‘Rent to buy’ dangers highlighted

Housing Minister Steve Maharey is welcoming a Tenancy Tribunal decision today awarding $500 exemplary damages and ordering illegal charges of $7580 to be repaid to a Papatoetoe family caught up in a scheme they thought was ‘rent to buy’, but in fact gave them no such right.

Mr Maharey said the Tribunal awarded the damages under the Residential Tenancies Act, ruling that money paid by the tenants in addition to rent since August 2001 was illegal.

“The family involved signed over ownership of their house in the belief that this would help them out of financial difficulties. The family understood they had a tenancy agreement with Blue Sky Holdings Ltd that would help them to gain credit-worthiness to buy back their house, by making extra payments in addition to rent.”

The Ministry of Housing’s Tenancy Services division uncovered the illegal payments after Blue Sky Holdings Ltd applied to the Tenancy Tribunal to evict the family for falling behind in their rent.

“The Ministry is aware of at least seven other possible cases where tenants appear to have signed similar agreements with the company and we are making sure the tenants involved are aware of their rights, which include taking their case to the Tenancy Tribunal.

“It’s in the public interest that the Ministry of Housing actively pursues cases of this kind, and helps raise people’s awareness of the dangers of signing a tenancy agreement that they don’t fully understand,” Mr Maharey said.

Mr Maharey also endorsed earlier Consumers’ Institute comments that warn people against schemes that involve transferring property ownership to secure finance.

“The risk of vulnerable people losing their homes through this type of arrangement is too great and anyone considering such a transaction should get solid legal advice on any contract they are asked to sign,” he said.

. . / 2 The Minister said the issues of this case go further than the scope of the Residential Tenancies Act, which covers landlord-tenant relationships. The Ministry of Housing is ensuring that people potentially affected by Blue Sky agreements understand the full range of their rights and remedies under the law, in terms of the legal ownership of their properties, and how they can go about enforcing those rights.

Key points from the Tenancy Tribunal adjudicator’s decision include:

There was no legal basis upon which Blue Sky was entitled to claim an additional $145 per week from the tenants. The tenants mistakenly paid the additional money in the belief that those payments were accumulating equity for the purchase of the property, and were therefore entitled to full recovery of those payments. The manner in which the arrangements between the parties came into play were of particular concern. They were reasonably complex and conducted without the tenants receiving the benefit of legal advice. Blue Sky should have ensured that all the documentation was properly executed and understood by the parties. However, the lease agreement was undated and unsigned and there was no proper record of the apparent agreement that the tenants would receive financial benefit in the event they decided to exercise the option to purchase. The tenants also did not appear to have received copies of the documentation.

A full copy of the decision is attached.

Order of Tenancy Tribunal Residential Tenancies Act 1986 Office of the Tenancy Tribunal

Tenancy Tribunal at Manukau

TT No: 1712/3

(Appln. No: 3/1067-3/2167)

Tenancy Details
Address: 170 Shirley Road, Papatoetoe, Manukau
Applicant Other Party
Full Name: Hiranthi Abeygoonesekera – Chief Legal Counsel –M.O.H. (For Mr and Mrs Young) Address: P.O. Box 10-729 Wellington Full Name: Blue Sky Holdings Limited Address: P.O. Box 2921 Shortland Street, Auckland

Orders of the Tribunal

THE TRIBUNAL HEREBY ORDERS;

1. The agreement entered into by the parties in or around August 2002, under the name and description of “lease agreement” constitutes a binding and legally valid tenancy agreement, and that the Tribunal has jurisdiction to determine matters arising from the agreement.

(S 77(2) (a) (b))

2. Blue Sky Holdings Limited shall pay to Mr and Mrs Young, the sum of $7,580.00 being reimbursement of monies overpaid from commencement of tenancy to date of completion of hearing.

(S 77(2) (k), S78 (1) (d) (g), S135 (1) s137 (4))

3. The rental for the property is set at $340 per week, being the sum specified in the agreement. (S78 (1) (a))

4. Clause 2.4 of the agreement is void and of no effect.

(S78 (1) (a) 32 (1) (c))

5. Clause 3.1 (d) of the agreement is void and of no effect. (S 78 (1) (a) (g))

6. Clause 8.5 of the agreement is void and of no effect.

(S78 (1) (a))

7. Blue Sky Holdings Limited is to pay to Mr and Mrs Young, the sum of $500 by way of exemplary damages.

(S137 (1) (a) (2) (4), S 109 (3) (4) (c))

Background

This matter came before the Tribunal for hearing on 7 April 2003. Blue Sky Holdings Ltd (the Applicant in the proceedings) was represented by Mr Burley. The tenants, Mr and Mrs Young, were represented by Ms Abeygoonesekera, Chief Legal Counsel for the Ministry of Housing. Ms Abeygoonesekera on behalf of the Chief Executive had made application to the Tribunal, to be joined to the proceedings.

