Friday, June 1, 2018

How Should Landlords Handle Interim-Occupancy Rent in Condos

Under the Residential Tenancies Act, (the 'RTA') the rent first charged when the tenant moves in becomes the lawful rent. This is the basis of vacancy de-control, our Ontario system of rent control. From that point forward, rent can only be increased in accordance with the RTA.

So what does a landlord do when they rent out a new condo, probably purchased pre-construction, and it's during the interim occupancy period? The gym is not finished, nor is the pool, the party room, media room or other common spaces. The hallways are not carpeted, one elevator is used for construction, and the whole building feels like a construction site.

The usual strategy is to charge a lower first year rent, with the understanding that 12 months later the rent will go WAY up to what the market dictates. And that was a fine strategy until April 20th, 2017 when the Liberal government extended rent control to all buildings, including those built after November 1991. So if you charge, let's say, $1,800 to your new tenant in your not-yet-completed condo building, with the expectation that rent can go up to $2,400 a year down the road, you are out of luck. It can't be done, not even by agreement. The RTA applies despite any waivers or agreements to the contrary. So the landlord is stuck with a VERY low rent, and the tenant will likely want to stay forever. So what to do.

The RTA actually has an answer. Rent Discounting. It's not simple and can be dangerous if you do it incorrectly. Landlords may offer temporarily free rents as a market inducement. Such practices are given limited recognition and permission within the RTA by eliminating the risk and downside that the discount would otherwise have on the "lawful rent". Although the Act allows methods of discounting, due to the complexity and the strong possibility of the discount negatively affecting the lawful rent, landlords should be very careful and make sure it is done properly. In other words...get legal advice.
You need to carefully follow these special RTA discount rent rules, otherwise the basic vacancy decontrol rule would apply, meaning that the lawful rent for the first rental period for a new tenant under a new tenancy agreement is the rent first charged to the tenant. That would be the discounted rent. If it was not for these special discount rules the legal rent would be permanently lowered by the discount.

 Here’s a summary of how it can be done:

A landlord can offer a marketing discount to a tenant without affecting the lawful rent for the unit when the discount ends. The discount for a monthly rent can be applied as follows:
Up to three months discount used in any 12 month period are authorized without impacting the lawful rent as long as it is provided in writing, and is given as a whole rent-free period rather than being spread out throughout the year. The intention of having these as actual whole rent-free periods is to prevent year-long reductions which could lead to abuse when the discount is removed. So for instance, if you agree to give the tenant a discount of 1.5 months rent, it should be taken as one full month followed by one half month rent free. The tenancy agreement should specify not only the discount permitted, but that it is a one-time allowance only to be used for the first year of the tenancy.

 The specifics are as follows:

Where a discount is equal to rent for one month, it must be taken in during a rental period;

Where a discount is equal to rent for between one and two months, the discount equal to the rent for one month must be taken during one rental period and the balance within one other rental period;

Where a discount is equal to rent for between two and three months, the discount equal to the rent for two months must be taken during two rental period and the balance within one other rental period.

So there is a way to deal with it. But if you bury your head in the sand and just hope you can bump up the rent in year two by agreement, you are sadly mistaken.

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