The Residential Tenancies Act.
We are sometimes asked about renting to a favoured family or other residential tenant with option to buy the house. Such arrangements benefit landlords because the tenant is motivated to look after or improve the property. But the Tenancy Tribunal is alert for abuses, such as where a landlord cancels for a minor breach and the tenants lose the value of their improving work and any higher rent they have paid. Thus the Act provides that whatever the tenant has paid for the option (i.e. everything paid or done over and above a fair rent) is refundable to the tenant. The Act is silent on whether the option can still be exercised. For these reasons great care is needed to structure such arrangements.
This is not the only provision in the Act whereby tenants can recover rent they have paid. Writing for a local investor magazine, Milton Sperring lists examples: commercial premises, (undesignated) converted garages, illegally split bedrooms, and liveable new or altered property yet to receive a certificate of compliance. He warns Dunedin landlords that “if your tenancy is illegal, there is a presumption that the tenant shall receive the entire repayment of their rent. Any rent arrears will also be unrecoverable.” unless the landlord proves the result to be unjust.
Sperring’s caution is well urged, but it is questionable whether tenants can recover rent in respect of “liveable new or altered property yet to receive a certificate of compliance”. Parbhu v Want  NZHC 2079 suggests that if the premises can be lawfully occupied, restitution of rent may not be available.
Landlords should nonetheless heed the general warning. They have a duty to ensure that there is no legal impediment to premises being used for residential purposes and the Tenancy Tribunal can award a refund of rent for the whole time the premises fall short of that standard. Don’t let it happen to you.