Monday, 31 December 2018

Ontario and the Rent Control See-Saw

TENANTS IN NEW BUILDINGS (November 2018) BEWARE!


The Globe and Mail ran a story (Developers forge ahead with apartments amid easing of Ontario rent-control rules December 31, 2018) about three developers who have committed to building more rental housing, ostensibly because rent control has been removed in relation to the projects they were contemplating.  This story, unfortunately, leaves a lot to be desired and creates the impression that until recently Ontario had a full rent control regime.  This is not an accurate portrayal of what the law in Ontario has been.

A brief history of rent control in Ontario requires us to consider the “dark days” before the coming into force of the Tenant Protection Act in June 1998. Prior to this date, Ontario had a very confusing mix of rent control laws where rents, in many/most buildings were actually registered rents and the lawful amount of rent that could be charged was regulated and controlled at all times by a government bureaucracy.  If a landlord charged a tenant a “market rent” but this amount was higher than the registered rent there was a system by which tenants could get rent refunds. The reality of this situation was that many landlords had buildings where the rents were unable to support maintenance and renovations and buildings fell into disrepair.  Under this system, (pre-June 1998), few developers could be convinced to build new apartment buildings as the revenue from rents was so tightly controlled.

This changed with the Tenant Protection Act and specifically section 124 of that act. This section provided that the legal and lawful rent for an apartment was the amount that a landlord first charged to a tenant.  The entire history of registered maximum rents for specific rental units was gone. This meant that whenever a landlord had a vacancy the landlord could charge the incoming and new tenant any amount that they wished—essentially, whatever the market would bear.  This, as you can imagine, was an earth shaking shift away from serious rent control.  While some tenants may reside in a unit for a very long time, many tenants are mobile or transient and their “moving” on a somewhat predictable time frame allowed landlords to adjust the rent to market rates (presumably upward but not necessarily) between tenancies.

The “rent control” that remained after the passing of the Tenant Protection Act was that the rent charged to a tenant, during a tenancy, could not be increased more than the percentage calculated and allowed by the government.  The government calculated an annual percentage that was similar to an “inflation” amount and the intended effect was that tenants couldn’t be priced out of their apartment by an exorbitant rent increase that might be disconnected to economic realities (i.e. a rent increase designed to evict).   The effect of a rent control during the tenancy and no rent control between tenancies was a partial rent control or a partial de-control depending on one’s perspective.

The Tenant Protection Act, like current legislation, also extended the exemption from partial rent control to certain specific buildings (lifting rent control entirely).  In June 1998, that exemption applied to rental units never rented since July 1975 or no part of a building residentially occupied before 1991 (basically anything built after 1991 had no rent control).

This partial rent control exemption continued through various legislative amendments and even into the new (and currently named legislation) the Residential Tenancies Act (RTA).  The RTA was passed in 2006 and came into effect on January 31, 2007.   The RTA continued the partial exemption from rent control and landlord’s could continue to charge any amount of rent that they wished for new tenants.  Hence, one a rental unit became vacant the landlord could charge the next tenant any amount that the market would bear or the tenant was willing to pay.  

With the RTA we saw a newish exemption date—but conceptually similar idea, with the exempting of any rent control from tenancies in rental units that were not occupied for any purpose before June 17, 1998.  What this means, in practice, is that rental units that fit this exemption and tenants living in these rental units, could have the amount of their rent raised to any amount whatsoever—once every twelve months with 90 days notice. Fortunately, this exemption flew under the radar for the longest time.  Most landlords, most tenants, and people generally believed that there was rent de-control between tenancies but that during a tenancy the amount of the increase was limited by the published annual amount set by government.  The outcome was that while there were many rental units (and more and more as time went by and more were built) that were exempt from the annual percentage increase amount most landlords only applied the annual percentage increase amount established by the government or some other amount that was reasonable enough to maintain the tenancy.

The big problems in rental housing started with the boom in real estate generally and what can be considered to be a housing shortage in Toronto.  Rocketing real estate prices made rental housing increasingly valuable.  Market rent for an apartment increased as well as housing increased and the market supply tightened.  Inevitably, tenants who were used to get rent increase notices in accordance with the annual guideline amount set by the government started getting double digit percentage increases because their apartment could actually command that amount of rent.  The landlord’s expenses did not necessarily increase and the cost of carrying the building did not grow exponentially—landlords simply discovered that their existing buildings could make them a lot more money.

