Do the hustle!
The ‘gig-economy’, mum/dad-preneurs, social media influencers, ebay stores, Uber drivers, Airbnb hosts, and consulting – the way people are earning money is evolving. However, could a tenant’s ‘side hustle’ be jeopardising the landlord’s insurance cover?
When a property owner wants to run a business from home, it’s a relatively simple matter between them, their accountant, their insurer, the ATO and the council. However, it isn’t so simple when a tenant wants to run a business from their rental.
Operating a business from a rental is likely to be a breach of the tenancy agreement. At its most basic level, “a residential tenancy agreement is an agreement under which a person grants another person for value a right of occupation of residential premises for the purpose of use as a residence”. The salient point being that the property is used as a “residence”, not for a business/commercial enterprise.
So a tenant may breach their rental agreement if they use the premises for business purposes without the lessor/property manager’s approval. A tenant’s rights under the Residential Tenancies Act may also be affected if the primary use of the rental property is not residential.
Aside from potentially breaching the lease agreement, having a business operate from the rental premises is also likely to invalidate the landlord’s insurance cover.
Running a business from the premises greatly increases risks – opening up the landlord’s exposure to loss or damage and even liability claims (it’s important to note that the landlord’s Public Liability will not cover customers/clients visiting a business). This is the reason why many insurance policies exclude cover for properties that house a business. In order for the landlord to maintain full cover on their insurance policy, neither landlord nor agent should allow tenants to trade from a residential property.
Many tenants won’t ask permission to operate a business from their home, and landlord and agent will often be none the wiser until something goes wrong, like a fire or flood destroys stock or someone visiting the premises injures themselves and claims compensation. If the landlord/agent is not aware of the business operating, they are likely to be covered by their insurance.
Of course, many tenants do ask if they can operate a business from their home. If it could mean the difference between their tenant being able to pay their rent from the extra income, or not, many landlords will consider allowing them to do so.
If a landlord is considering giving a tenant permission to operate a business from their rental, they need to do their own due diligence and not rely on info provided by their tenant or other third-parties. In particular, they should:
- Check whether the local council permits businesses to operate from residential premises (and any restrictions, exclusions etc.)
- Ensure that the predominant use of the property will remain as a “residence”
- Investigate if the lease arrangement is ‘commercial’ or ‘residential’ (there can be ramifications in terms of tax and GST collection etc.)
- Discuss any issues pertaining to the premises being a registered business address (including appearing in directories, legal matters etc.)
- While it is the responsibility of the tenant to ensure that they have all relevant licenses and registrations as required by law to operate their business, and to ensure that their business complies with all relevant legislation, get the tenant to provide evidence that they have obtained written authority from the council/relevant permits/licences and registrations etc. to operate a business
- Consult their financial institution to check whether the mortgage they have on the property prohibits a business being conducted on the premises (breaching the condition could result in the loan being terminated and necessitating immediate repayment)
- If the property is governed by a body corporate, check if operating a business from an apartment/unit is permitted
- Understand precisely what sort of business the tenant intends to operate – as some pose more risks than others (it goes without saying they should ensure that the business proposed is not illegal or they could find themselves sharing a cell with their tenant!)
- Ensure the tenant has their own Public Liability insurance, especially if customers/clients/suppliers will visit the premises – obtain a copy of the Certificate of Currency (including at each subsequent renewal)
- Sight evidence that the tenant has all applicable insurances for running a business (the types of insurance needed will depend on the nature of the business – they should speak to a business insurance broker) and that the tenant is well aware that the landlord’s insurance cover does not extend to their business operation (make sure there are no ‘grey’ areas about who is covered for what)
- If permitted, amend the rental agreement with a special condition specifying that any insurances associated with the business operation are the responsibility of the tenant, that they agree to ensure the insurance remains current and that the landlord assumes no responsibility for risks associated with the running of the business
- Determine if the business will cause noise or nuisance for neighbours
- Scope the parking situation
- Find out if the tenant will store stock on the premises or have stock delivered
- Decide if running a business from the rental will impact maintenance and repair obligations – will there be increased wear and tear at the property, over and above what would be normal for the home – and the implications for utilities such as water, electricity, phone/internet lines or provided appliances such as aircons or dishwashers
- If the tenant proposes to install any fixtures or fittings to run the business, specify who will be responsible for removal/reinstatement etc. (or make it clear doing such is not permitted, especially if there are restrictions on the building such as heritage listing)
- If upgrades to the property are required to operate a business (e.g. security, locks, fire extinguishers, universal access etc.), decide which party is responsible for the costs/installation
- Put any agreement in writing and have it overseen by a professional (e.g. lawyer) – and don’t forget to let the agent know about any agreement made (the contract with the agent may also need to change)
If a landlord does agree to allow a tenant to operate a business from their residential investment property, the landlord should notify their insurer to discuss cover options. While allowing a tenant to operate is likely to void an existing landlord insurance policy (there is usually a clause that prohibits the residential premises being used for commercial purposes), the insurer may have other options available for the landlord.
The insurer will advise whether they will extend cover and under what conditions, the type of policy and excesses that are applicable, and the premium payable to cover the risks. They will also outline their conditions for extending cover, such as requiring tenants to insure against the risks accompanying the business in the landlord’s name and in their name. This is important from a liability perspective. If a customer/client/supplier is injured on the property they could sue the tenant but the landlord could also be liable and there may be questions asked about why the property wasn’t safe etc.
Allowing a tenant to operate a business from the rental premises is not a decision landlords and agents should take lightly – there are plenty of considerations, not least of which is the impact on the landlord’s insurance cover. If faced with this dilemma, EBM RentCover can advise on insurance options to ensure landlords safeguard themselves and their investment.