Real Estate Law Blog

The average permitted residential rent increase the past 10 years in British Columbia hovered around 2.7%. Such increases are prescribed under the Residential Tenancy Act (the “Act”)^[1] and the Residential Tenancy Regulation (the “Regulation”).^[2] In a rare Residential Tenancy Branch (“RTB”) decision^[3] that was widely reported by the news media last year, a landlord was granted an overall rent increase of 27% (including the 3.5% permitted annual increase) to cover the landlord’s expenditures. Was this decision to open the floodgates for landlords to similarly seek drastic rent increases, or were there unique facts to this case that lead to its outcome?

This article discusses the controversial RTB decision and considers the legal basis under the Act and Regulations for such an increase, and the decision’s implication for both landlords and tenants.

The RTB Decision

The landlords of the subject case purchased a four-plex property in October of 2021 as a rental investment and opted for a variable rate mortgage with one of Canada's major banks. Having always favored variable rate mortgages, this was their first venture into property investment. At the time of securing the mortgage, the interest rate was 1.9%, and variable rates had been stable.

However, by July 2023, interest rates had surged unexpectedly to 6.65%. The landlords expressed that maintaining their rental property at the current rental rates was unsustainable due to the significant increase in interest rates. They reported incurring $80,000 in financing costs over the last fiscal year, compared to approximately $46,000 the previous year. Even with a proposed 27% rent increase, they projected an annual net loss of $10,000. This is the first unique fact of the case.

The RTB ruled in favor of the landlords as they successfully demonstrated all the necessary criteria to justify an additional rent increase due to financial losses from the financing costs of purchasing the rental property. So how was this accomplished?

The Law

Section 43(3) of the Act permits landlords to apply to the RTB for a rent increase beyond the amount specified in the Regulation. Section 23(1)(b) of the Regulation permits landlords to request an additional rent increase if they have reasonably incurred a financial loss due to financing costs associated with purchasing a residential property, provided these costs were unforeseeable under reasonable circumstances.

While financing costs have long been a basis for requesting additional rent increases under the Act and Regulation, the RTB only issued its policy guideline^[4] (the “Guideline”) in February 2023. This was likely in response to a growing number of rent increase applications from landlords under such grounds. The Guideline clarifies the scope of financing costs and how the RTB assesses their reasonableness. Interest payments are recognized as financing costs, and legal fees for setting up the mortgage and registration fees may also qualify. However, the RTB does not consider the following as financing costs:

1. mortgage default insurance, title insurance, or life/critical injury insurance;
2. surveys, appraisals, and inspections;
3. transfer, sale, or property taxes; or
4. prepayment charges and penalties for breaking or refinancing a mortgage.^[5]

Landlords claiming financial loss from financing costs must demonstrate they acted reasonably. The RTB requires landlords to take reasonable precautions by securing a mortgage through a reputable lender. Landlords must also show care, foresight, judgment, financial prudence, and due diligence in obtaining financing. For instance, obtaining a mortgage from a B-rate lender at high interest rates would be deemed unreasonable. In a previous RTB decision, a landlord's reliance on a mortgage broker's optimistic market assessment was considered unjustifiable and unreasonable.^[6]

Are There Implications for Future Landlords and Tenants?

In our view, the recent RTB decision, despite concerns from the public about potential 'floodgates' of similar applications, maintains a high threshold for approval. For an application to succeed, the landlord’s financial loss must stem from unforeseen circumstances that it could not reasonably predict. In many cases where landlords have failed to secure such additional rent increases, the RTB has determined that financing costs must be unforeseeable under reasonable circumstances. The Guidelines note that mortgage interest rates, which typically fluctuate, are considered foreseeable.

In this particular RTB decision, the arbitrator noted that while a slight increase in mortgage interest rates at renewal is reasonable, the substantial and rapid rise in 2023 was not. This is the second unique fact of the case. The impact of global and economic events related to the pandemic was deemed unforeseeable, affecting landlords. To succeed, landlords must demonstrate an external factor beyond their control. The Guideline clarifies that major shifts in monetary policy leading to dramatically higher interest rates, or regulatory changes by government leading to higher borrowing costs, may qualify as sufficiently difficult to foresee under reasonable circumstances.

Landlords facing financial loss due to financing costs must consider the following factors towards whether an additional rent increase application can be made successfully:

1. whether its financing is with a recognized and well-known lender at prevailing market rates;
2. whether it has any financial cushion to sustain reasonable hikes in interest rates – failure to prudently mitigate this risk would work against a landlord;
3. in the totality of the rent increases being requested, will the landlord break even? The landlord in the successful RTB application was charging below-market rents and so while the total rent increase at 27% was high, it appears the landlord was charging below-market rental rates to begin with;
4. whether it has steadily increased rents when permissible to cover increased financing costs? Failure to mitigate increases may be counted against a landlord by the RTB;
5. was the cause of the financing costs an external factor beyond the landlord’s control like a world-wide pandemic event?;
6. was the requested rent increase applies equally to all rental units in the property – failure to do so would lead to a rejection of landlord’s application;
7. the subject building in question needs to be rented out in some profit-seeking commercial capacity. Rental housing used for not-for-profit services (especially with a history of operating as a loss) will not qualify for the rent increase application;
8. the financing costs must originate from purchasing the property, not from new loans or through a refinancing, and a built home constructed by the landlord would not qualify for the rent increase application;
9. applications may be denied due to insufficient evidence, such as unaudited financial statements or lack of a statutory declaration from the landlord. Presenting a financial statement for less than a fiscal year can also lead to denial; and
10. landlord must differentiate between the increasing rents under 'financing costs,' and not under 'operating expenses,' as different rules apply to each category.

Each of the above factors, if not factually in favour of an applicant landlord, is a pitfall that can potentially derail an application for additional rent increase under Section 23(1)(b) of the Regulation. It is evident that the RTB’s interpretation of the Regulation sets a high bar and requires a strict set of facts in order for an additional rent increase to be awarded.

With the Bank of Canada forecasting a continued decrease in interest rates in the near future, such applications will likely decrease in time and fade away entirely as the unique nature of global events causing unforeseen financial costs is rare.

Asides from the above discussed additional rent increase justifications, landlords should be reminded there are other means under the Act and Regulations to seek justifiable rent increases:

1. agreement with the tenant in writing;^[7] or
2. an application to the RTB due to capital expenditures.^[8]

If you require any further assistance, contemplating a rent increase through the RTB, or have any questions concerning the subject RTB’s decision, please feel free to reach out to Timothy Law or Xue Zhang. 

^{[1] Section 43(1)(a), Residential Tenancy Act, SBC 2002, c 78, https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/02078_01}

^{[2] Section 22.2, Residential Tenancy Regulation, BC Reg 477/2003,  https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/10_477_2003}

^{[3] https://www.housing.gov.bc.ca/rtb/decisions/2024/05/052024_Decision5027%20.pdf}

^{[4] Guideline 37D: Additional Rent Increase for Expenditures, https://www2.gov.bc.ca/assets/gov/housing-and-tenancy/residential-tenancies/policy-guidelines/gl37d.pdf}

^{[5] Page 3, the Guideline}

^{[6] http://www.housing.gov.bc.ca/rtb/decisions/2024/06/062024_Decision6057%20.pdf}

^{[7] Section 43(1)(c), Residential Tenancy Act, SBC 2002, c 78, https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/02078_01}

^{[8] Section 43(3), Residential Tenancy Act, SBC 2002, c 78, https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/02078_01; Sections 23.1 to 23.4, Residential Tenancy Regulation, BC Reg 477/2003, https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/10_477_2003}