Saturday, March 28, 2015

RESIDENTIAL TENANCIES ACT'S DIRTY LITTLE SECRET ABOUT RENT INCREASES...FINALLY REVEALED!

Section 6(2) of the Residential Tenancies Act is the dirty little secret that nobody wants to talk about.  The tenant advocacy side keeps it quiet, as it would hurt their constituency if landlords became aware of it.  Many landlords don't know it exists, and if they did, rents would be jacked way up.

Landlords who know about the Section keep it quiet, as they don't want the newspapers to pick up on a story about an “egregious abuse” of the exemption.  Those in the know are happy to have it for themselves.  They've almost lost it before.
The exemption from the annual rent guideline increase first appeared in the Tenant Protection Act, 1998 (the “TPA”), and survived when the TPA was replaced by the Residential Tenancies Act, 2007 (the “RTA”).  It was added into the TPA in 1998 as a bone to developers since rent control was being put into place, and that was potentially a game-changer not just going forward, but it breached a trust retroactively.  

 Ostensibly it was included in the law to encourage future development; s.6(2) allows certain rental units to be exempt from the annual rent increase guideline which approximates CPI inflation.  The argument was that if the exemption wasn't provided, NOBODY would build new high-rise rentals.
So, the Tenant Protection Act came into force in June of 1998, not only exempting new construction going forward, but in some cases, going back to 1991 and beyond.

That section has seen its challenges.  There have been two failed private members bill in the legislature – one in 2010 and the most recent in 2013 – attempting to eliminate the so called "loophole".  
The section reads as follows, and refers to several sections of the RTA that do not apply in certain circumstances, but most importantly, exempts certain rental units from s.120 which creates the annual rent increase cap:

6(2)  Sections 104, 111, 112, 120, 121, 122, 126 to 133, 165 and 167 do not apply with respect to a rental unit if,
     (a) it was not occupied for any purpose before June 17, 1998;
     (b) it is a rental unit no part of which has been previously rented since July 29, 1975; or
     (c) no part of the building, mobile home park or land lease community was occupied for
     residential purposes before November 1, 1991.

Section 6(2) is badly written, and as a result is subject to a lot of different interpretations.  Divisional Court, a mid-level appellate court where Landlord and Tenant Board (the “Board” or “LTB”) decisions go for appeal, has only dealt with it a couple of times:

1.     Drewlo Holdings Inc. v. Weber, 2011 ONSC 6407 (CanLII).  The Court affirmed that the plain meaning of the word "building" includes a bungalow.  Good thing the Court didn’t say it must be a multi-unit building.  The decision didn’t have much value as the Court simply upheld the Board’s interpretation of the section as being reasonable and therefore not subject to appellate review.  That's called curial deference in appeal parlance.

2.     Coburn v. Tenants of 152 Concession 11 Road West, 2014 ONSC 2421 (CanLII) – Again, not very helpful or instructive.  The original Board decision was found to be reasonable.  However the Court also brought s.134 into the analysis.  More about that later.

Here’s my take on the three subsections:

6(2)(a) is confusing, but it seems to want to capture individual rental units, not the building.  It reads:  “sections ......do not apply with respect to a rental unit if it was not occupied for any purpose before June 17, 1998”.  I think this means that the exemption applies to a unit in a building built since 1998 or a new rental unit in an older building or a rental unit in a building that was simply never occupied residentially or otherwise, before June 17, 1998, the day the TPA was proclaimed.


6(2)(b) seems to apply to a first time rental unit, regardless of when it was built, so long as it was not rented to anyone since 1975.  Remember this first became the law in 1998.   It reads:  “sections ......do not apply with respect to a rental unit if it is a rental unit no part of which has been previously rented since July 29, 1975.”  In other words, only an owner (not just the current owner) lived there since 1975, and at some point decided to turn it into a rental.  In my mind, this is a grandfathering provision. 

Factually, it would be tough for either party to prove usage going back 40 years.  I think that the idea behind this exemption is that imposing a rent guideline over properties which did not have residential rental use since before any rent control laws came into force constitutes a form of expropriation of title. The significance of the year in 6(2)(b) is that it was in July 1975 when the Residential Rent Review Act 1975, (the “RRRA”), was enacted.  Prior to that there was no rent control to speak of in Ontario.

However Section 6(2)(b) is confusing even if you go with my interpretation. If I lived there since 1975 as an owner, and then in 2012 I decided to rent it out, is it s.6 exempt forever, for all future rentals?  I don’t think so.  I think any subsequent rental would take you out from the exemption.  By the way, this is so rare, I've never seen it asserted.


6(2)(c) is the subsection most landlords normally rely on for support.  It deals with the building.  Most think of it as new buildings constructed after 1991, condos primarily but not necessarily.  It reads, “no part of the building, mobile home park or land lease community was occupied for residential purposes before November 1, 1991.”  But if you examine the wording carefully, I think it’s meant to capture an older building used for a commercial or industrial purpose before 1991, but that was converted to residential use post-1991.  After all, if it’s NEW post-1991, then how could any part of it have been residential pre-1991?  Wouldn’t the legislature simply have said “not built prior to 1991” if that was its intention?

My 6(2)(c) interpretation is not the norm, and it challenges how the LTB and many landlords have traditionally used it.  Everyone goes to the LTB and says “exempt... it was built after 1991”, but I really think it might be 1998 that applies to new construction and everyone is relying on the wrong subsecftion.  What did the legislature mean when it wrote in (a) “not occupied for any purpose”?  Does that mean it was built, but in an alternate dimension, protected by a force field, surrounded by a moat?  I just don’t know.

Even though all the units described in s.6(2) are exempt from the annual rent guideline, there are still rules for raising the rent.  Too many landlords who know they are exempt still serve the N1 instead of the N2 notice of rent increase.  The N1 is the normal notice of rent increase for guideline increases (or special applications above the guideline), while the N2 is supposed to be for those units partially exempt, such as social housing, s.6 etc. 

Depending on the adjudicator, the service of the N1 form may or may not be acceptable, possibly saved by the substantial compliance sections of the Residential Tenancies Act, the Statutory Power Procedures Act and Legislation Act.  Forms can be found here: 

http://www.ltb.gov.on.ca/en/Forms/STEL02_111311.html

I’m concerned that one day, an appeal regarding a s.6(2) decision from the LTB is going to go to Divisional Court, and the free ride will be over.  The facts will be that a landlord of an exempt unit increased the rent from $700 per month to $7,000 per month.  A Divisional Court panel will decide that in a building with multiple comparables, where a "normal" value can be established, such a tactic breaches s.134 of the Act (see below).  The judge will call the rent charged a premium, and strike down the increase as an illegal premium. An over-zealous landlord will ruin it for everyone.

Additional charges prohibited
134.  (1)  Unless otherwise prescribed, no landlord shall, directly or indirectly, with respect to any rental unit,

(a) collect or require or attempt to collect or require from a tenant or prospective tenant of the rental unit a fee, premium, commission, bonus, penalty, key deposit or other like amount of money whether or not the money is refundable;

My advice to a landlord lucky enough to have an exempt unit is to be up-front when signing the lease, including a clause where the parties acknowledge that the annual guideline does not apply, and that any new rent will not constitute a premium.  I believe it's better to act in good faith up-front and avoid fights a year down the road.
I always remind people that this blog does not constitute legal advice.  In this instance, it's even more important for you the reader to know that there are still many unanswered questions about this controversial exemption, and you should consult a lawyer or paralegal for additional advice.

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