notice. They are now also used more frequently by community housing organisations. Previously, these social housing landlords rarely resorted to “without grounds” termination notices; since the change, we are aware of five social housing landlords who have routinely used them, or have used them on more than one occasion. There are likely to be instances that we are not aware of, where the tenant did not seek advice but accepted termination as a fait accompli.

We note that the notice period for a “without grounds” termination notice is now longer (90 days, compared with 60 days under the 1987 Act). It appears to us that the longer notice period has not deterred landlords from using this form of termination notice.

Landlords should be able to give termination notices with reasonable grounds only. As a first step towards this, we propose that the Act be amended to include certain new reasonable grounds for termination, specifically:

where the landlord or a family member needs the premises for their own housing;
where the premises are to be demolished, converted to a non-residential use, or renovated such that vacant possession is required;
where the tenancy is related to a contract of employment and the employment is terminated.

These reasonable grounds for termination would be in addition to those already in the Act (specifically: breach, sale, frustration and death of a sole tenant). For the moment, provision for “without grounds” termination notices may be retained, but with a long notice period (six months), to encourage the use of termination notices with grounds. Later, as a second step, the provision for “without grounds” termination notices could be repealed altogether.

‘Pay and stay’: termination for rent arrears

Section 89 of the Act protects tenants from eviction in circumstances where they have fallen into arrears, but may pay those arrears and bring the rent back up to date. If a tenant pays their arrears, or enters into an agreed payment plan, before they are properly evicted, then any termination proceedings are to cease, or termination and possession orders made to have no effect.

On the face of it, this is an excellent innovation, as it resolves an impasse often encountered under the 1987 Act: that is, where the tenant wanted an assurance that the tenancy would continue before they paid the arrears, and the landlord wanted to see the tenant’s money before giving any such assurance. By giving the assurance that if a tenant pays, they can stay, the provision means that rent arrears matters can usually be resolved without ending tenancies.

However, a rushed amendment was made to this provision, in response to a concern that tenants could abuse it by paying only at the eleventh hour in order to vex their landlords. So, section 89(5) was added to allow that terminations may occur, notwithstanding a tenant’s payment of arrears, if the tenant has “frequently failed to pay rent owing”.

The amendment was unnecessary from the outset. The anticipated problem – that rent might only ever be paid “on the steps of courthouse” – can be dealt with without reference to section 89(5). Where the Tribunal makes a termination order under section 83 of the Act, it must also make an order specifying the day on which vacant possession is to be returned to the landlord. If satisfied that a tenant’s reasons for rent arrears are disingenuous, the Tribunal may order vacant possession to be returned immediately. Such orders, coupled with prompt enforcement action from the landlord, drastically diminish the likelihood of tenants “gaming the system”.

But the amendment has created greater problems than the one it was intended to avoid.

It is sufficiently vague to ensure that no tenant can ever be assured their tenancy will not be terminated, despite the full payment of arrears. The ‘pay and stay’ principle, which was to the mutual advantage of tenants and landlords, is undermined.
The use of the phrase “frequently failed to pay rent owing” has resulted in old instances of arrears, which had been settled and put behind the parties, being reopened for dispute – rather than the focus being on the present incident of arrears and the question of whether the tenant is deliberately or vexatiously withholding rent.
There have been instances of tenants paying arrears after Tribunal orders have been made, only to have the landlord pursue the eviction anyway – despite their obligation to notify the Tribunal and/or the Sheriff, at subsection 89(4). The Tribunal has taken the view that until an eviction has occurred, a landlord is not in breach of the residential tenancy agreement, and thus tenants face procedural difficulties in taking proactive action to prevent the eviction.

Section 89(5) should be repealed. It follows that section 89(6) – a provision that has no bearing on the Act other than in relation to section 89(5) – should also be repealed.

Break fee on abandonment

Section 107 of the Act provides that a tenant who abandons a tenancy is liable to compensate the landlord for their loss, including loss of rent. This liability is qualified by an obligation on the landlord to mitigate their loss (s 107(2)). It may also be limited to the amount of a so-called ‘break fee’ (equivalent to either four or six weeks rent, depending on what’s left of the fixed term). This limitation applies only where the tenancy agreement provides for the break fee (as an additional term),

This is different to the break fee scheme that was initially proposed in the consultation draft of the Residential Tenancies Bill 2009. In the draft Bill, the break fee was not an optional, additional term; it fixed the liability of a tenant who breached their agreement by terminating it early. The question of mitigation (and what the landlord should or should not have done in response to the breach) would have been irrelevant, and all parties would have certainty.

