Dual key properties
Investors are jumping on the dual key bandwagon because the yields can be very attractive. But what are the legal risks and how can these be managed?
1. What is a dual key property?
Dual key properties are a relatively recent trend in the Australian market.
A dual key property generally means one dwelling that has a layout that can accommodate two households on one legal title. Each area in the dwelling may have its own entrance allowing occupants to live in or rent each area independently and share facilities such as a laundry area. They are often designed to look like normal houses from the street but have a separate door on the side.
A dual key property is different from a dual occupancy or duplex, which often means two self-contained dwellings, whether or not attached, for separate households on one legal title.
2. Why are they becoming so popular?
Dual key properties are attractive to both owner occupiers and investors.
Owner occupiers may be able live in a dual key property and if the layout suits, rent out an area to a separate household. Or if they have an ageing parent or relative they can live close together but still have some privacy.
Investors can have two rental incomes instead of just one income from the one property and only pay one set of rates and land tax. This can significantly increase the investment yield.
3. Are they legal?
Town planning laws can vary between local authorities. It is important to obtain town planning advice before building or buying a dual key property. Where dual key properties are not defined in town planning laws, a town planner may need to interpret what class of building they fall into in the local town planning scheme.
Building a dual key property is generally acceptable as long as the appropriate building and planning permits are obtained. The more controversial question that has arisen recently in some local authority areas is whether a dual key property can be rented to non-related households (as an investor would).
An example where this has been some controversy is in the Brisbane City Council area. The Brisbane City Council (BCC) has issued breach notices and fines to some owners of dual key properties for renting out their properties to separate households.
The BCC town planning laws state it is legal to rent out a dwelling on a dual occupancy property to a separate household but illegal to rent out a house to separate households. As dual occupancy properties are generally only approved in high density areas or on larger blocks, the BCC has issued notices where they believe a property is either a house that is being rented to separate households or that there is an unapproved dual occupancy property in a low density area.
Many of the notices and fines have been quashed by the Queensland Civil and Administrative Tribunal because the BCC failed to prove breaches of the planning laws.
As Ellen McDonogh of Gateway Survey & Planning explains “the City Plan 2014 town planning scheme created the concept of rooming accommodation in which a property in the low density residential zone, could be rented out to 1 or more separate households of no more than 5 unrelated people. Dual key properties that can comply with the rooming accommodation code could potentially be considered legal.”
Care must also be taken to ensure that the dual key property has been classified as a Class 1B building so that it is fit for rooming accommodation. Class 1B buildings have stricter fire safety requirements. A building certifier will need to confirm the requirements.
Other local authority areas such as Logan and Ipswich in South East Queensland appear to be more relaxed with their current attitudes to dual key properties and dual occupancy dwellings but you should check with your town planner first.
4. Are there any practical issues or risks?
Some of the issues to consider when building or buying a dual key property are:
- Extra building costs: as mentioned above, the building class requirements may mean it is more expensive to build or buy a dual key property. However, this will need to be weighed up with the benefits.
- Financing your purchase: check with your lender that they will finance a dual key property. There should be no issues if the dual key property is essentially a house.
- No separate title: this means you can only sell the whole property and not the individual areas separately. It also means that there is no separate formal address. The occupants may need to share a postbox.
- Insurance: occupants may have limited options for insurance although there are some specialist insurers in the market who do provide insurance for separate rented areas in dual key properties.
5. What do landlords need to consider?
As stated earlier, it is legal to rent out a dwelling on a dual occupancy property to a separate household as long as the local town planning laws allow it. That part is clear, but it is quite likely that renting out a house to separate households (ie. to a dual key household) may be found to be illegal.
Problems can arise for landlords – as occurred recently in Canberra – where a single house is converted into separate dwellings and then rented out separately. In the recent Canberra example, the single house had a street number ‘77’. The landlords created a separate entry, split the upstairs area from downstairs and then rented out each level as separate residences – with the upstairs property advertised (and rented out to tenants) as having a ‘77B’ address – an address that technically does not exist. As a result, a series of problems arose, which ended up costing the landlords dearly.
After the new tenants moved in and went about setting up the usual “connection and contact” services, they discovered that their new residence (which they believed to be ‘77B’) was not a valid address so Australia Post would not deliver post. To make matters worse, by not having a valid address, the tenants were unable to obtain insurance cover for their home contents or car, nor could they connect an internet or telephone account because those service providers were unable to find the property in their systems, based on the ‘77B’ address.
After the problems were brought to the attention of the landlords by the new tenants, the landlords suggested that the existing single letterbox could be shared with the other tenants, or a PO box could be rented for the new tenants at the owner’s expense. The new tenants refused either of the proposed “makeshift” solutions because of privacy concerns and inconvenience.
In addition to these problems, the newly converted split residences only had one air-conditioning system operated by only one control unit, which would have required the new tenants upstairs to share the system with the tenants downstairs. That would have been unworkable so the landlords said they would install a split system unit, but by that stage the tenants had had enough and rejected that offer too.
What made this scenario potentially disastrous, with enormous potential legal liability for the landlords, was the suggestion that emergency services such as ambulance, fire brigade and police might be unable to find the Franklin property in an emergency.
The tenants took action against the landlords in the ACT Civil and Administrative Tribunal, seeking to break their lease without penalty and to be compensated for the situation they had been put in by the landlords. The Tribunal heard evidence that ‘77B’ was not a registered property with the ACT Planning and Land Authority and there was no record elsewhere of a ‘77B’.
The Tribunal found in favour of the tenants, ordering the landlords to pay the tenants a total of $4,800 in compensation for breaches of the rental contract and refunds for part of the rent paid. In reaching its decision, the Tribunal found that the combination of factors relating to the mail, internet and emergency services caused sufficient interference with “the quiet enjoyment or peace, comfort, security and privacy of the property, and so a breach of contract”.
The landlords are appealing the Tribunal’s decision and re-advertised the unregistered upstairs part of the property for rent again. Without making any other adjustments, the landlords could be going down a dangerous and costly path. The Tribunal noted that even if some of the issues could be overcome (such as the air-conditioning issue), by not having a valid/recognised street address, the more serious issues (such as with the emergency services, mail delivery, insurance, internet and phone) could not be readily overcome.
Any landlords who are renting a dual key residence to separate tenants and who are unsure about the status of their address should check with their local planning authority to confirm whether or not the additional address is registered, in order to avoid placing themselves in a similar position and being exposed to potentially huge liability.
In many such instances, a bit of proactive planning by landlords can allow them to seek advice on how they might be able to alleviate some of these problems before they sign a lease with new tenants.
This article is co-authored by
Richie Muir, Legal Director at lawlab, a specialist legal services provider for property transactions large and small across Australia.
Zoran Tomich, National Landlord Services Manager at Rent.com.au, Australia’s leading property website dedicated to rental property.