Mr and Mrs Young purchased a property at 170 Shirley Road, Papatoetoe on 5 February 1991.

The Youngs got into financial difficulties

On 17 May 2000, the Youngs sold their property to Richworth Properties Ltd, ( hereafter “ Richworth”)

Mr and Mrs Young remained in the home after the sale of the property to Richworth Properties Ltd. They executed a tenancy agreement with Richworth. Mr and Mrs Young were under the impression that their arrangement with Richworth would assist them to re-establish their credit worthiness and allow them an opportunity in the future to buy back their home. On a date uncertain, but as best the Tribunal could establish likely around August of 2001, the Youngs were contacted at their home by a representative of Blue Sky Holdings Ltd. (hereafter “Blue Sky”). Blue Sky advised Mr and Mrs Young that they had purchased the property from Richworth Properties Ltd, and that Blue Sky would, from that point on, be managing the property.

Blue Sky and the Youngs entered into an agreement described as a lease agreement. It was submitted at hearing that contemporaneous with executing the lease agreement, the Youngs and Blue Sky executed an agreement for sale and purchase, that sale and purchase agreement to be triggered on the Youngs electing to exercise an option to purchase. Details of the option are recorded in Clause 9 of the lease agreement.

Some weeks after entering into the lease agreement with the Youngs, Blue Sky finalised the legal transfer of the property into the name of Blue Sky Holdings Ltd. The certificate of title to the property (number B/1296), confirms that the property was transferred to Blue Sky Holdings on 16 October 2001, and that immediately subsequent to that transfer being registered, the ownership of the property was transferred to a Gordon James Oliver and Valarie May Oliver.

Copies of the Memorandum of Transfers for the relevant transactions produced at hearing recorded that:

Mr and Mrs Young sold the property in May 2000 to Richworth Properties Ltd for a consideration of $226,000.

Richworth Properties Ltd sold the property to Blue Sky Holdings Ltd on the 8th of October 2001 for a consideration of $252,000.

Blue Sky Holdings Ltd sold the property to Gordon James Oliver and Valarie May Oliver on 8 October 2001 for a consideration of $320,000.

Whilst there was a little confusion at the hearing as to the precise date the tenancy commenced, the parties’ Counsel settled on the 27th of August 2001 as a commencement date for the lease agreement.

On 12 August 2002, the tenancy tribunal at Manukau dealt with an application brought to the tribunal by Blue Sky Holdings Ltd under TT No. 3863/2, application number 2/4991. Orders made by consent on 12 August 2002, provided that Mr and Mrs Young were to clear rental arrears of $580 by weekly payments of $580, being rental of $485 plus an additional $95 per week towards arrears.

Blue Sky brought a second application to the Tribunal on 5 February 2003. That application sought a termination of the Youngs tenancy pursuant to Section 55 of the Residential Tenancies Act and payment of rental arrears calculated as at 3 February 2003 in the sum of $3,455.

The Ministry of Housing, filed a cross application with the Tribunal on the 19th of March 2003, that application seeking orders for recovery of money paid by mistake, orders for exemplary damages, orders for determination as to quantum of rental for the duration of the tenancy, and declarations that a number of provisions of the lease agreement were in contravention of various provisions of the Residential Tenancies Act.

The Issues

The applications before the Tribunal raised a number of interesting issues and Counsel for the parties presented their arguments with considerable vigour. It was agreed that the first and foremost matter for consideration related to the question as to whether the Tribunal had jurisdiction to determine the applications before it. Whilst there were a number of issues for the Tribunal to consider, the jurisdiction issue necessarily had to be addressed before consideration could be given to other matters.

The Jurisdiction Issue

Mr Burley for Blue Sky submitted that the Tribunal had no jurisdiction to deal with the proceedings, that the agreement entered into between Mr and Mrs Young and Blue Sky Holdings in August 2001 under the title of lease agreement did not constitute a residential tenancy agreement, that the nature of the relationship between Blue Sky and the Youngs was not that of Landlord and tenant, but rather determined by the provisions of the lease agreement. Mr Burley contended that the relationship between the parties was of a commercial nature, and not that of a residential tenancy.

