The following article was researched and written by member Dianne Varga, an organizer and life-long tenant currently living on the unceded territory of the Snuneymuxw First Nation.
All B.C. renters know rent increases are officially limited to one every 12 months, and are further limited to the percentage set by the government to reflect inflation.
It wasn’t always so. Prior to January 2019, the formula for rent increases was inflation plus two per cent. According to the government, the formula “was designed to allow for an increase to cover inflation as well as an amount for upkeep and maintenance.”
The formula was changed in response to an early recommendation of the B.C. Rental Housing Task Force, whose members spent part of 2018 examining ways to improve security and fairness for renters and landlords.
The Task force recommended changing the formula because, Premier John Horgan said, it was “simply not sustainable for renters, many of whom are on fixed incomes, to see their rent increase by more than inflation each and every year.”
The two per cent that was added to the rate of inflation made a world of difference. Reporter Andrew McLeod calculated that in 2018, B.C. rents were “nearly 40 per cent higher than they would have been had increases been capped at the rate of inflation for the past 15 years.”
The government explained further that even though the old formula provided for upkeep and maintenance, such work was often left undone. The new approach, Horgan forecast, would “strike a balance between giving relief to renters while encouraging people to maintain their rental properties.” The Task Force added that the new approach would bring the province “into line with the similar practices that have been used in Ontario and Manitoba for over a decade.”
In December 2018, the Task Force finally released its full slate of recommendations. Therein, the new approach no longer referred to basic “upkeep and maintenance,” but instead, to “major renovations and repairs” – a very different magnitude of undertaking. The recommendations said renters would pay for these renovations and repairs through additional rent increases if landlords were successful with the applications they made to the Residential Tenancy Branch (RTB).
The Task Force also recommended that the government consult with both landlords and tenant groups to determine the criteria for approving such rent increases. But the government only committed to consulting with landlords. David Hutniak, CEO of Landlord BC, boasted that his organization “led much of the conversation with the RTB” when he announced, in August 2021, that the process had been finalized for additional rent increases (ARIs) for unexpected operating expenses or major capital expenditures.
The capital expenditures that are eligible are those related to “major systems or major components [that] include, but are not limited to, the foundation; load bearing elements such as walls, beams and columns; the roof; siding; entry doors; windows; primary flooring in common areas; pavement in parking facilities; electrical wiring; heating systems; plumbing and sanitary systems; security systems, including things like cameras or gates to prevent unauthorized entry; and elevators.”
ARIs are capped at nine per cent. The largest ARIs are phased in over successive years, each phase limited to three per cent.
A landlord may apply for a new ARI every 18 months for capital expenditures incurred over the previous 18 months, although he may impose only one ARI at a time in the instance of a large ARI being phased in over two or three years. That is, if a landlord is granted another ARI while an earlier ARI is still being phased in, the landlord must hang back and “impose the increases in the order the applications were granted.”
There is no limit on the number of ARIs that can run concurrently, and they are imposed in addition to the regular annual rent increases based on inflation.
Manitoba and Ontario rent increase regimes: the similarities and differences
Regular rent increases that correspond to inflation are termed guideline increases in both Manitoba and Ontario, and additional increases relating to capital expenditures or other unusual or unexpected costs are termed above guideline increases (AGIs).
It’s inconceivable to talk about Manitoba’s AGIs without recognizing that they exist in the same regulatory environment as vacancy control. Buildings older than 20 years and whose units rent for less than $1570 in 2022 are eligible for vacancy control, meaning that rent increases are tied to the unit, not to the tenant, and that landlords cannot increase rents in between tenancies.
A wide tranche of the rental market is therefore protected against unlimited rent increases, which is not the case in B.C. Tenants in B.C. are subject to unlimited rent increases imposed by landlords when units turn over, as well as to the ARIs now allowed for unexpected operating expenses or major capital expenditures.
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A digression is in order. The Canada Mortgage and Housing Corporation (CMHC) began to report in January 2021 the difference between average rents in occupied and unoccupied units for cities without vacancy control. In Vancouver, the average rent for unoccupied units was 21 per cent higher, and in Victoria, 28 per cent higher. This, in effect, is the premium that tenants have to pay when they move into or around these cities.
