How property managers might be liable for damage

By Joshua Pietras

In Sainty & Sainty v Property Brokers Limited, the New Zealand courts considered, for the first time, whether a property manager could be held liable for damage caused by tenants.

Although the plaintiffs’ claim was dismissed at the summary judgment stage, the court found that a property manager could owe a professional duty of care to the landlord in certain circumstances.

It also found that a property manager could be held liable for breaching the Fair Trading Act 1986 where it had made misrepresentations about the quality of the rental management services, the guarantees it offered to customers and the suitability of the tenant.

The Sainty decision paves the way for holding property managers liable for damage caused by tenants. But it also shows the difficulties when using summary judgment in cases involving allegations of negligence or breaches of statutory duties. These types of cases involve complex factual issues that need to be tested at an ordinary trial.

The facts

Roger and Margaret Sainty were a retired couple from Lower Hutt with several rental properties in Taumarunui. For many years they had used Century 21 to manage their rental portfolio.

At the start of 2015, Property Brokers acquired Century 21’s business, including the plaintiffs’ three rental properties. As part of its sale pitch, Property Brokers made various representations about the quality of its services. After the handover of Century 21’s business, the plaintiffs did not enter into a separate written contract with Property Brokers.

In September 2015, Property Brokers found a replacement tenant for one of the plaintiffs’ rental properties, describing them as a “lovely couple who are expecting their first child and are existing tenants with us”. But when the keys were handed over to the new tenants, Property Brokers failed to obtain a written tenancy agreement or collect the full bond amount.

Throughout the tenancy, Property Brokers made various representations to the plaintiffs about the quality of its services and the guarantees it offered to customers. From time to time, Property Brokers also informed the plaintiffs that the tenant was a “good” tenant.

But Property Brokers did not monitor the property closely. During the 30-month tenancy, it undertook only two inspections, despite promising to do inspections “up to four times a year”.

When the plaintiffs visited the property in late March 2018, they discovered the tenants had caused extensive damage, carried out unsightly renovations and contaminated the property with methamphetamine.

The local police confirmed the property was a known drug house and was frequented by patched gang members. Police records revealed there had been 19 callouts, involving 32 police cars, to the property in the previous six months.

After obtaining a methamphetamine report, the plaintiffs instructed Property Brokers to apply to the Tenancy Tribunal for an urgent eviction order. But Property Brokers filed an incorrect application form, meaning the Tenancy Tribunal hearing was postponed for a further six weeks. The tenants remained in the property and caused further damage.

Court bailiffs eventually evicted the tenants and two weeks later, the plaintiffs terminated their management authority with Property Brokers.

The plaintiffs obtained a compensation order against the tenant in the Tenancy Tribunal but could not track her down. So, they made demand on Property Brokers for payment of $46,074.25. When no substantive response was received, they began summary judgment proceedings against Property Brokers, alleging two causes of action: negligence and a breach of the Fair Trading Act.

Negligence

At the outset, the court said claims in negligence were generally regarded as unsuitable for summary judgment because a close examination of the facts was required.

The court found there would have been some form of contractual relationship between the Saintys and Property Brokers, even if no written contract existed. It said it was difficult to see what duty of care Property Brokers would have owed the plaintiffs apart from the duties it would have owed as implied terms of a property management contract.

This made it problematic to define the scope of Property Brokers’ duty of care. The plaintiffs alleged it was both general (to exercise reasonable care and skill when providing rental management services) but also specific as to the signing and retention of tenancy agreements, collecting bond and rent and doing routine inspections.

As the alleged breaches were premised on specific failures, it was difficult for the court to gauge an objective standard of reasonableness. While some of the alleged breaches were accepted as uncontroversial, others were advanced without a clear and unarguable standard against which those breaches could be measured.

In the court’s view, Property Brokers should have retained a signed copy of the tenancy agreement so its terms were clear. There was also no question whether Property Brokers ought to have collected the full bond amount. However, whether it was reasonable for Property Brokers not to have inspected the property for six months was difficult to determine at the summary judgment stage.