Mr Burley submitted that the relationship between Blue Sky and Mr and Mrs Young was more analogous to that of vendor and purchaser, and he sought support for that proposition by reference to the option to purchase provisions of the lease agreement.

By allowing Mr and Mrs Young an option to purchase the property, Mr Burley submitted that the essence of the relationship shifted from that of Landlord and tenant, to one of a commercial nature. He argued that the lease agreement was more akin to that of a standard commercial lease than a residential tenancy agreement. Asked by the tribunal to identify the provisions of the lease agreement which he contended gave the agreement its commercial rather than residential flavour, Mr Burley directed the tribunal to Clause 2.4 , Clauses 3.1d, , Clause 3.1(j) and Clause 8.5 of the lease agreement. It was those provisions submitted Mr Burley, that should be sufficient to persuade the Tribunal that this lease agreement in essence constituted a commercial arrangement between the Youngs and Blue Sky, and not a residential tenancy.

It is appropriate to detail the clauses upon which Mr Burley relied.

2.4 In the event rent payable is not paid on or prior to the due date for payment, then such unpaid amount shall attract.

A late payment charge of 5% of the unpaid amount, if paid within 14 days of the date upon which it was due and A late payment charge of 10% of the unpaid amount, if paid outside the period of 20 days after the date upon which it is due.

Such charge being to compensate the Landlord for the administration expense arising from late payment.

3.1(d) To keep the property (both interior and exterior) and chattels in a good state of repair during the term and return the property and chattels to the Landlord when the term ends in the same state of repair as the property was at the commencement of the lease provided however that the Landlord may permit alternations and improvements to be carried out by the tenant on the condition that the tenant pays the Landlord compensation for re-instatement of the property, such amount to be non-refundable and paid weekly in advance commencing on commencement date and generally in accordance with the terms and conditions set out in Schedule B

3.1(j) To obtain any insurance including but not limited to, loss of earnings, redundancy or disability that the Landlord may reasonably require provided however that no such insurance required shall contravene Section 39(1) of the Residential Tenancies Act 1986.

8.5 The tenant shall indemnify and keep indemnified the Landlord from and against any action, claim demand, loss, damage expense and liability which the landlord may suffer or incur, or for which the Landlord may become liable in respect of or arising from any act, omission, neglect, breach or default by the Tenant under this agreement.

In summary then, Mr Burley submitted for Blue Sky, that by virtue of the option to purchase in the agreement, and the specified clauses detailed, the relationship between the Youngs and Blue Sky was essentially that of vendor and purchaser, and as a consequence, the agreement fell clearly within the exclusion provisions of Section 5 of the Act, and the Tribunal accordingly did not have jurisdiction to consider the matters.

Section 5 of the Act details a number of transactions which are specifically excluded from coming within the parameters of the Residential Tenancies Act. Section 5(o) provides that:

“Where the tenant is the purchaser of the premises under an agreement of sale and purchase with the Landlord as vendor, not being an agreement that is revocable at will by the vendor”

Ms Abeygoonesekera submitted that the relationship between the Youngs and Blue Sky was that of Landlord and Tenant, and therefore the arrangements between the parties should, at all material times be subject to the provisions of the Residential Tenancies Act.

Findings on the Issue of Jurisdiction.

It is the Tribunal’s view that the relationship between the Youngs and Blue Sky is that of Landlord and Tenant, and that the matters before the Tribunal fall properly within the jurisdiction of the Tribunal to determine. Reasons for that finding are as follows:

(a) It was difficult for the Tribunal to accept the proposition advanced by Mr Burley that it had no jurisdiction to consider these matters , when Blue Sky themselves had chosen to bring two Applications to the Tribunal seeking to have the Tribunal evict Mr and Mrs Young from their premises, and for orders for reimbursement of rental arrears.

On the 12th of August 2002 the Tribunal dealt with an application initiated by Blue Sky, and at the conclusion of that hearing, the Tribunal made orders with the consent of both parties. Clearly at that time Blue Sky was not advancing the proposition that the Tribunal lacked jurisdiction, to the contrary Blue Sky as an Applicant before the Tribunal, asked the Tribunal to record an arrangement between the parties which they clearly considered was premised on the assumption that the parties were in the relationship of Landlord and Tenant. Mr Burley argued that Blue Sky had not elected to enforce the orders of 12 August 2002. If that submission was advanced as an argument that Blue Sky had given further thought as to whether the Tribunal was the appropriate forum to consider these matters, its force was considerably weakened by the fact that Blue Sky continued to deal with Mr and Mrs Young on the basis of landlord and tenant. The parties attended mediation at tenancy services on the 12th of March 2003 following on from a further application filed by Blue Sky with the Tribunal on the 3rd of February 2003. If a party willingly submits to the authority of the Tribunal especially in the role of Applicant, it is difficult to accept subsequent argument from that party that the Tribunal lacks jurisdiction to consider matters. That argument it has to be said presents as something of an argument of convenience.