We understand that the scheme was redrafted in response to concerns from landlords who did not believe tenants should be able to so easily “break a lease”. In reaching a compromise, the then Minister for Fair Trading opted both to retain the old scheme of “compensation for costs arising” from the 1987 Act, and to provide for a new scheme of fixed “break fees”, leaving it up to parties to choose between the two when entering into a tenancy agreement.

But the new Act does not appear to have achieved this simple division. We note the confusion caused by subsection 107(2) – a requirement for landlords to mitigate loss – and subsection 107(3) – which limits any compensation payable to the break fee, if agreed. One common response to this confusion is for landlords to word their agreements in a manner that would incorporate both schemes at once.

In our submissions regarding the draft bill, the Tenants Union of NSW expressed support for the idea of a fixed break fee (albeit at a lower rate than the proposed four or six weeks), rather than the old, complicated scheme of compensation for loss subject to mitigation. We remain of this view.

Share housing

Section 10 of the Act takes share housing occupants out of the Act’s coverage. These occupants are therefore not tenants, but they are not protected under any other laws, either. Urgent reform of the marginal rental sector, including a regime for “occupancy principles”, such as is set out in the Residential Tenancies Amendment (Occupancy Agreements) Bill 2011, is needed to ensure these and many other occupants in marginal rental accommodation are not left out in the cold.

Terminations with suspended possession orders

Section 114 of the Act allows the Tribunal to suspend a vacant possession order when making termination orders. This means that tenants can remain in possession of premises, often in an uncomfortable relationship with the landlord, without the protection of a residential tenancy agreement. It is unclear, in such circumstances, what the legal rights obligations of each party would be.

This issue also occurred under the 1987 Act, but it is particularly highlighted in the new Act by the requirement for possession orders to be suspended for 90 days when the Tribunal terminates long-term tenancies (that is, tenancies that have run for 20 years or longer). Orders for termination and possession should, where possible, have contemporaneous effect. Allowing for the suspension of termination orders, instead of orders for possession, should resolve this.

Bugs and glitches

Some minor corrections to the following provisions will improve the Act.

Section 9 – the Act applies to agreements where the exchange of consideration is work for the right to occupy, as a component of the wage or salary. It is not clear that it applies to agreements where the right to occupy is conditional on an employment agreement, but where other consideration (rent) is paid.

Section 62 – the ‘urgent repairs’ definition should be reworded to make clear that sub-tenants may use the urgent repair provisions.

Section 89 – creates a potential issue with recovery of bond money. Where an order for payment of bond is made along with an order for termination. Problems arise when a tenant pays arrears and the termination orders become ineffective, but the bond has already been released to the landlord.

Section 89(5) – does not operate well with sections 89(2) or 89(3). It presents an issue of procedural fairness for tenants, who may be unaware that their landlord intends to terminate their tenancy on the basis of “frequently failing to pay rent” and thus not equipped to respond; and by allowing for termination orders to be made even in circumstances where such orders are of no effect, it does not operate in a logical way.

Section 95 – operates in too narrow a way. The provision only works when a residential tenancy agreement has been terminated, but in many cases this will not have occurred because vacant possession will not have been returned to the landlord.

Section 110 – 14 days notice of termination for the grounds set out in this section should also apply to periodic agreements.

Section 111 – deals with the question of whether a notice of termination was “given in accordance with the Act”. This could be read narrowly to refer only to the manner in which the notice is served, and not to defects in the notice itself. Note that the provision at section 113 refers to defects in both the notice and the manner of service.

Section 209 – the definition of “out of date” does not properly accommodate situations where a tenancy has been terminated for a debt that is less than the bond.

Section 216 – a penalty should apply where a database operator contravenes subsection 216(3), by receiving an excessive fee in exchange for personal information.

Section 217 – a tenant may not apply to the Tribunal for orders about a proposed listing. They must wait until the listing has actually occurred. Additionally, the Tribunal may not order the removal of a listing that has expired, as per the provisions at section 218.

Residential Tenancies Regulation 2010 clause 19 – “life tenancy” confuses freehold life estates and tenancies for the term of a life. The result is that tenancies for term of a life are left to 1899 Act. So too are tenancies given by life tenants – but not sub-tenancies.