A council-owned six-bedroom flat in a historic building on Hamilton's main street did not have all its required building consents and has safety and hygiene issues.
Hamilton City Council earned $25,000 last year renting the substandard property out and there are now questions as to whether it met its legal obligations as a landlord.
Hamilton City Council is now terminating the tenancy seven months after an internal report found significant work was needed to bring it up to standard.
A condition survey of an upstairs flat in one of the Victoria St buildings the council bought last year has revealed it is damp and mouldy, with leaky drains and blocked drainage, poor ventilation, inadequate fire protection and requires an entire refurbishment. It also falls short of the new insulation rules.
The survey, carried out in April and released to the Herald under the Official Information Act, has shocked new Hamilton mayor Paula Southgate, who says councillors weren't even told the building had accommodation.
The first-floor apartment sits above a restaurant at 264 Victoria St. It was one of three buildings the council paid $6.49 million for to support former mayor Andrew King's vision to transform the area into a giant park.
According to the survey author and the council's maintenance team leader Ross Brunton, the residence required a complete overhaul that would come at a "considerable expense".
Some pipe joints in the kitchen had separated and are leaking and the exposed pipe work in the shower had "evidence of being stood on several times", the survey said. The bottom of the shower base also revealed damp and mould.
There were also concerns that someone could slip in the shower and fall through the window from the first floor.
The bedrooms were small and dark, had minimal ventilation and when council staff visited most of the smoke alarms installed weren't working.
The accommodation is also unconsented after a shower installed in the mid-90s was never signed off.
The council earns $25,000 a year in rent for the upstairs abode, which the tenant then sub-let for short-term accommodation.
Hamilton City Council general manger of growth Jen Baird said the council gave the tenant three months' notice to vacate in September - five months after the survey identified "some issues".
However, the council learnt earlier this month the tenant had not received the notice and had now agreed to vacate the premises in January.
Baird said the council decided to terminate the lease because it did not meet the new insulation requirements for residential tenancy and was not adequately consented.
The council spent $2365.87 on fixing some leaks and repairing a fire alarm after doing the survey.
Baird said the council only carried out a "high level" inspection of the properties before buying them last year because the plan had been to buy them for strategic purposes rather than as a commercial investment.
Baird said the council was not being prosecuted for renting out a substandard property.
The apartment was included in the purchase of 260 Victoria St, which the council paid $790,000 - which, according to a private valuation commissioned by the council, was $140,000 above market value. The property has a current capital value of $710,000.
Condition reports for the other commercial premises housed in 242 to 266 Victoria St indicated they were in fair condition for the age of the buildings and nature of the tenancies.
Pidgeon Law principal Joanna Pidgeon, who specialises in property law, said the council had a responsibility to do its due diligence before purchasing the property.
All landlords had legislative standards they were required to meet and councils should be leading by best practice, she said.
"A prudent purchaser should be doing due diligence before going unconditional and deciding to purchase the building. As soon as they become the owner they had the obligations to ensure the requisite standards were met."
She said even prior to the survey, a council property manager should have been inspecting that property and raising concerns.
"It isn't enough of an excuse to say, 'Well, we are just getting a temporary income while we are planning to demolish it ...' Either it is of a standard to rent to a residential tenant or it isn't."
Southgate, who voted against purchasing the buildings, said she would be unhappy if it turned out the council was letting out substandard accommodation to anyone.
"You've raised considerable concerns to me which I do need to take seriously and look into."
Southgate said the council needed to re-look at the medium and long-term plans for the buildings, particularly given the recent survey.
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Tenancy Compliance & Investigations Team national manager Steve Watson said his organisation was not investigating, as the tenancy was ending.
"Landlords should always undertake due diligence when purchasing a property, especially with a sitting residential tenant. If work needs to be undertaken to bring the property up to standard then the landlord should arrange to undertake that work as soon as possible. Information about the required standards can be found on our website tenancy.govt.nz."