(b) The argument that the lease agreement in form and purpose presents as being more analogous to that of a commercial lease than a tenancy agreement is rejected. I find that the lease agreement bears little resemblance to a typical or standard commercial lease agreement, and that it is compellingly apparent on the face of the document that the agreement entered into by the parties in August of 2001 was intended at all material times to be a tenancy agreement and that there was no suggestion or intention whatsoever that Blue Sky and Mrs Youngs contractual relationship would be dominated or defined by the clauses in the agreement relating to the option to purchase.

(c) To the contrary, the agreement presents in most respects as being quite typical of a standard tenancy agreement. The agreement, whilst described as a lease agreement, records at clause 8.1, that the “Residential Tenancy Act 1968 shall apply to this agreement”. It could be sensibly argued that there is no more compelling evidence of the fact that the agreement intended to define the relationship of the parties as that of landlord and tenant, when it records that the residential Tenancy Act, “is to apply to this agreement”.

(d) The agreement describes the parties in terms of landlord and tenant, not lessor or lessee. The tenants obligations, described in clause 3.1 of the agreement, impose obligation on the tenant “not to use the property except for residential purposes”.

(e) The agreement requires the tenant to maintain the property in a clean and tidy state, to refrain from causing nuisance to neighbours, to not damage or permit damage to the property, and to act in a tenant-like manner at all times. Conversely, the landlord is required to provide the tenant with quiet enjoyment of the property, to pay rates and land taxes if applicable, and to comply with restrictions on right of entry.

(f) The agreement has, in the opinion of the Tribunal, all the hallmarks of being what it was described as at the time it came into force, being an agreement to which “The Residential Tenancy Act 1986 shall apply. In short, a tenancy agreement.

(f) The Tribunal did not agree with the submission that clauses 2.4, 3.1d, 3.1(j) 8.5 and 9.0, shifted the agreement into the realm of a commercial arrangement. One of the clauses cited in support of the proposition that the Act be excluded (clause 3.1(j)) specifically provides that the clause shall have no application if it contravenes s39 (1) of the Residential Tenancies Act!

(g) The application and implications of the option to purchase clause require careful consideration, as does the effect of clause 3.1(d) of the agreement. Those clauses are detailed in the agreement as follows:

Option to Purchase

In consideration of the tenant entering into this agreement the Landlord grants to the tenant an option to purchase the property and the chattels on the term and conditions set out in the agreement for sale and purchase of real estate attached hereto.

The tenant must give notice in writing to the Landlord not less than two months prior to the expiry of this agreement in the event the tenant wishes to exercise the option pursuant to Clause 9.1.

9.3 In the event that a further agreement is entered into pursuant to Clause 11.1 this option will not lapse and will continue to have effect for the term of the new agreement.

Tenant’s Obligations.

3.1(d) To keep the property (both interior and exterior) and chattels in a good state of repair during the term and return the property and chattels to the Landlord when the term ends in the same state of repair as the property was at the commencement of the lease provided however that the Landlord may permit alternations and improvements to be carried out by the tenant on the condition that the tenant pays the Landlord compensation for re-instatement of the property, such amount to be non-refundable and paid weekly in advance commencing on commencement date and generally in accordance with the terms and conditions set out in Schedule B

(h) I do not accept Mr Burley’s submission that the option to purchase clause moves the parties into the arena of vendor and purchaser. An option to purchase is simply that, an option, exercisable at some future date at the behest of the party upon whom the benefit of the option is conferred. At the time of entering into the agreement, the parties quite clearly were not in a legal relationship of vendor and purchaser, and the possibility of them becoming so in the future was entirely dependant on whether the Youngs would elect to exercise the option granted. They become vendor and purchaser, if the option is triggered. Until that option is exercised, which of course it may never be, the parties remain in the relationship of landlord and tenant.

