B.C. LANDLORD CAN INCREASE RENT 23.5% BECAUSE OF VARIABLE MORTGAGE: ARBITRATOR
A potentially precedent-setting ruling from the Residential Tenancy Branch has prompted B.C. Minister of Housing Ravi Kahlon to review regulations for special rent increase applications from landlords.
At issue is a recently published May 8 ruling that allowed a landlord to increase rent by 23.5 per cent for four tenants. The landlord claimed that their increase in mortgage financing costs, due to a sharp rise in interest rates in 2022, “could not have been foreseen under reasonable circumstances.”
Questions are now being asked in the B.C. real estate industry about whether this will prompt more applications for rent increases beyond those allowed by the provincial government.
“Landlords will definitely apply,” said Keaton Bessey, owner and managing broker at Greater Vancouver Tenant and Property Management.
Last February, the branch received an application from Kriss Canada Ltd. claiming it needed to increase rent by 23.5 per cent, well beyond the government-mandated rent control increase of 3.5 per cent for 2024.
In B.C., landlords must apply to the branch for increases beyond the rent control cap, which is set annually by the Housing Ministry.
Bessey said applications typically involve increases for one-time infrastructure improvements, such as new pipes.
However, Kriss Canada used what Bessey said has been an otherwise dormant regulation that allows a landlord to apply for a special rent increase for financial losses incurred for the financing costs of purchasing a property.
Kriss Canada claimed that it was entitled to impose the higher rent because it did not foresee under “reasonable circumstances” a historic rise in interest rates and it had “acted reasonably” — criteria the regulation stipulates as a requirement for a successful application.
The ruling states Kriss Canada, represented by “Landlord S.O. and Landlord K.O.,” purchased a four-plex home in October 2021 with an initial interest rate of 1.9 per cent on a variable mortgage from a Canadian bank.
In the intervening time, the Bank of Canada raised its interest rates from 0.25 per cent to 5.0 per cent, causing the landlord’s financing costs to soar to $80,058.99 in 2023, versus $45,722.44 in 2022.
In April 2023, the landlord asked the four tenants to pay an extra $500 per month each; the tenants “were not agreeable,” the ruling noted.
The ruling addresses some thinking behind the landlord’s assessment of its own situation: “The Landlords stated that if they fixed their interest rate in 2023, the penalty would be very large. It was too early in their mortgage term.”
Two tenants identified as “V.D.” and “M.S.” told the branch that with a variable rate mortgage “it is reasonably foreseeable that the rate will change” and the landlord ought to have had a financial cushion to absorb increases. Tenant M.S. offered to pay an extra $50.
The arbitrator, who is not named in the ruling, accepted the landlord’s story that it did have a cushion but rates rose too quickly and sharply.
“I find the world and economic events in reaction to the pandemic were not reasonably foreseeable and have impacted the Landlords, despite them taking reasonable precautions by accessing a mortgage through a recognized and well-known lender. I find the landlords exercised care, foresight, judgment, financial prudence, and due diligence in purchasing and financing the residential property, but significant increases in the mortgage interest rate occurred due to unforeseen events,” the arbitrator wrote.
The arbitrator allowed the landlord to increase rent amounts by 23.5 per cent over two years. Rents of between $1,282 and $1,550 a month rose to between $1,628.14 and $1,968.50 (not factoring in the standard increase).
Names of the landlords and tenants were redacted from the ruling and the location of the property was not disclosed. Kriss Canada Ltd. was incorporated in Alberta in 2016 and has an attorney named Niranjan Konepally with a Terrace address, according to the B.C. Registry Service. Glacier Media was unable to contact any of the parties involved for comment.
Although Bessey has been outspoken on social media against rent control, he called the ruling “weird” and “completely ridiculous” because the branch is in no position to assess financial planning. “Nobody asked this person to go out and get a loan and buy a property,” said Bessey. He said the regulation is out of touch with reality. “A loan on an investment property is personal to the owner. The loan is your problem.”
Bessey described the nature of branch decisions as being fairly arbitrary on a case-by-case basis.
And while expressing doubt as to whether a precedent may be set, Bessey speculated the branch will see more such applications, but whether they will succeed is another matter.
Hunter Boucher, vice-president of operations at Landlord BC, a non-profit advocacy and lobby group, expressed doubts a precedent will be set.
“This process has been longstanding. It’s not new. That being said, applications under this (regulation) are exceedingly rare, especially over the past nearly 20 years,” as there has not been such a dramatic rise in interest rates, said Boucher.
Another matter at play, said Boucher, is that the regulation stipulates the financing losses are associated with the purchase of a property, so such applications are likely only relevant to landlords who recently bought an investment property. “If you’re renewing at this point, it’s hard to say it’s unforeseen.”
Despite his opposition to policies that are unfavourable to landlords, Bessey said it would be “political suicide if they let this keep going” and “a lot of landlords think this is stupid.”
Notably, the regulations do not allow a tenant to claim lower rent should interest rates drop after having higher rent imposed on them via a special application.
The Housing Ministry issued this statement, attributed to Kahlon:
“Renters are struggling with the high cost of rent. That’s why we are taking action to fight the housing crisis and ensure renters have a home they can afford. Since 2018, we have kept rental increases at or below inflation, below the rate set by the previous government.
“The policy that allows these kinds of exceptional rental increases because of financing is an old policy from the old government and this is the first time an application like this has been granted since we started collecting data in 2021.
“I know people have a lot of questions and I’ve directed staff to review this policy and how it impacts renters in the current context.”
Story by: Times Colonist
