Raising Rents

An interesting case study of the provincial government’s law allowing landlords to raise rents above rent control to market rates was recently put to use with the residents of a West End apartment unit. You can read the news coverage here and here and, if you are truly interested in what is required under the Residential Tenancy Act's provision for Rental Increases, read the entire decision (pdf).

This is a bit of a long post but if you have interest in this case, you may also be interested in reading on.

In order to apply for a rent increase above the rent control limit, a landlord must show specific and comparable units whose rents are above what would be possible under normal allowed rental increases. The ruling went partially in favour of the landlords, who recently bought the units, and are looking to increase their profits.

Whether you agree or disagree with this provision in the Residential Tenancy Act is one thing. I would like to offer some commentary on how this particular case went and some observations I see ignored by the news coverage, the landlords, and the tenants.

Be Specific

It is immediately obvious the Dispute Resolution Officer (DRO) was required to use specific and comparable rents in deciding the outcome. For the most part the decision provided little in the way of specific rents from comparable units from tenants. The DRO used only a handful of comparable properties in making the final decision, all from the landlord.

In the decision the DRO has stated:

The landlords do not have to prove that the rent is significantly lower than all comparable rental units, but merely have to prove that there is evidence that in the current market, there exist similar rental units which attract a higher rent than what is currently being paid for the subject unit

An interesting interpretation of the Act; it effectively cuts the tenants from having their data used as balancing evidence. Scary perhaps. But if it's any solace most landlords don't resort to such rent increases, and not because they are bad businesspeople.

It is probably fair to say the landlords filtered units for rents that were purposefully higher than those in the units they own. It would be silly of them to present units that do not maximise the rents they can charge. But, yes, they are allowed to do this.

The tenants have learned the hard way that, while they needed to find specific and comparable examples to their units, when it came time to make the decision, it didn't seem to matter. Given all tenants in that neighbourhood have an incentive to keep their rents down, the tenants should have had no problem finding comparable rents that were not cherry-picked to be high. What I am not sure of is what burden of proof tenants are required to show to have their evidence considered and accepted. This is certainly a valuable lesson to be learned by others who may find themselves in a similar situation.

Subprime Tenants

What is often missed by looking at listing rents is that renters, like mortgage applicants, have different credit ratings. I am sure landlords will agree that there are tenants that are duds. If a landlord were to rent to such a tenant, to compensate for the added risk of taking on a deadbeat tenant, he should charge a premium.

Why this is important is that, while the Act looks at comparable rents to make a decision, no weight is given to the quality of the current tenants. It could be these tenants are “golden”; maybe they always pay their rents on time, perhaps even taking on repairs themselves since the rent is so good. The previous owner may have accepted lower rents because the risk was exceptionally low.

With new landlords, these unfortunate tenants have effectively lost their built-up credit and business relationship with the previous landlord. To be fair, the new landlords don’t know these tenants from a hole in the ground so are, perhaps a bit naively, treating them as any generic off the street renter. By raising rents to market rate, they are effectively raising rents to what they would charge a tenant with no “credit” history.

What are the current tenants to do? Perhaps they will accept the rent increase, act in good faith, and try to build up their past good favour again with the new boss. This will manifest itself by below inflation rent increases as the landlords realise the tenants are actually “prime” tenants. This assumes the landlord places value on low maintenance tenants. Not all landlords think this way, in which case I would strongly advise the tenants to find a landlord who does. There is no easy way to win a war with a slum lord, or even a landlord looking to offer a premium service for a premium price.

The problem now for the landlords, unfortunately, is that by taking an adversarial approach, they will most likely be paying more than they would should the rents have been raised at a smaller rate. The tenants who decide to stay will undoubtedly “work to rule”. Perhaps the little repairs and renovations they did to save their previous landlord money are now left to the landlord to handle. Perhaps heats are turned up a little too high.

It is hard to really know the motives of the landlords. It could be they are hardnosed businesspeople who will run this rental complex like a generic high turnover unit. This is their prerogative of course but this comes at a much higher operations cost than would a stable lot of tenants, either through higher turnover or greater wear and tear. To be fair, some landlords charge high rents but offer a high quality service to compensate. Perhaps they paid a high price for the units and the only way to stay cash flow positive is to jack up the rents. I don't know anything specific about the actual owners in this case.

All’s Fair

The third thing to note about this sad affair is that, while the Act’s arbitrator has decided for a marked rent increase, the court of public opinion is much more divided and angry. Rent control and the treatment of seniors (of which some of the tenants happen to be) seem to trigger an emotional response. I am sure the landlords have faced added stress and complications by having these tenants go to the local press. Tenants certainly played the sympathy card well, given the high level of media coverage.

I am sure readers here have an opinion on this case. It is a complex issue and I have sympathies for both sides of which I will not expand upon much. But I will say that it’s completely fair game for the tenants to have brought in the media who effectively sensationalised this story. Like it or not, a free press is, well, free to report on these stories as they see fit.

Actually, it was a decent strategic and tactical move on the part of the tenants, worthy of careful study in business schools. The landlords, while likely pissed off, should not be too surprised they are receiving such attention, as should any businessperson trying to make money through uncomfortable situations such as this one. Par for the course, guys. I doubt, though, these landlords really thought media coverage likely before they bought.

In the end, the landlords received a partial increase in rents for some of the units, to be phased in over a course of several months. But with them having an entire building of pissed off (and possibly high quality) tenants who can make the landlord's life miserable or move out and be replaced with what could well be higher maintenance and riskier tenants, I wonder if their investment is really going to be a good one in the end. It could also be that these rents were just too low.