The lease agreement is undated. The memorials to the agreement contain, as would be expected, provision for the agreement to be witnessed. There is no evidence of the agreements being witnessed by a third party. The conditions of the option to purchase are recorded in clause 9.1 as being “set out in the Agreement for Sale and Purchase of Real Estate attached hereto”. There was no agreement for sale and purchase attached to the application filed in the Tribunal. Explanation was provided to the Tribunal by a Blue Sky witness on the morning of the hearing that the documentation relating to a number of transactions that Blue Sky had entered into around the time of their dealing with the Youngs had been difficult to locate. The Tribunal was then being asked to consider the implications of an option to purchase, the terms of which were said to have been recorded in an agreement for sale and purchase, in the absence of any evidence of any such agreement.

When the hearing reconvened on the afternoon of the 7th of April, the Tribunal was advised that a copy of the sale and purchase agreement had been procured during the luncheon break. With the consent of Ms Abeygoonesekera, that agreement was put in evidence to the Tribunal. The agreement produced at hearing recorded that Blue Sky Holdings Limited or its nominee as vendor, entered into an agreement for sale of the property at 170 Shirley Road Papatoetoe with Mr and Mrs Young as purchasers, for a purchase price of $441,000. The agreement records a deposit to be paid of $88,270. Adjacent to the deposit figure, in parenthesis, but crossed out, is the phrase, “182 payments @ $485.00”. The agreement for sale and purchase is unsigned and undated. It is initialled on the bottom of each page with the signatures of parties likely to have been Mr and Mrs Young, and a representative from Blue Sky. The initials from the purported representative from Blue Sky on the sale and purchase agreement appears, at least to the untrained eye, to be identical to the initials on the lease agreement. There are no other terms of sale recorded in the agreement. The sale and purchase agreement is in the standard form approved by the Real Estate Institute of New Zealand and the New Zealand Law Society.

(i) The significance of the relationship between the option to purchase and the agreement for sale and purchase, must also be considered alongside clause 3.1(d) of the agreement, being the clause which stipulated that the tenants were to pay a sum of $145 per week in addition to their rental of $340, as compensation for costs the landlord would incur for reinstating the property to its original condition. The payment of $145 per week, non refundable, payable weekly from commencement of the tenancy, is said to be required to reimburse the Landlord for alterations and improvements that the tenant may carry out during the course of the tenancy. The effect of this clause has been that Mr and Mrs Young have, throughout the duration of the tenancy, been paying in addition to their weekly rental of $340, an additional and not insubstantial sum of $145 per week. Ms Abeygoonesekera submitted that the requirement to pay these monies represented a clear contravention of s 32 of the Act.

Mr Burley explained to the Tribunal in general terms, the underlying assumptions on which the arrangements with the Youngs proceeded. In this he was assisted by a witness for Blue Sky, Ms Meaker. Ms Meaker advised the Tribunal that she worked for Blue Sky in the capacity of legal executive. She was not legally qualified. She is not engaged in the drafting of legal agreements. She was not involved in any of the dealings with the Youngs and indeed had no personal involvement in any of the dealings which formed the basis of the applications before the Tribunal. Rather her evidence was to speak to the Tribunal in general terms about the nature and purpose of the type of arrangements which Blue Sky had entered into which were of a similar nature to the arrangements with Mr and Mrs Young. Ms Meaker advised the Tribunal that to the best of her knowledge there were in existence approximately twenty to twenty- five agreements similar to the one being considered by the Tribunal, most of them involving homes in the South Auckland area.

Ms Meaker explained the arrangements as follows. A property would be purchased. The vendors would be allowed an opportunity to remain in the property as tenants, but on the basis of an arrangement which would allow them an opportunity to purchase the property back. Blue Sky may elect to on sell the property to what was described as an ‘investor purchaser”. Blue Sky would continue to manage the property. This arrangement, Ms Meaker assured the Tribunal, was designed to “provide good cheap housing for tenants”, whilst allowing them an opportunity to accumulate equity in the property. The arrangements, said Ms Meaker, also created a “no hassle situation” for their investors.

Both Mr Burley and Ms Meaker were questioned by the Tribunal as to how, in this particular case, the Youngs were to benefit from the substantial payment that they were required to make each week that was additional to their agreed rent. That payment was clearly expressed in the agreement as being non refundable. It was presented to the Tribunal that in the event that the Youngs elected to exercise their option to purchase, then there would be calculation made at that time as to the amount that the property had appreciated during the course of the tenancy, and the Youngs would receive some form of credit, based on that assessment. To say that the explanation provided as to the precise nature of this arrangement approached the vague would be to understate the position. There was no written evidence before the Tribunal as to the details of this arrangement. There was no reference to any such arrangement in either the lease agreement or, most surprisingly, the agreement for sale and purchase. If it was the case that Mr and Mrs Young were, on electing to exercise their option to purchase, entitled to receive benefit on settlement of the sale for a sum to be calculated by reference to the increase in the value of the property during the duration of the tenancy, it would be expected that those arrangements would have been spelt out in the clearest of terms, and certainly formally recorded in the agreement for sale and purchase. Certainly, there is no written evidence to confirm that the additional payment required by clause 3.1(d), would be credited towards purchase price, and it was made emphatically clear at the hearing that the payments made pursuant to that provision were not to be construed as anything in the nature of a deposit.