The more difficult issue was whether Property Brokers’ “breaches” caused the plaintiffs’ losses.

The evidence established that significant damage and methamphetamine contamination had been caused to the property sometime between late September 2017 and March 2018. But it was difficult to say that Property Brokers’ failure to do a scheduled inspection in December 2017 or January 2018 would have prevented any of the damage.

In the court’s view, the only loss suffered by the plaintiffs for which Property Brokers was unarguably liable was the shortfall on the bond.

Property Brokers had a duty to collect it, failed to do so (or tell the plaintiffs they had not collected the full amount) and were responsible for the plaintiffs’ lack of recourse to the full amount of the bond when they obtained a compensation order in the Tenancy Tribunal.

Since the plaintiffs could not establish that Property Brokers had no arguable defence to the negligence claim, the application for summary judgment on this cause of action failed.

The Fair Trading Act

Quality Representations

The court focused on the quality representations arising from the information published on Property Brokers’ website,

This described Property Brokers as having experience in residential property management, a strict tenant selection process based on “unique tenant selection criteria” and advanced software to allow clients to access records online.

The website represented that Property Brokers would inspect each rental property every three to four months.

The management fee charged was stated on the website to include tenant screening, completing tenancy agreements and lodging bonds, issuing appropriate breach notices and providing representation at the Tenancy Tribunal.

The court rejected Property Brokers’ argument that the representations did not apply to the relationship because the plaintiffs did not enter the property management relationship in reliance on these representations.

It found the management relationship was terminable at will so if the plaintiffs read the online representations during the property management relationship, then the representations could reasonably have induced them to remain with Property Brokers.

In the court’s view, it was clear that Property Brokers did not fulfil some of the online representations, including:

  • retaining a copy of the tenancy agreement;
  • conducting three - or four-monthly inspections; and
  • collecting the full amount of the bond.

Despite these obvious breaches, it was at least reasonably arguable that the plaintiffs’ losses were not due to a failure by Property Brokers to meet the standards represented in their online advertising, with the obvious exception of their failure to collect the full bond.

Guarantee Representations

The court then turned to the guarantee representations arising from further online material, in which Property Brokers represented:

  • that its rent collection process is such that it guarantees to pay the rent if the tenant will not;
  • if a client is not happy with its service, Property Brokers will pay the management fee;
  • if the property becomes untenanted and Property Brokers does not sign up a tenant within 28 days of it being available, Property Brokers will pay the rent.

The service guarantee statements were apparently subject to “full terms and conditions”, which neither party had produced in evidence. As a result, the court could not discern the parameters of the guarantees and the circumstances in which they would apply.

Tenant Representations

The tenant representations consisted of Property Brokers writing to the plaintiffs at the beginning of the tenancy and during the tenancy, saying the tenant and her partner were:

  • A “lovely couple who are expecting their first child…and are existing tenants… who are great and are very happy to have found your property”;
  • “A good tenant”;
  • “A low maintenance tenant”;
  • “good for many years”.

The court said there was insufficient evidence to conclude these statements were inaccurate representations, at least until the property was found to be extensively damaged in late March 2018.

By that stage, the tenant had been occupying the property for two and a half years, apparently without incident. The two previous inspections carried out by Property Brokers in April 2016 and September 2017 did not record any noticeable damage.

The court found the tenant’s performance clearly did not match Property Brokers’ description. But when the representations were made, there is insufficient evidence that Property Brokers’ assessment of the tenant was inaccurate.

For this reason, the court concluded it was at least reasonably arguable that Property Brokers’ misrepresentation did not lead to the plaintiffs’ losses, except for the shortfall with the bond.

The Fair Trading Act cause of action was dismissed.

Joshua Pietras is a senior solicitor at Thomas Dewar Szirany Letts and a member of the ADLS Civil Litigation committee  



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