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The council said in a statement - first provided to student magazine Critic - it had made alternative arrangements for the tenants who were forced out after recent safety checks.
The accommodation, on the top two levels of the council's nine-storey car park building in Moray Pl, had nine flats - four of which were occupied by a total of 11 tenants.
Property services group manager Laura McElhone said recent safety checks revealed a fault in the fire alarm system which affected several of the flats.
The fault meant if a fire started in this area the alarm would not automatically activate.
``The affected flats have working smoke alarms.
``However, for these tenants to alert the rest of the building to a fire, one of them would have had to manually activate the fire alarm system.
``We were not comfortable that the situation provided an adequate level of safety for our tenants and we therefore offered them either alternative short-term accommodation or financial assistance to find alternative long-term accommodation.''
Other building occupants were not affected.
The council would install a new fire alarm system and the future use of the part of the building where the boarding house was would be reviewed.
``The configuration of the building in terms of access, layout and shared facilities means it doesn't meet the level of service expected by tenants.''
The council said it could not respond to further questions yesterday because Dr McElhone was on leave, but a spokeswoman said the boarding house was not illegal.
``The boarding house met legal requirements, but in our view these did not provide a sufficient level of safety for our tenants,'' the spokeswoman said.
The council did not say how much it had paid tenants, but Critic, which spoke to a tenant, said it was several thousand dollars per tenant.
It reported tenants were given four days to find somewhere else and quoted an unnamed tenant saying they were happy with the way they were treated by the council.
``They did everything right.
``I'd say the big scare came from the London fire.''
The payout comes after the recent resignation of city property manager Kevin Taylor, who was replaced by Dr McElhone.
The Otago Daily Times reported in March Deloitte had been called in to examine the department responsible for property worth hundreds of millions of dollars.
Ministry of Business, Innovation and Employment compliance and investigation (tenancy) national manager Steve Watson said under the Residential Tenancies Act 1986, landlords were required to install smoke alarms.
This was different to a fire alarm, which was designed to alert building occupants to a fire, Mr Watson said.
This meant the council was not breaking the law.
However, MBIE was pleased the council was taking additional steps to ``protect the lives of its tenants''.