(j) Clause3.1 (d) is, in the opinion of the Tribunal, concerning. The clause purports to represent its purpose as being to compensate the landlord for alterations and improvements that the tenant may complete during the course of the tenancy. The nature of those improvements or alterations is not defined, indeed it may well be the case that there are no alterations or improvements completed, but even in that event, the tenant would be required to pay, if the tenancy run its full course, a sum of $26,390 in addition to normal rental. It is difficult to justify a requirement to pay a sum, in advance, purportedly for compensation for reinstatement of the property, when there is no evidence of the fact that there is loss or damage for which compensation could be sought or justified. Mr Young gave evidence at the hearing, that it was his impression that the weekly payments of $145 were to accumulate and provide funds to assist with the purchase of the property, in the event the option to purchase was exercised. On this point, I found Mr Young convincing, and taking into consideration both the way in which these arrangements were transacted of which I make further comment later in this decision, and the manner in which the documentation recording the transactions was handled, I find on the evidence that it was highly probable that Mr and Mrs Young entered into arrangements with Blue Sky under the mistaken impression that the additional payments of $145 per week, were being paid to accumulate a deposit which would assist with repurchasing the home. I find that the Applicant was not entitled to claim an additional non refundable sum of $145 per week from the tenants, and that there was no lawful basis upon which that sum could be claimed. If Blue Sky, on taking over the tenancy, wished to have the rental increased to $485 per week, then the agreement should have said so in clear terms. The schedule to the agreement records the rental payable as $340 per week, and there was, in the opinion of the Tribunal, no justification for the Applicant to demand an additional payment of $145 per week as compensation, unrecoverable, for “reinstatement” of the property. One is left with the compelling impression that for Mr and Mrs Young, their clear belief was that the additional $145 per week was accumulating as a deposit to assist with purchase of the home.

Remaining Issues.

Consequential upon the Tribunals finding that the lease agreement constitutes a binding tenancy agreement, the Tribunal makes findings as follows.

1. Payments made by the Youngs pursuant to section 3.1(d) were mistakenly paid by them in the belief that those payments were accumulating equity for the purchase of the property, and therefore monies paid under that misapprehension and mistake fall for full recovery pursuant to section 135 (1) of the Act.

2. Clause 3.1 (d) of the agreement is void and of no effect, being a payment which does not fall for recovery within the specified outgoings detailed in s39 of the act.

3. Payments made by the Youngs pursuant to section 3.1(d), in effect constituted additional rent payments which were not lawfully payable, and therefore monies unlawfully paid, fall for recovery, pursuant to section 137(4) of the Act.

4. Mr Burley submitted that in the event that the Tribunal was to find that monies paid pursuant to clause 3.1(d) were refundable, it would be unreasonable to make such an order as it would cause prejudice to the new owner, and that the new owner should be provided with opportunity to make submission on the matter. The “new” owner to whom Mr Burley refers is presumably Mr and Mrs Oliver, the parties with whom Blue Sky had been negotiating to on sell the property shortly after they had purchased the property from Richworth. That submission was advanced by Mr Burley in the face of his emphatic assurance to the Tribunal, that Blue Sky was at all material times, up to and including date of hearing, authorised to act in the proceedings. That submission was also it must be said, advanced in the face of the fact that Mr and Mrs Young had never been given notice as to the identity of any new owner, their impression at all times was that their arrangements were with Blue Sky, and they remained quite oblivious to the contemporaneous legal transfer of title to the property from the ownership of Blue Sky to Mr and Mrs Oliver which occurred on the 16th of October 2001. They continue to pay rental to Blue Sky. They were required to respond to two applications brought to the Tribunal by Blue Sky, including the application which precipitated the current proceedings. With every respect, Mr Burley’s submission that a third parties interest should be considered lacks force.

5. Clause 2.4 of the agreement is void and of no effect. That clause clearly contravenes section 32 of the Act which specifically prohibits (clause 32 (1) (c)), the imposition of monetary penalty by way of damages for late payment of rental.

