[Winter 2010]

There are some occupations where a perk of the job is cheap or ‘free’ accommodation provided by the employer. This type of arrangement is common for farm workers and for employees who work in hard-to-staff areas.

Service tenancies

Where an employer provides an employee with accommodation during their employment the arrangement is referred to as a service tenancy.

Most employers are not aware of their obligations under a service tenancy. Employers often do not realise that:

• they are a landlord as well as an employer;
• service tenancies are fully covered by the Residential Tenancies Act 1986;
• rent does not need to be payable for a service tenancy to exist;
• there are special rules covering payment of rent in advance;
• are special rules covering notice periods for the termination of a service tenancy; and
• they have obligations under the Income Tax Act 2007.

Obligations under a service tenancy

The Residential Tenancies Act states that all tenancy agreements must be recorded in writing. While a service tenancy can technically exist without a written agreement, to comply with the law the arrangement should be recorded in writing. Recording a service tenancy arrangement in a written employment agreement may not be enough. The Residential Tenancies Act lists specific information that must be contained in a tenancy agreement. This information is rarely found in a written employment agreement.

A tenancy agreement which meets the minimum requirements of the Residential Tenancies Act can be accessed from the Department of Building and Housing website. Having a written tenancy agreement not only ensures that you comply with the law but is useful as it sets out clearly the obligations of all parties from the outset of the relationship.

Under the Income Tax Act, accommodation provided to an employee is deemed to be a taxable benefit if the rent paid by the employee is less than market value. The value of the benefit (calculated using the market rental value minus any rent being paid) needs to be added to the employee’s wages and PAYE must be deducted from the total.

Once a service tenancy has been established the Residential Tenancies Act provides rules for the payment of rent. For example:

• rent may be deducted from the employee’s pay by agreement; and
• rent may be deducted from an employee’s holiday pay to cover rent during the holiday period.

Ending a service tenancy

There are special provisions in the Residential Tenancies Act for the notice period required to terminate a service tenancy. The general rule is that when notice is given to terminate the employment relationship a minimum of 14 days’ written notice is required to terminate the service tenancy. Notice to terminate the service tenancy can be less than 14 days where:

• the notice to terminate the employment relationship is less than 14 days; and
• the landlord believes on reasonable grounds that the tenant will cause substantial damage to the property if the tenant is permitted to remain for 14 days; or
• it is necessary for the conduct of the landlord’s business where the tenant was employed that a replacement employee be appointed in less than 14 days and no suitable alternative accommodation is available for the replacement worker during the period of 14 days (in which case notice must not be less than 5 days).

Notice must be in the form specified in the Residential Tenancies Act. The service tenancy cannot be terminated before the employment relationship ends.

Conclusion

The landlord/tenant relationship is often neglected during a service tenancy. The focus on the relationship tends to be on the employment relationship. To ensure that both the employment relationship and landlord/tenant relationship run smoothly, care is needed in setting expectations from the very beginning. Documenting the arrangement is important.

For employers with questions about service tenancies, see your Lawlink lawyer for information and advice.