Rent Increase Guideline and Exempt Properties

Toronto Real Estate News

Landlords in Ontario are not allowed to increase rents however they please. Each year, the Government of Ontario announces a Rent Increase Guideline that sets a cap for rent increases. The allowable rent increase determined by the Ministry of Municipal Affairs and Housing from January 1,2014 and December 31, 2014, is 0.8 per cent. It is the second-lowest rate in more than two decades, and many landlords expressed their dissatisfaction with such a low legal increase. Under the current legislation, Ontario landlords who want to increase rents above this limit will not be able to do so without applying to the Landlord and Tenant Board.

Detail Of Condos In Toronto
The rent increase should be based on real cost of maintenance and services.

The rent increase cap is based on the Ontario Consumer Price Index (CPI), which measures changes in the price levels of a market basket of consumer goods and services purchased by households. It is calculated monthly by Statistics Canada and provides an objective, reliable measure of inflation. The rent increase cap is determined by averaging the per cent change in the Ontario Consumer Price Index during the previous 12 months, in accordance with the 2006 Residential Tenancies Act.

Nevertheless, landlords claimed that the rent increase guideline does not reflect the true cost of property management. There is no cap on the costs they have to pay, including property taxes, maintenance, and services. As Rachelle Berube from LandlordRescue told us,

The problem is that rent increases should be based on real cost of maintenance and services that the landlord needs to pay for. Recently it was announced that natural gas rates will go up 40% next year. Who will pay for that if the increase allowed is only 0.08%

Landlords pointed out that the low rent increase limit will mainly affect those who take care of their properties and keep them in good condition. On the other hand, landlords who don't spend their rent income maintaining their properties won't necessarily notice the change.

Renting A Flat
It is important that housing remains affordable. Tenants should not be living in uncertainty that they won't be able to afford their homes after their rent expires.

How Can Landlords Increase Rents?

Usually, the rent for a unit can be increased if at least 12 months have passed since the tenant first moved in or since his or her last rent was increased. The landlord has to send a proper written notice of the rental increase at least 90 days before the rent increase takes effect. Landlords in Ontario can collect a rent deposit from a new tenant before the start of a new tenancy, but they cannot use it for anything but the rent payment for the last month or week before the tenant moves out. However, the rent control ends when a tenant leaves and the landlord is free to increase the rental fee according to the market rate. This means landlords will be able to increase rents if their tenants leave.

Landlords noted that this situation might be more beneficial to property owners who do not provide sufficient upkeep and whose dissatisfied tenants leave after shorter periods. As Rachelle Berube remarked,

What we saw in the past with rent control is that the owners cut the only place they can to break even, that's the maintenance and services for the tenants. Landlords do not like long-term tenancies because over time the rent control guideline doesn't equal the raise in market rents or costs.

Street In Toronto
The rent control guideline over time doesn't equal the market rents.

On the other hand, landlords who decently maintain their properties and are looking for long-term tenancies will struggle to maintain their standards. The low rental increase cap might lead landlords to stop maintaining their properties, losing their old tenants and then shifting the financial burden of upkeep on the new tenants. Moreover, residential property investors might decide to invest into commercial properties or choose other provinces where there is lower or even no rent control for landlords.

On the other hand, it is important that housing in Ontario remain affordable and predictable. Tenants should not be living in uncertainty that they won't be able to afford their homes after their rent expires.

Landlords can increase rents above the guidelines, but they have to apply to the Landlord and Tenant Board. Rachelle Berube suggested that this procedure is too complex and expensive. She noted,

Currently only large corporate landlords with large buildings are able to do rent increases. This is because the cost of the application is prohibitively high and it's quite complex, so most landlords would have to pay legal costs to be successful.

This means that the majority of smaller landlords who would need to increase their rents above the limits won't do so because of all the obstructions. Overall, this will reflect in the quality of housing and maintenance they provide.

Rent Cap Exception

Not all residential landlords are covered by the 2014 Rent Increase Guideline. Landlords who own newer rental properties are exempt from the guideline and can increase the rent to an amount that is not limited to the guideline amount. The exception includes:

  • Rental units that were not occupied for any purpose before June 17, 1998
  • Rental units no part of which had been previously rented since July 29, 1975
  • Rental units if no part of the building, mobile home park, or land lease community was occupied for residential purposes before November 1, 1991
Condos In Toronto
Currelntly only large corporate landlords with large buildings are able to do rent increases.

Even though these residential properties are outside of the guidelines' scope, landlords still have to give proper notice to their tenants. When increasing the rent, they can use an N2 rent increase form and are required to provide 90 days' written notice. Apparently the purpose of the rent exemption for post-1991 rental properties is to provide an incentive to private landlords to create new rental properties. This should secure a sufficient influx of new rental properties in Ontario, which also creates employment in the construction industry and helps the Ontario economy.

Because the government wanted people to build new rental housing, they removed the rent control guideline on units built after November 1, 1991. This includes a lot of new condos. Investors still didn't build new condos because of the mill rate on multi-residential being about double the amount on condos but that's another story,

Rachelle Berube informed us.

Rent control was first introduced in Ontario in the 1944 National Housing Act but did not survive strong business lobbying and was repealed after approximately five years. Rent control was reintroduced in 1975, and since then, it has undergone numerous changes. The Ontario government is using rent control as a tool to provide affordable housing that should help people in their everyday lives. However, their recent step — setting a very low rent increase cap — was not received positively, especially by small and medium residential landlords who are facing financial challenges and need to increase rents to cover their costs.

Taking into consideration the rent increase exemptions as well as the fact that landlords can increase rents without any limits if their tenants leave makes it unclear whether the low cap will really protect tenants from large rent increases. Rachelle Berube suggested,

Even in a scenario where there was no rent control at all, many landlords would not even raise the rent on their good tenants, preferring not to incur renovation and vacancy expenses. Usually most landlords like a one-year to 18-month payback on their investment.

House In Toronto
It is unclear whether the low cap will really protect tenants from large rent increases.

Furthermore, landlords will still have the possibility to go above the guidelines with their rent increases if the Landlord and Tenant Board gives them permission. If the improvement is truly beneficial and the costs really demand an increase above the cap, the board should grant such an increase. After all, the purpose of rent control is to protect tenants from being squeezed by unreasonably high rents.

VS00NM

4 thoughts on “Rent Increase Guideline and Exempt Properties

July 1, 2014 at 8:04 am
Robert Rickel says:

Not sure that I agree that it Gov’t should be involved in rent setting decisions. I am from Montreal originally and having lived in South Florida my entire adult life, I have become more and more cynical about governments imposing themselves on private enterprise. Do you know my friend Michael Meltzer of Advocate Realty?

Reply
July 1, 2014 at 8:14 am
Nancy Welch says:

I am just about to increase rents to the same level they were in 2005 before the market
disintegrated. How can Landlords increase rents??? With due respect….very easily.

Reply
July 1, 2014 at 8:31 am
Robert Rickel says:

Good for you Nancy!

Reply
July 1, 2014 at 10:10 am
Ronald Egoroff says:

I am from Toronto originally and am familiar with rent control, as a tenant it is great as an investor “Not so much!” However living in Florida where there is no rent control the market conditions determine rents! I have had property rent today for less than it did 10 years ago because of the market, with rent control the rents are more stable however they never appear to be attractive enough for the small investors. So there are the good and bad’s of either option.

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