6. Clause 3.1 (j) does not breach the Act. The clause contains the specific directive that any sums sought pursuant to that provision, shall be subject to the Act.

7. Clause 8.5 of the agreement is void and of no effect. Section 40 of the Act defines the tenant’s obligations and responsibilities. My view is that section 8.5 of the agreement, is overly expansive and raises concern that a tenant may be held liable or responsible for consequences which go beyond those that could reasonably be foreseeable as being within the parameters of S 40 of the Act.

Public Interest

Ms Abeygoonesekera submitted that the Applicant had committed breaches of the Act which justified awards of exemplary damages, and that it was in the public interest that there be such an award. Her view was that the transaction promoted by Blue Sky was deceptive and misleading of the Youngs, and that it be appropriate that the public be informed as to the dangers of entering into such agreements. Mr Burley emphatically rejected the notion that there was anything untoward about the arrangements. He pointed to the fact that the Youngs had been paying more rent to their previous landlord then they were paying to Blue Sky, he alleged that there had been no complaint made by the Youngs prior to the intervention of the Ministry of Housing, he argued that even if the Tribunal was to find that there had been breaches of the agreement the Youngs were statute barred from bringing any claim for exemplary damages.

There was conflicting evidence produced at the hearing as to the reasonableness of the rent. That evidence was not conclusive, and the Tribunal did not have the opportunity of questioning either the Ministry of Housing’s witness, nor the agents who prepared at last minute, appraisals for the Applicant. Neither of the parties presented at hearing as being particularly well prepared to address the issue of quantum of rental arrears or issues of appropriateness or otherwise of the rental charged for the property.

In view of the nature of the issues raised by these proceedings, I consider it appropriate that the Tribunal does comment on the arrangements between these parties.

There were aspects of the arrangements between the parties which were disquieting. Particularly concerning was the manner in which the arrangements came into play. Mr Young presented at hearing as a very genuine, open person, entirely lacking in guile. He presented as a person quite unsophisticated in matters financial. It would not be unfair to suggest that Mr Young seemed very naive about business matters. His first agreement with Richmond properties was negotiated from a background of he and his wife being under considerable financial pressure, their home was at risk of mortgagee sale. He gave evidence that his understanding of his agreement with Richworth Properties Limited was that the substantial rental he was paying each week ($519) would in some way, provide him with an opportunity to purchase back the family home. The intervention of Blue Sky came as a surprise to Mr and Mrs Young. They were unaware that the property had been sold. Further arrangements were entered into. Those arrangements were reasonably complex and conducted without the Youngs receiving the benefit of legal advice.

Mr Youngs evidence was that he believed that the additional $145 per week that was being paid in addition to the rent would “help us to buy back our house”. How that was to work, Mr Young was uncertain at hearing, and I suspect, uncertain at the time he and his wife entered into the agreement. This was a situation in which it would, in the opinion of the Tribunal, be not only prudent, but indeed essential that Mr and Mrs Young receive proper legal advice. Mr Young is unable to read. His brief of evidence at hearing was required to be read on his behalf by his representative. Whilst the Tribunal could not go so far as to say that Blue Sky should have insisted that the Youngs receive legal advice, the disparity in bargaining power between the parties and the fact that Mr Young could not read, should have, one would have thought, alerted Blue Sky’s representative to the need to ensure that the documentation was properly executed and properly understood by the parties.

That was not the case. The lease agreement is undated and unwitnessed, and there is no proper record of the apparent agreement that the Youngs would receive a financial benefit in the event that they decided to exercise the option to purchase. The Youngs do not appear to have received copies of the documentation. Blue Sky did not produce originals of the documentation at hearing. That presents as unsatisfactory.

I am of the view that Mr and Mrs Young were under the clearest impression that their arrangements with Blue Sky provided them an opportunity to accumulate a deposit which would allow them an opportunity to purchase the home, and that they at minimum believed that the additional payment of $145 per week, was a payment over and above the weekly rental which was recoverable. I certainly do not consider it remotely likely that the Youngs understanding of the additional payment was that it was to compensate the landlord in advance for renovations or improvements they may or may not have been of a mind to carry out to the property.

