Why we may not want to close Ontario’s rent control ‘loophole’: Reasonable Doubt

Forcing a landlord to choose between operating a unit at a loss or selling it isn't an appropriate balancing of rights and obligations in Ontario's Residential Tenancies Act.

The average rent for a condos in Toronto climbed nearly 12 per cent in the last quarter of 2016 compared to the same period in the previous year, according to Urbanation Inc. This has led some people to bemoan a rent control ‘loophole’ in the provincial residential tenancy legislation.

Residential tenants who occupy units in buildings that were used for residential occupancy prior to May of 1991 enjoy the benefit of a limited degree of rent control. While a landlord can set the initial rent for one of these units at whatever price the market will bear, once the unit is rented, increases are restricted by a percentage increase cap (referred to as a guideline) set by the province of Ontario. This percentage, which has ranged in recent years between 0.7 per cent and 3.1 per cent, is 1.5 per cent for 2017. A landlord may increase the rent for an existing tenant once per 12-month period, and must give proper notice to the tenant before doing so.

The ‘loophole’ in the system is that the cap does not apply to residential rental units that were built after May of 1991. This means that units in buildings constructed after that time, or buildings converted from non-residential to residential use after that time, can only have their rent increased once per 12-month period, but there is generally no limit on the amount of the increase. The implication of this for tenants in Toronto is obvious: much of the residential rental stock in the city, particularly in the downtown core, is primarily comprised of condominium buildings that were constructed after 1991.

The fact that tenants in non-guideline units can have their rent increased by a theoretically unlimited amount has led to calls for the exemption for post-1991 units to be abolished entirely. In my view, however, the fact that so many rental units are condominium units owned by individual investors should lead to the exemption being retained at least in part, for reasons that I explain below. 

A tenant who rents a condominium unit will pay rent, and may be required to pay hydro and gas if separately metered for the unit. This tenant will have monthly housing costs that are either fixed or at least generally predictable. The owner of the condominium unit will also have fixed, predictable costs in the form of mortgage payments, property taxes and maintenance fees. However, unlike the tenant, the owner may also have unpredictable increases in his or her costs, such as a special assessment (an extra maintenance fee levied by the condominium corporation to cover a shortfall or finance a special project), or an unexpected increase in the monthly maintenance fees. These are costs that the owner will be required to pay regardless of the monthly cash flow that the unit is generating.

What if the owner is now losing money each month on the unit? If that owner was restricted from increasing the monthly rent for the unit to cover the monthly operating and carrying cost of the unit (that is, what the tenant would be paying if the tenant owned the unit), this would appear to be entirely unfair to the owner. A stated purpose of the Residential Tenancies Act, 2006, the legislation that governs residential tenancies in Ontario, is to balance rights and obligations as between landlords and tenants. Forcing a landlord to choose between operating a unit at a loss or selling it isn’t an appropriate balancing of rights and obligations.

It will ultimately be up to the Legislature to determine whether it will modify the rent guideline exemption for post-1991 rental units. I would suggest that they give careful consideration to the people who are likely to be affected on both sides of the equation. Not all landlords are large organizations of the sort that can absorb a loss on an individual unit in the course of doing business. Some landlords only have the one unit, and a loss on that unit could lead to a loss of the landlord’s entire investment.

Timothy Duggan is a condominium lawyer and civil litigator with Horlick Levitt Di Lella LLP. Reasonable Doubt appears on Mondays. You can contact him on Twitter at @timmyd_ and tell him what you would like to read about in future columns.

A word of caution: You should not act or rely on the information provided in this column. It is not legal advice. To ensure your interests are protected, retain or formally seek advice from a lawyer. The views expressed in this article do not necessarily reflect those of Horlick Levitt Di Lella LLP or the lawyers of Horlick Levitt Di Lella LLP.

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