The breadth of the exemption from guideline increases (i.e. the date that it goes back to), was largely the problem.  Philosophically, you can understand that a landlord who has invested in a new building (say up to 10 years old), wants to be able to recoup that investment as quickly as possible in accordance with what the market would allow if rents were unregulated.  The counter point, and what seemed unfair to many, is that the exemption from rent control (during a tenancy), had existed for so long (since the Tenant Protection Act in 1997 reached back to 1991), that landlords were just getting a massive windfall on buildings that were long paid for.  Essentially, landlords were hitting a jackpot because of a booming real estate market and not because of any investment in the quality of their existing rental stock.

The RTA was amended on May 30, 2017, to remove that exemption to the special category of rental units (based on the age of the unit or occupation of it—i.e. 1975, 1991, 1998), in which landlords could raise the rent to any amount that they wished even during the occupation of the rental unit by a tenant.  Tenants now, could only face an annual guideline increase in accordance with the amount set by government capped to a 2.5% increase on the monthly rent amount.   Of note, this big change that so upset the real estate developer world did not in fact take away the right to charge any amount that a landlord wished between tenancies.  The market rent can always be charged for a rental unit when a tenant vacates and a new tenant takes possession.   Also continued, is the right for landlords to seek Above Guideline Rent increases in the event that there are extraordinary costs incurred in relation to improving or maintaining the residential complex.

From approximately May 30, 2017 (it was backdated to the date of the announcement), landlords lost the right to increase the rent for certain exempted units to any amount that they wished.  Arguably, this gave a lot of stability to tenants who were living in apartments that had affordable rents—or perhaps phrased another way---rents that they could afford.  No longer could a landlord raise a rent by 30%,40%, 50%, or any other percentage merely because the apartment could command this amount of rent in a booming real estate market.

There is an underlying public policy in the provisions of the Residential Tenancies Act. If you think about it for a while, you will recognize that a stable rental market contributes significantly to stable families and a stable workforce.  People are connected to their community through the location of their home. Just think about the impact on employers if their workers were constantly quitting, or late to work because they were moving again. What about children who have to transfer schools if the parents are moving regularly because the rents are being legally increased to an unaffordable amount? Is this healthy for kids?  How about the connection that people have to important services such as their doctor, groceries, family, transportation, social clubs, sports, etc., that is closely connected to where they live.  When rents are unpredictable and the renting population finds itself constantly moving or under threat of being evicted by unaffordable rent there is a certain societal instability that comes with that which I don’t think anyone would say is “good”.

The Globe and Mail article reports on the removal of rent control that the current Ontario Conservative government has given us.  New legislation, removes the limit on annual guideline increases from rental units that are built or firstly available after November 15, 2018.  Tenants who move into these kinds of units are subject to unlimited annual rent increases at the whim of the landlord.  Now this doesn’t mean that the landlord has to inordinately increase rents for those units but the landlord will indeed have the right to do so.  Whether this is good or bad is left to be seen.  However, I can’t help but feel like this is a big déjà vu reflective of the passing of the Tenant Protection Act in 1997 when this conception of a special exemption was first introduced.  

This current exemption, I don’t anticipate will cause much difficulty in the near future. Rental units existing before November 15, 2018, will still be subject to a maximum annual rent increase as set by the province.  Rents can still be adjusted between tenancies and landlords with older buildings can still apply for Above Guideline Rent Increases.   I suppose what is a little surprising in the article is that you have the sense of a jubilant developer community because of the removal of the annual rent increase control for buildings constructed or occupied after November 15, 2018.   Given how the various governments create, change, and remove this particular exemption (as evidenced by the history of the exemption), I can’t imagine that any developer is really modeling a residential rental complex relying on this current state of the law.