In a letter to Vancouver’s mayor and council in 2018, David Hutniak contended that if landlords did not have the ability to increase rents between tenancies, they “would unfairly lose the right upon tenant turnover to try to move rents to market in hopes of recovering over time a portion of the cost of improvements to their asset [and] to offset their steadily increasing operating costs.”
In 2022, he again argued that landlords had to be able to raise rents between tenancies in order “to upgrade the unit to make sure it’s safe and healthy and reflect the cost of doing that in the new rent.”
When his attention was drawn to the existence of the new ARI regime that he helped devise, he replied, “While it’s a positive step, it hardly allows us to recover the real cost of the substantial investments made, it’s a portion. It’s intended to be done for like if you’re doing a roof on a building or some major investments, very specific criteria, it’s not replacing or cleaning carpet in a single unit, those aren’t eligible under that.”
The right of landlords to raise rents without any limit in order to ‘replace or clean a carpet’ is hotly contested. Individual tenants, tenant unions, tenant advisors, seniors’ groups, policy think tanks, anti-poverty activists, labour unions and members of the legal community told the Rental Housing Task Force in 2018 that an absence of vacancy control policy leads to unaffordable rents, increased poverty, evictions, homelessness, community upheaval, and public investment in rental housing subsidies filtering through to unregulated landlords. “Vacancy control is the most pressing policy need of our time,” concluded Emily Rogers of the Together Against Poverty Society.
But the Task Force refused to implement vacancy control, instead embracing a warning issued by the Urban Development Institute that implementing vacancy control would stifle new rental housing construction.
Evidence from Manitoba shows this need not happen. The rent regulation policy in that province is designed to balance competing objectives: those of tenants for protection against unwarranted rent increases and those of landlords for an adequate return on investment. Vacancy control had been in place for 13 years when economist Hugh Grant reported that the policy had had no negative impact on the supply of rental accommodation, “either in the conversion of existing units to condominium ownership, or in slowing the rate of construction of new rental units.”
Earlier this year, the Renters’ Advisory Committee of the City of Victoria succeeded in convincing mayor and council to pursue a resolution asking the B.C. government to once again consider vacancy control. The resolution passed with only one councillor having voted against it, and passed again at the convention of the Association of Vancouver Island and Coastal Communities, although by a much tighter margin, 76 to 72. The resolution will move forward to the Union of B.C. Municipalities convention in September.
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Returning now to David Hutniak’s assertion that only “a portion” of capital expenditures can be recovered through an ARI in B.C., this is true in Manitoba, but not in B.C. In Manitoba, only one-third to one-eighth of capital expenditures can be recovered, depending on the type of capital investment made. In B.C., renters are liable for 100 per cent of the landlord’s eligible expenditures.
It’s also the case that in Manitoba, a landlord’s rent revenue is considered in one part of the four-part formula for above guideline increases. It’s not as though the landlord must prove he experiences a deficit – that he’s actually in need of an AGI in order to perform the repairs or upgrades – but revenue is at least taken into account. In B.C., revenue is not considered at all when a landlord applies for an ARI.
In Manitoba, when a landlord pursues an upgrade in order to conserve energy – for instance, by installing low-flow toilets or energy efficient windows – he must deduct his energy savings from his operating expenses, which are considered in two parts of the four-part formula. This deduction would then reduce the amount of the AGI calculated. In B.C., the needle moves in only one direction, relentlessly toward the landlord being allowed to impose the maximum ARI possible.
This is seen nowhere more clearly than when the additional rent increase regimes in Ontario and B.C. are compared. In Ontario, the “useful life” of work done or a thing purchased is set out in a reference schedule. When the useful life of the work or thing expires, the AGI also expires and rents are rolled back. This is not the case in B.C., where all ARIs are amortized across ten years. Once the capital expenditures are paid off at the end of those ten years, the rent increase stays in place.
The ARI, unhinged from its original purpose to pay for capital expenditures, effectively becomes a general rent increase, one that contradicts the legislation limiting general rent increases to one per year based on inflation. The fact that an ARI could be as much as nine per cent spread over three consecutive years constitutes an even greater mockery of established law.