The sale and purchase agreement exhibited contained a crossed out clause in the deposit section of the agreement. That clause recorded that the deposit was to be paid by way of 182 payments of $485, being precisely the number of weeks recorded in the schedule as the duration of the tenancy. The sum of $485 would clearly have been calculated on the basis of combining the two figures payable under the agreement, being the weekly rental of $340 and the weekly “compensation” payment of $145. It is not inconceivable that during the course of the negotiations, the Youngs may have formed a view that all their weekly payments would be put towards purchase price. The concern with this arrangement, is that it has the potential to encourage the tenants in the belief that they will be able at some time to repurchase their home, when in reality, the nature of their circumstances and the commitment they are required to make to meet the demands of weekly payments, make it unlikely that they are ever in the position to complete the repurchase, and they have committed payments (in this case by way of a “compensation” payment), which may be unrecoverable.

There is unquestionably scope for confusion and misunderstanding when the boundaries between landlord/tenant and other commercial relationships such as vendor/purchaser become blurred. In this instance, one could imagine that Mr Young may have been perplexed to meet the argument on the 8th of April that he was not a tenant, and that Blue Sky were not his landlord, when he had been to the Tribunal as recently as August 2000 in his capacity as tenant, followed by attendance at mediation as tenant, and was facing further application in the Tribunal to terminate his tenancy in March of 2003.

In circumstances where homeowners are facing risk of mortgagee sale and enter into arrangements to sell their properties but to remain in the property as tenants, with opportunity provided to buy back their home, it is essential that the homeowner receives legal advice which addresses issues such as:

Whether the owner has an adequate understanding of the nature of the transaction. Whether the owner has a realistic prospect of repurchasing the home. Whether the purchase price is at fair market value.

It must be stated that in the present case, the point at which Mr Young faced risk of losing his home had long since passed, the property had been sold, but it was clear on the evidence that as the home transferred first to Richworth, then to Blue Sky and unknowingly to the Youngs, to Mr and Mrs Oliver, Mr and Mrs Young continued to harbour the hope and expectation that they would be able to purchase their home back. Indeed, Mr Young made it clear at hearing that he and his wife wanted to buy the home. It could be argued that Mr and Mrs Young continue to have that option open to them, and that their problems are most directly related to their inability to meet their financial obligations. That may be so, but I am firmly of the view that throughout the course of these matters, it would have been at times quite difficult for the Youngs to properly understand and appreciate the nature of the transactions that were occurring. They were negotiating from a position of financial pressure. They should have received legal advice. They should have received originals of the documentation. They were entitled to expect that the documentation would be properly executed. They should not, in the opinion of the Tribunal, have been presented with an agreement to lease which contained, in Clause 3.1 (d) a clause which was illogical in its construction, and potentially misleading and oppressive in its implementation.

Ms Abeygoonesekera submitted that the Tribunal should consider making an award of exemplary damages against Blue Sky on the basis that the company had levied charges on the tenant that were not recoverable at law, and had breached a number of provisions of the Residential tenancy Act. I have given that submission careful consideration, and am satisfied that the breaches complained of are serious. I consider an award of $500 appropriate.

Rental Calculations.

1. Blue Sky’s application to the Tribunal (3rd of February 2003) sought termination of the Youngs tenancy on grounds that the Youngs were at date of the application, $3,455 in arrears.

2. The parties agreed at the conclusion of the hearing that the tenancy had run for eighty five weeks. There was some uncertainty as to the precise date at which the Youngs agreement with Blue Sky commenced. There was also disagreement as to the total amount of rent paid to the date of hearing. On balance I consider that the rental statement produced by Mr Burley provided the best evidence of the history of rental payments made. That rental statement commences in the week beginning 27 August, 2001. I hold then that the tenancy to the 8th April, 2003, comprised eighty four weeks. The rental statement records (allowing for deduction of reversed payments) the tenants paying total rental for the relevant period in the sum of $36,140. Ms Abeygoonesekera submitted that the Youngs had made payments totalling $36,940. She contended that some payments made had not been recorded in the rental statement however on checking the receipts provided for those disputed payments, I am satisfied that the rental statement produced by Mr Burley accurately records payments made.

3. In finding that the weekly payments made of $145 pursuant to clause 3.1(d) of the agreement were payments made for rent which were not lawfully recoverable and were payments made by mistake (being that the tenants understood those payments to be recoverable) it follows that the tenants are to be reimbursed for the payments made pursuant to clause 3.1(d). The correct rental payable to date of hearing is $28,560, being eighty four weeks at $340 per week. The amount paid by the tenants total $36,140. The amount to be refunded to the tenants then, is $7,580.00.

DATED AT MANUKAU THIS 13TH DAY OF MAY, 2003.

............................................................... Adjudicator

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