“Tips and traps surrounding rent increases”
On that chilly afternoon my coffee of choice was French Vanilla, extra-hot. As I took the first sip, slowly savouring the experience, an email popped up.
“Hey Stevie, long time no talk.”
It’s been a couple months since I heard from Alberto and Maria, a couple I’ve had a decade’s long business relationship with.
“As you know Stevie, we’ve had a great tenant in the Queen west loft for the past two and a half years, no complaints whatsoever.
Tanya pays the rent on time and takes good care of the condo, treating it like her very own. Her lease is up for renewal in a few months and because she’s been such a good tenant, we’ve never increased the rent.
But, our maintenance fee and property tax went up slightly this year, so we’re thinking perhaps now’s the time. What are your thoughts on a reasonable amount to raise the rent by?”
I took another sip of coffee, the flavour and aroma had a calming effect. I knew my response to their question would not be the most welcoming of news.
Hey guys, great to hear from you. Let me dive right into your question. While Tanya remains a tenant in your unit, you cannot increase the rent above the annual percentage limit, which, happens to be 1.8% for the upcoming year.
The rent increase guideline is based on the Ontario Consumer Price Index (CPI), which is calculated monthly by Statistics Canada. Each year, the percentage maximum is pegged to the current CPI figure.
Prior to April of 2017, units built after 1991, were exempt from the guideline. As a landlord, you had the flexibility to adjust the rent according to what the market was willing to pay. Under the new rules, the guideline now applies to all residential dwellings in Ontario, regardless of when they were built.
I paused and thought for a moment. Alberto & Maria were facing the perfect Catch 22. Rents for units similar to theirs had gone up by 35% over the two year period.
By the numbers, their one bedroom condo that originally leased for $1,600 per month, could now fetch close to $2,100 in today’s competitive market. All well and nice, except those financials gains would not been seen if their tenant decides to stay.
I continued.
Guys, the only practical means at your disposal is if Tanya decides to leave at the end of the lease. Then, after finding a new tenant, you’re allowed to charge whatever the market dictates in that first year.
The rules do permit some rent increases above the Guideline, but only if the following applies:
The landlord’s costs for municipal taxes and charges have increased by an “extraordinary” amount.
The landlord did extraordinary or significant renovations, repairs, replacements or new additions to the building or to individual units. This type of work is called a “capital expenditure”.
The landlord’s costs for security services increased, or the landlord began providing security services for the first time.
For the most part, these exceptions are skewed to benefit large building owners, not smaller individual unit owners like you.
A question that comes up a fair bit is, can’t we simply refuse to renew the lease?
The short answer is no.
The Ontario Residential Tenancy Act provides a fairly prescriptive process on how a landlord can end a tenancy. In short, if a tenant does nothing to compromise the rules, like say damaging your unit or refusing to pay rent, then they can potentially remain in your unit until they decide to leave. Yup.
There are some allowable exceptions to ending a tenancy at renewal, they include:
If both parties agree to end the tenancy
If the unit is up for sale or has been sold
If the unit will be occupied by the landlord, his spouse, parents, children, or persons who will provide care services for any of these individuals.
Sufficient notice must still be given and a landlord’s claim regarding immediate family occupancy, must be legitimate.
Going forward, my advice to you is two-fold.
First, assume that your tenant will remain far longer than the traditional one to two year cycle. In fact, assume a three to five year occupancy as the new going minimum. It’s thus clearly in your best interest to obtain the highest rent you can, right from the beginning.
When you listed your property for lease, ensure the price you set is at or slightly above market value, never below.
Recently, I listed a small studio unit (under 450 sq feet) at what I assumed was a reasonable lease price. To my shock, we had over twenty five showing requests within the first two hours.
I promptly advised my clients to revise the lease price upwards. Within the next 48 hours, we received several offers, each above the new listing-price, with one candidate offering an entire year’s lease, upfront.
My second bit of advise is simply to take advantage of the yearly guideline increases. Yes, the upcoming 1.8% guideline increase pales in comparison to the going 17.5% year over year market rate.
However, if your tenant decides to remain in your unit for the long-haul, this may be your only leverage over that period of time.
As always, great to hear from you both. Say hi to the girls for me and let me know if you’re up for a French Vanilla latte sometime next week!
Stevie