The rules on ARIs in B.C. implicitly recognize that capital expenditures at times relate to depreciable property that may wear out or become obsolete over time. We see this at the point where it’s said that eligible capital expenditures must not be expected to recur for at least five years. Imposing a permanent rent increase for property that is not expected to last is also patently unfair.
Another important feature of the AGI regime in Ontario concerns the right of tenants to counter-claim at the time of an AGI application if they believe a landlord has seriously breached his maintenance obligations in relation to their rental units. If the Landlord Tenant Board finds in favour of tenants, the Board must dismiss the AGI application or else order there be no rent increase until the landlord meets his obligations. In B.C., there is no provision for a tenant’s counter-claim.
In most other ways, the B.C. regime closely resembles the one in Ontario, including how the regime fails to recognize, ironically, that it permits landlords to breach their maintenance obligations by offloading these onto tenants. The legislation is “sloppy legislation, it needs to be stopped,” Victoria tenant Theodore Lutz told CHEK News. “It totally flies in the face of the Standard of Maintenance that has been in place for decades.”
The Standards of Maintenance require landlords to “maintain their rental properties in a state that is suitable for occupancy – they must meet housing, safety and building standards required by law.” Antonia Mah, a tenant advocate for Victoria’s Together Against Poverty Society, emphasized to CHEK News that the Standards should be seen as “the landlord’s minimum expectation for renting the building. It’s unreasonable to expect . . . tenants to pay for a minimum safety upgrade to the building.”
The legislation in B.C. and Ontario also resemble one another in terms of the rent increase cap of nine per cent. Geordie Dent, the Executive Director of the Federation of Metro Tenants' Association, described the marvellous benefits for landlords derived from property ownership, AGIs, and the tax system. Landlords are "quadruple dipping," he told the CBC. They first collect rent, then an AGI increase. Building improvements, paid by tenants who have no ownership stake, “up the value of a landlord's property.” Landlords can also claim the capital expenditures on their tax returns.
Lastly, in both provinces, those who adjudicate applications for additional rent increases have no discretionary power to refuse to approve them. In B.C., if the arbitrator determines that claimed capital expenditures are eligible according to the rules and if tenants are unable to prove the opposite, the ARI must be granted.
In 2020, academic researcher Philip Zigman conducted interviews with Ontario tenants to see how they were impacted by AGIs. He and fellow researcher Martine August also examined AGI application data over a period of eight years to learn about the ownership of buildings and the types of landlords involved. In order to understand landlord perspectives on AGIs, they looked at financial reports and other publicly available information. In order to understand the policy rationale for AGIs, they analyzed records of legislative debates.
What Zigman and August found was in some ways startling, beginning with the financial impact on renters. The renter who pays $1,150 for rent and receives an AGI of 2.5 per cent for one year in relation to a work or a thing with a useful life of 15 years will pay $1,788 after five years in consideration of the AGI only. They will pay $3,744 after 10 years and $5,881 after 15.
The renter who pays $1,150 for rent and receives an AGI of 3 per cent per year for three years running will pay $5,318 in consideration of the AGI after five years, $12,565 after 10 years, and $20,489 after 15.
The renter who pays $2,000 for rent (which is more in line with the rental rates for one-bedrooms in cities like Toronto and Vancouver and rates for two-bedrooms in many other places) and receives an AGI of 3 per cent per year for three years running will pay $9,248 in consideration of the AGI after five years, $21,853 after 10, and $35,633 after 15.
The mind boggles at the impact additional rent increases will have in B.C., where ARIs never expire once they are imposed, or in a situation where a landlord applies for successive ARIs. Zigman and August mentioned one such instance where three properties owned by the same landlord were each subject to four AGI applications within the eight years of their study. The CBC described another instance where an Ontario landlord applied for six AGIs in a ten-year period.
Zigman and August reported that AGIs result in severe financial strain as well as risk of displacement, particularly for tenants with low or fixed incomes. Vicki Pilot, executive director of the Seniors Serving Seniors Association of BC, is concerned that seniors with the lowest incomes were challenged by rent increases, and some of them rendered homeless, even before additional rent increases were legislated into existence.