For those interested in seeing how the current Conservative government effected the change here is the wording of the exemption from the Restoring Trust, Transparency, and Accountability Act, 2018, S.O. 2018, c.17 (Bill 57):

SCHEDULE 36
RESIDENTIAL TENANCIES ACT, 2006
1 The Residential Tenancies Act, 2006 is amended by adding the following section:
Exemptions from rules relating to rent
6.1 (1) In this section,
“addition” means, with respect to a mobile home park or land lease community, an expansion beyond the boundaries of the mobile home park or land lease community; (“rajout”)
“commencement date” means the day section 1 of Schedule 36 to the Restoring Trust, Transparency and Accountability Act, 2018comes into force. (“date d’entrée en vigueur”)
Buildings, etc., not occupied on or before November 15, 2018
(2) Sections 120, 121, 122, 126, 127, 129, 131, 132, 133, 165 and 167 do not apply on and after the commencement date with respect to a rental unit if the requirements set out in one of the following paragraphs are met:
1. The rental unit is located in a building, mobile home park or land lease community and no part of the building, mobile home park or land lease community was occupied for residential purposes on or before November 15, 2018.
2. The rental unit is entirely located in an addition to a building, mobile home park or land lease community and no part of the addition was occupied for residential purposes on or before November 15, 2018.
Rental units in detached houses, semi-detached houses or row houses
(3) Sections 120, 121, 122, 126, 127, 129, 131, 132 and 133 do not apply on and after the commencement date with respect to a rental unit if all of the following requirements are met:
1. The rental unit is located in a detached house, semi-detached house or row house which, on or at any time before November 15, 2018, contained not more than two residential units.
2. The rental unit is a residential unit that meets all of the following requirements:
i. The unit has its own bathroom and kitchen facilities.
ii. The unit has one or more exterior or interior entrances.
iii. At each entrance, the unit has a door which is equipped so that it can be secured from the inside of the unit.
iv. At least one door described in subparagraph iii is capable of being locked from the outside of the unit.
3. The rental unit became a residential unit described in paragraph 2 after November 15, 2018.
4. One or both of the following circumstances apply:
i. At the time the rental unit was first occupied as a residential unit described in paragraph 2, the owner or one of the owners, as applicable, lived in another residential unit in the detached house, semi-detached house or row house.
ii. The rental unit is located in a part of the detached house, semi-detached house or row house which was unfinished space immediately before the rental unit became a residential unit described in paragraph 2.
Non-application of exemption under subs. (2) or (3)
(4) Subject to subsection (5), the exemption under subsection (2) or (3) does not apply with respect to a rental unit that is subject to a tenancy in respect of which a tenancy agreement was entered into on or before November 15, 2018.
Application of subs. (4)
(5) Subsection (4) applies only with respect to the tenancy described in that subsection and does not apply with respect to any subsequent tenancy.
Burden of proof
(6) For greater certainty, in an application to the Board in which the application of subsection (2) or (3) is at issue, the onus is on the landlord to prove that the subsection applies.
Transition rules
(7) The following rules apply on and after the commencement date with respect to a rental unit, if subsection (2) or (3) applies to the rental unit and the unit is subject to a tenancy in respect of which a tenancy agreement was entered into before that date but after November 15, 2018:
1. Despite subsections (2) and (3), sections 121 and 122 continue to apply with respect to an agreement that was entered into between the landlord and the tenant of the rental unit under section 121 before the commencement date.
2. Despite subsections (2) and (3), section 132 continues to apply with respect to an application that was made by the landlord or the tenant of the rental unit under that section before the commencement date and was not finally determined before that date.
3. Despite subsections (2) and (3), section 133 continues to apply with respect to an application that was made by the tenant of the rental unit under that section before the commencement date and was not finally determined before that date.
4. Despite subsection (2), section 165 continues to apply with respect to an assignment of the rental unit for which the landlord granted consent under section 95 before the commencement date or which was authorized by the Board under section 98 before that date.
Commencement
2 This Schedule comes into force on the day the Restoring Trust, Transparency and Accountability Act, 2018 receives Royal Assent.






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About Michael Thiele

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Ottawa lawyer and partner at Quinn Thiele Mineault Grodzki LLP.  Graduate of Queen's University in Kingston, Ontario.  Called to the bar in Ontario in 1997.  Undergraduate degree at Colby College, Waterville Maine, U.S.A.