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Renting Minor Dwelling Units

Scotney Williams L.L.B 1

One of the difficult issues for property managers and landlords alike is the lawfulness of renting a minor dwelling unit. Minor dwelling units take many forms from converted basements and converted garages to granny flats and or specially designed and built minor dwelling units.

Anecdotal evidence would suggest that there are thousands of these dwellings all over New Zealand. The question which arises is whether or not it is lawful to rent them out separately from the major dwelling on the site?

One of ways that the lawfulness rears its head is when a property manager is asked by a sales agent to value the income stream from the property as two independent dwellings. The valuation can be very important because, not only will the income stream support the borrowing for the rental unit but the income can also be capitalised to support the price being asked. What happens then, if the property manager becomes aware that the minor dwelling unit cannot lawfully be rented out separately from the main dwelling? Let us say that a property manager gave an initial valuation as home and income and then subsequently became aware that the minor dwelling unit should not be rented out separately and then later gave an amended valuation significantly reducing the market rent for the two units. By this time the vendor had become comfortable with the asking price and the returns being quoted to support the price. The vendor was very unhappy with the amended and downward rent assessment.

So what is the catch with renting minor dwelling units?

It is, that minor dwelling units were are often built with building consents which give them concessions compared to major dwellings. They were colloquially called “Granny flats” when the policy was launched in the 80’s and were to enable family members to live onsite in a separate dwelling which provided all essential amenities but sometimes did not have kitchen. The idea, being that Granny would eat with the family in the “big house”. The policy was to free up large houses occupied by grannies and for granny to live with the extended family. Many building permits issued for such dwellings are actually stamped with a notice which advises the owner that they cannot be separately rented.

Additionally, tenants have sometimes sued Landlords if they find out that the minor dwelling unit is separately rented but have had little success with compensation because the dwelling does not represent a health or safety threat and represents fair value for money. Accordingly the tenants can show no loss and generally are awarded no compensation. However when and if Government amends S.45 of the Residential Tenancies Act 1986 as is proposed, the owners as landlord, could find themselves being sued by tenants for exemplary damages rather than compensation.

The local Council can also investigate and take action against the owner for breaching the terms of the building permit / consent. This action can range from being ordered to remove the (unlawfully installed) kitchen to more serious sanctions. Loosing the ability to rent out both dwellings as independent units can have a marked effect on the rent level and the net return. This in turn may affect servicing the mortgage.

The Auckland City Council confirmed that granny flats (minor dwelling units) are no longer possible in its area. All units are now only possible if they are built on land zoned for the purpose and built with a building consent. Accordingly there should be few problems for investors in the Auckland City Council area, because all new units require a building consent and all will be able to be rented out separately, when complete.

There are however many thousands of unlawfully converted units, in basements of houses, attached garages, and granny flats built in the eighties and nineties which cannot be lawfully rented out separately from the major dwelling. It is these units which require due diligence when being purchased as an investment. Purchasers enquires should first look at the title, the L.I.M. and any resource consent but even all of these documents might not tell the whole story.

In the case of a purchase of two dwellings on one site, it is a significant purchase and can be complex. I therefore recommend that purchasers seek legal advice before signing the agreement for sale and purchase.