Zigman and August also found that of the units impacted by AGIs, 84 per cent were owned by financialized landlords (ones who acquire and manage apartments for investors) or by corporate landlords, rather than by independent operators (also known as mom-and-pop landlords). Reviewing financial records, they found that the standard profit margin of Canadian financialized landlords, based on net operating income (rent and fees charged to tenants less operating costs), was 60-65 per cent.
Such landlords “make more than enough to invest in maintenance, repairs, security, or whatever upgrading is currently used to apply for AGIs, while still turning hefty profits,” they concluded.
Although the researchers had no access to financial records for corporate landlords, family-owned private firms or mom-and-pop landlords, they surmised they also enjoy healthy revenues and profits. They reasoned that the large companies successfully compete in the same sector as the financialized landlords, and that if the smallest landlords were having difficulty living within their means, they would be applying for AGIs in droves.
Patrick Condon, professor of Urban Design at UBC, looked beyond revenue to the windfall profits landlords have experienced through rising property values. “Apartment owners have made fantastic realized and unrealized passive capital gains during the run-up in land values throughout B.C. They do not need more,” he said.
‘Cash-strapped landlords’ is one rationale for AGIs, according to Zigman and August. But if landlords are enjoying massive profits and capital gains, why are tenants being made to reimburse their capital expenditures?
It turns out the other rationale for AGIs is the ‘lazy landlord’, the type John Horgan spoke of, the one who is able to repair or upgrade his property but needs encouragement to do so. Zigman and August made short shrift of this.
“If landlords can afford to do repairs but are simply unwilling to, there are better ways to incentivize maintenance that do not transfer costs on to tenants and that do not gift landlords with increased profits. For example, government could adequately enforce appropriate property standards and impose penalties on landlords when certain necessary repairs are not completed. If the problem is a lack of landlord motivation, the appropriate solution should motivate landlords without causing harm to tenants, which AGIs clearly do.”
Reaction in B.C.
“B.C.’s new additional rent increase (ARI) legislation gives landlords enormous leverage to circumvent rent control and push tenants out of their homes through runaway rent increases. The wide selection of eligible projects that tenants are expected to pay for includes energy retrofits that will actually save landlords money, and surveillance systems that will put a chill on tenant organizing efforts. Our union anticipates that this policy will be weaponized against tenants organizing and asserting their rights in poorly maintained buildings. From what our members have observed so far, the landlords taking advantage of this policy are already well resourced, with large portfolios, like Hollyburn (Vancouver’s largest landlord) and Starlight/MetCap (one of Canada’s largest real estate investment trusts). It is so telling that the BC NDP snuck in legislation to enable AGIs at the same time that minor tweaks to address renovictions stole the headlines – it’s perhaps the most egregious and duplicitous betrayal of tenants yet from this government, and that’s saying something."
- Neil Vokey, Vancouver Tenants Union Steering Committee
"I have been a renter with a mental health disability for the past 30 years. It has been a difficult, challenging, and at times harrowing experience. To the point of giving me panic attacks from relentless stress. The landlords have all the control. Landlords can ask any price they want. For those living with a disability the provincial support rate is $1356 per month. Soon those with a low income will not be able to rent anything. This goes for everyone who falls through the cracks, including the working poor, seniors, families, and people with addictions. We are being held hostage by these landlords."
- Shannon Soroka, Action Committee of People with Disabilities
"I strongly support the case made in this document. Apartment owners have made fantastic realized and unrealized passive capital gains during the run-up in land values throughout B.C. They do not need more. Vacancy control would be an important step in slowing this land price inflation dumpster fire and protecting tenants across the province, but especially in our major cities where the need is greatest."
- Patrick M. Condon, Professor, School of Architecture and Landscape Architecture, UBC
"Effects of rent increases frequently have a disproportionate impact on seniors living on CPP and OAS alone. In the past two years, however, rent increases have created a much more important challenge to resolve. The lack of affordable housing is creating a seniors homeless crisis! And the lack of attention to this situation is abominable. What will it take for those with power and position to take action to prevent this crisis?"
- Vicki Pilot, Executive Director, Seniors Serving Seniors Association of BC
Tenants Feel Squeeze of Special Upgrades Levy (Globe & Mail article, Aug 5, 2022 features VTU members fighting Capital Expenditure Rent Increases)