Landlords could face jail if they form rent cartels

Landlords teaming up to raise rents en masse in response to the new tax rules could potentially end up behind bars.

A new law in effect from Thursday criminalises cartels, with anyone convicted facing up to seven years behind bars.

"Cartel conduct harms consumers through higher prices or reduced quality, and it harms other businesses which are trying to compete fairly," said Commerce Commission chair Anna Rawlings.

"The introduction of possible imprisonment for cartel conduct underlines just how serious and harmful this offending is."

The jail terms possible under the Commerce (Criminalisation of Cartels) Amendment Act 2019 come on top of "already significant" financial penalties - $500,000 for an individual, and either $10 million, three times commercial gain or 10 percent of turnover per year per breach for companies. 

"Now more than ever, businesses and their staff need to make sure they understand the kind of commercial arrangements they should avoid to stay on the right side of cartel laws," said Rawlings.

In March, the Government announced it would phase out tax arrangements that allowed landlords to use interest costs to reduce their tax liabilities - something owner-occupiers can't do, giving investors and speculators a financial advantage. 

The change was met with outrage by landlords, some of whom have threatened to hike their rents in response, even though experts say the change will cost only a fraction of what they typically get back in capital gains. The Property Investors Federation this week released a survey of its members, which found three-quarters are planning to charge more. 

If they're caught plotting to hike rents together to prevent tenants finding a better deal, they could now face prison. 

Last year in September landlords were informally warned they were close to breaching the Commerce Act after going online to discuss raising rents together when the freeze on rent increases lifted. Letters were sent from the Commerce Commission to property industry representatives reminding them investors "should make independent pricing decisions about rent and rent increases to avoid breaching the cartel prohibition in the Act".

That same month, two Hamilton real estate companies were fined $4 million between them after agreeing to pass on new selling costs imposed by auction site Trade Me, ensuring neither would obtain a price advantage over the other - in contrast to how free markets are supposed to work. 

"From our face-to-face advocacy work we know some people do not understand what cartel conduct is or that it's illegal," said Rawlings. 

The Commerce Commission on Thursday gave a few examples of the kinds of behaviour that could now result in a jail sentence. 

The first was price-fixing.

"Three businesses compete to sell farm machinery. They agree to allocate the areas that they could sell to by agreeing one business would only sell in the North Island and the other two businesses would only sell in the South Island. They also agree six-monthly price increases and a 'scoresheet' to make sure all of them stick to the agreement.

"This is a cartel involving market allocation and price fixing."

Another example of this was highlighted in a 30-second advert involving two real estate agents agreeing to stay off each other's turf

The  second type of cartel noted was bid rigging.

"A group of companies in the fire alarm and sprinkler installation business meet regularly to discuss tenders. They call it a 'coffee club'. For every tender, participants decide who will win the tender and submit prices just above the agreed winner. This makes the tender process look legitimate while ensuring bidders supply at higher prices."

It's not just property sellers being warned. The Commerce Commission pointed to a real-life case in 2019 where a company set up to advise buyers found its members were competing against one another, driving prices up, so found a way to ensure they didn't. The company - Ronovation Ltd - was fined $400,000.