The Hidden Condo Clause

The pursuit of finding a rental unit is a treacherous feat, driven by a desire to find a great location with adequate living space at a reasonable market price.  Upon finding that near-perfect space for you to call home, a lengthy process commences which concludes with the signing of the tenancy agreement.  We all know it is important to understand the terms of this contract so that, as a renter, you are not surprised by any hidden fees or obligations and in turn, are apprised of your rights in respect to the unit.  But what if you were told, that as a tenant, your rent could significantly increase each year simply because your unit was built-in or occupied after November 1, 1991?

The Law

The Residential Tenancies Act, 2006 (“RTA”) is a piece of legislation that governs, amongst other things, the landlord-tenant relationship in respect to rental rates.  The RTA (which came into effect on January 31, 2007) seeks to create a “rental housing system that protects tenants, helps landlords and promotes investment in Ontario’s rental housing market”.^[1]  In other words, the act regulates how, when and how much a landlord may increase your rent.

One of the ways in which your rent is subject to an increase is by way of Ontario’s annual rent increase guideline.  This guideline is based on the Ontario Consumer Price Index (CPI) and is capped at 2.5%, even if the CPI exceeds this amount. The good news for 2014 renters is that the rate of allowable rent increase is set at 0.8%.  Unfortunately, that’s not the end of the story.  The RTA allows exemptions from this cap for landlords who own buildings built in or occupied as a residential unit on or after November 1, 1991.^[2]  All the landlord needs to do is be approved by the Landlord and Tenant Board and notify the tenant within three months prior to the increase.^[3]  The threshold for costs is quite low: the landlord must show they have incurred an increase of 1.25% above the CPI guideline in relation to municipal taxes and charges (including interest and penalties), utilities or any ‘eligible capital expenditures’.  What qualifies as an ‘eligible capital expenditure’ you ask?  Anything that relates to the following:

1. protection or restoration of the physical integrity of the residential complex or part of it;
2. maintenance plumbing, heating, mechanical, electrical, ventilation or air conditioning system;
3. provide access for persons with disabilities;
4. promote energy or water conservation; or
5. maintain or improve the security of the residential complex or part of it.^[4]

To put this into context – a landlord who pays $10,000 in property taxes in 2013 and $10,500 in 2014 has incurred a 5% increase in costs, which surpasses the very low threshold of 1.25% above the CPI, and can now apply to the Board for an increase in rent to absorb these costs.  Keep in mind, this is one of many scenarios in where a landlord can make an application – the very broad language of section 126 allows for a landlord to apply for an increase above the guideline in a number of ways.

Limitations and Calls for reform

Despite the ease to which a landlord may increase your rent, it is important to note that there are certain limitations to this exemption.  The most straightforward is timing – if you move in after the landlord incurs these types of costs, you are exempt from an annual increase.  If you already are a tenant and your unit or building has serious outstanding maintenance issues, then you may apply to the Landlord and Tenant Board to prohibit all rent increases (including an above-guideline increase).^[5]

However, these limitations do not offer much relief – tenants across Ontario have been vocal about this matter in hopes of altering the legislation to reflect a rental freeze. For example, in June 2013, a private member’s bill (Bill 82) called ‘The Residential Tenancies Amendment Act’ was introduced by MPP Cindy Forster with an objective to eliminate the exemption from rent regulations for buildings constructed post-1991. However the Bill died with the dissolution of the legislature this May.  These sorts of attempts for provincial wide rent control have continually failed.

In response to these outcries, the government of Ontario has released statements indicating their reasons for allowing such increases, specifically in respect to buildings post-1991.  The province opines that such exemption has been maintained, “…as an incentive for private landlords to build new rental accommodation…[which in turn] creates jobs in the construction sector”.^[6] And that “…any changes to this incentive could have an adverse effect on…the economy and job creation”.^[7]  Although it is important to support these industries, tenants should not have to bear the brunt of such costs.

What now?

The implication of these provisions is clear – higher rent for tenants living in post-1991 units.  The Canada Mortgage and Housing Corporation (CMHC) released a report in 2012 showing that buildings constructed in 1990 and after have rents that are 37% greater than rents in the overall rental market ($1,513 versus $1,103/month).^[8]

Armed with this information, you maybe asking yourself what practical steps can you take as a residential tenant or first time renter?  Here are three fundamental takeaways:

• Know your rights:

It is important to know your rights as a tenant in regards to rental increases.  As previously noted, you cannot incur costs retroactively; the application for an increase has to relate to a cost that will be incurred while you are the tenant. It is helpful to be aware of this should your landlord approach you regarding previously incurred costs. You have to be a tenant for 12 months before the landlord can apply for an increase. However, a landlord can still pass on costs for ‘extraordinary property tax and utilities’ incurred before a new tenant has moved in.

If your unit is in need of serious repairs, you can bring an application to the board to stop the increase from occurring and have the repairs done.  Fortunately, the RTA does not define what is meant by ‘serious’ and treats each application on a case-by-case basis.^[9]  Lastly, your landlord must give you 90 days notice – therefore, you may bring an application to the board should your landlord fail to notify you in a timely manner.^[10]

• Negotiate:

Don’t underestimate the strength of a positive landlord-tenant relationship.  For every great tenant, there also exists a great landlord – you shouldn’t ignore your intuition, and you always have the right to perform a background check on your landlord – ask other tenants in the building how their experience has been (note it only applies if your landlord owns the building, not just the unit).  Your landlord may not even be aware of their right to apply for a rent increase.  Nevertheless, if this is a matter you would like to face head on, there is some room to negotiate – section 121 of the RTA allows for a landlord and tenant to enter into an agreement to increase the rent by up to 3% above the statutory guideline to offset the cost of a capital expenditure and new service.^[11]

• Think long-term: 5 year plan at 5%.

When browsing for your perfect unit, think long-term affordability instead of present-day affordability.  For instance, consider the maximum amount of rent you would be willing to pay five years from now and deduct an annual 5% to see what that price would be today.  For example, $1,600 five years from now at a 5% annual increase would equal to $1,300 today. This gives you a realistic idea of what you could pay should your landlord increase your rent above the annual guidelines each year.  By following this plan you ensure a safe range to search within while selecting your future home.

Conclusion

Whether you are halfway through a one-year lease or at the beginning of your search, it is never too late to understand your rights and make choices accordingly.  It is important to ask the right questions when searching for your next (or first!) residential rental unit.  Although it is uncommon to inquire into the year of the building’s construction, such a question could save you a lot of money as well negate the possibility of economic eviction.  So the next time you’re inquiring into which utilities may be covered, whether your unit has laundry or whether it offers parking for visitors – remember to ask whether your building was built-in or occupied after November 1, 1991.

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