Thousands of renters in New South Wales could discover their tenancy agreements are unenforceable if their landlord lives interstate, following a ruling by the state's highest court.

The legal loophole emerged after the Court of Appeal declared in February that the NSW Administrative and Civil Tribunal, which handles a range of small civil disputes, has no jurisdiction if one party lives in another state.

The ramifications of the decision have cost Sydney couple Anna Jacobs and Sefton Darby thousands of dollars after they were forced out of their rented Paddington home in April because of toxic mould.

The couple took their landlord to the tribunal's tenancy division to reclaim rent paid in advance as well as damaged property including a bed and clothing.

But they discovered they were powerless to seek the thousands of dollars they were allegedly owed.

"The landlord's agent showed up and announced the landlord wanted the case dismissed because the tribunal isn't able to enforce any law against him because he lives in South Australia," Ms Jacobs said.

Ms Jacobs said the tribunal members told the agent to try and negotiate a settlement regardless.

"The agent's response was that he had no authority to do so and his only instructions were to dismiss the case immediately," Ms Jacobs said.

"There is no question about whether it's open to being exploited by agents: we were exploited by an agent."

She said their only alternative avenue to seek compensation was to launch a claim in the local court for breach of contract.

"This increases costs, there's different standards of evidence and is incredibly difficult to do so without legal representation," she said.

Call for law change to treat civil tribunals as a court

The decision, known as Burns v Corbett; Gaynor v Burns, also has ramifications for interstate landlords looking to settle disputes with NSW tenants.

Real Estate Institute of NSW chief executive Tim McKibbin said both parties may now be exposed if they cannot resolve issues themselves.

Real Estate Institute of NSW chief executive Tim McKibbin says the law needs to change. ( ABC News: Ursula Malone )

"People can't disregard their contractual obligations but ... if parties are in dispute, if either party wants to bring the proceedings then that becomes very difficult when the judicial authority that has the exclusive jurisdiction to hear the matter is unable to do so," he said.

"[There are] 800,000 rental properties in NSW and there would be a significant number of these properties that would be outside those jurisdictions."

He said the institute had written to the NSW Government, suggesting the legislation be changed to reflect the situation in Queensland, where civil tribunals are classified as a court.

"So in Queensland they wouldn't be suffering this problem as far as I'm aware," he said.

"We've said to government that this should be, and believe [it] is, a priority for government to resolve. We're also aware the Government is fully cognisant of just how serious a problem it is."

NSW Attorney-General Mark Speakman said only a small amount of cases heard in the tribunal were affected by the decision.

"In the last financial year, NCAT received almost 30,000 applications to resolve residential tenancy disputes. The number of matters potentially affected by the Court of Appeal's judgment in Burns v Corbett; Gaynor v Burns makes up 0.2 per cent of those applications," he said.

"In the interim, the NSW Government is examining a number of options to enable NCAT to continue delivering informal and affordable dispute resolution."

He said the High Court was expected to hear an appeal in the Burns matter later this year.

Mr Darby said real estate agents should be required to tell renters if the landlord lives interstate.

"Until there is a change, they need to actively disclose if your landlord is out of state, I think tenants should be aware and it should be disclosed," Mr Darby said.

"I can't understand how you could have an entire set of tenants, an entire set of landlords and as we understand it, a whole load of other tribunals not just tenancy issues, where the most basic level of resolving disputes is not available to people.

"The whole point of these tribunals is that normal people can turn up, without lawyers, just on a small claim and get resolution quickly and that's now not available to people."

Ned Cutcher from the Tenants' Union said the ruling could have ramifications for landlords.

"Probably the biggest grey area that this has thrown up is whether or not landlords now have the ability to affect an eviction through due process using the Residential Tenancys Act," he said.

"There is a question as to whether or not a termination proceeding can be commenced in the local court whether or not the residential tenancy act allows that.

"That's a big concern I think, huge concern for landlords and I guess a concern for us that we might start seeing landlords take matters into their own hands."