Written By: Matt Marshall, Lawyer
Nov 29, 2021

Each year the Government of Ontario releases a Rent Increase Guideline based on the Ontario Consumer Price Index. This guideline represents the maximum amount that landlords can increase a tenant’s rent without applying for the approval of the Landlord Tenant Board (LTB). While in 2021 this rate was set at 0% as part of a rent-freeze policy, in 2022 this amount will be set at 1.2%.

There are a number of exceptions to this maximum which can allow landlords to increase rent above the guideline amount. This article will serve to give a general description of some of the different exceptions and their characteristics.

Agreements to Increase Rent

While it might sound outside of the realm of possibility, landlords and tenants can make binding agreements which allow the landlord to raise rent above the guideline amount. Section 121 of the Residential Tenancies Act (RTA) states that agreements may be made to charge above the guideline amount if the landlord has carried out or undertakes to carry out a specific capital expenditure in exchange for the rent increase, or the landlord has provided or undertakes to provide a new or additional service in exchange for the rent increase.

The applicable form for this type of agreement is Form N10 (Agreement to Increase the Rent Above the Guideline), and the maximum increase allowed is the guideline amount +3%.

It should also be noted that tenants who enter this type of agreement retain the right to cancel the agreement by giving written notice to the landlord for five days after signing.

Above Guideline Rental Increase Application

Landlords are also able to apply under section 126 of the RTA if they fall under one of the following exceptions

1) There has been an extraordinary increase in municipal taxes or charges for the rental complex, or building where the rental units are located.

2) There have been eligible capital expenditures incurred for the residential complex.

3) There have increased operating costs related to security services for the residential complex

Extraordinary Increases in Municipal Taxes or Charges

Changes in municipal taxes and charges can have major impacts on the operating costs for rental units. In order to offset this, landlords are able to apply to the LTB if there has been an “extraordinary” increase. An increase qualifies as extraordinary if it is greater than the yearly rental increase guideline plus 50% of the guideline. If we take the 2022 guideline amount for example, an extraordinary increase would be any increase that is greater than 1.8% (1.2% + 0.6%).

This increase is determined by establishing a “base year” which is the last completed calendar year immediately preceding the day that is 90 days before the effective date of the first intended rent increase referred to in the application, and a “reference year” which is the 12-month period immediately preceding the base year.

The application must also include evidence of the costs of the base year and reference year, and evidence of payment of these costs, as well as evidence of all grants, other forms of financial assistance, rebates, and refunds received by the landlord that effectively reduce those costs for the base year or the reference year.

Calculating the Applicable Rent Increase

(Note: The reference year and base year costs may be modified in accordance with the regulations in a

way that is not presented here. The following is a simplification of the process for informational

purposes)

1. Subtract the reference year costs from the base year costs

2. Divide the total rents of the rental units in the residential complex that are subject to the

application and are affected by the operating costs by the total rents of the rental units in the

residential complex that are affected by the operating cost. (The rent for a vacant unit is deemed

to be the average rent charged for the rental units in the residential complex).

3. Multiply the figure from paragraph 1 by the figure from paragraph 2

4. Divide this amount by the yearly rent for the unit or units, and that will result in the amount that

the rent can be increased by, up to a maximum of 3% over the guideline amount for the year.

Eligible Capital Expenditures

Landlords can also make s. 126 applications if they have incurred eligible capital expenditures regarding the residential complex. Capital expenditure means an expenditure for an extraordinary or significant renovation, repair, replacement or new addition, the expected benefit of which extends for at least five years including,

(a) an expenditure with respect to a leased asset if the lease qualifies as determined under subsection (2), and

(b) an expenditure that the landlord is required to pay on work undertaken by a municipality, local board or public utility, other than work undertaken because of the landlord’s failure to do it,

but does not include,

(c) routine or ordinary work undertaken on a regular basis or undertaken to maintain a capital asset in its operating state, such as cleaning and janitorial services, elevator servicing, general building maintenance, grounds-keeping and appliance repairs, or

(d) work that is substantially cosmetic in nature or is designed to enhance the level of prestige or luxury offered by a unit or residential complex;

Capital expenditures are deemed “eligible” if they comply with the act and regulations.

(7) ) Subject to subsections (8) and (9) and except under the prescribed circumstances, a capital expenditure is an eligible capital expenditure for the purposes of this section if,

(a) it is necessary to protect or restore the physical integrity of the residential complex or part of it;

(b) it is necessary to comply with subsection 20 (1) or clauses 161 (a) to (e);

(c) it is necessary to maintain the provision of a plumbing, heating, mechanical, electrical, ventilation or air conditioning system;

(d) it provides access for persons with disabilities;

(e) it promotes energy or water conservation; or

(f) it maintains or improves the security of the residential complex or part of it.

(8) A capital expenditure to replace a system or thing is not an eligible capital expenditure for the purposes of this section if the system or thing that was replaced did not require major repair or replacement, unless the replacement of the system or thing promotes,

(a) access for persons with disabilities;

(b) energy or water conservation; or

(c) security of the residential complex or part of it.

Formal Requirements

This type of application must be filed in Form L5 (Application for a Rent Increase Above the Guideline). The application must be filed at least 90 prior to the effective date of the first intended rent increase, and the eligible expenditure claimed must have been incurred by the landlord at the time the application is filed. Incurred meaning that they have been paid in full prior to the filing of the application, except if there is a holdback under the Construction Lien Act).

Calculation of Rent Increase

(The following is a simplification of the process for informational purposes)

1. First the amount of capital expenditure is calculated

a. Add the following amounts

i. Purchase prices

ii. Cost of leased assets

iii. Installation, renovation, and construction costs.

iv. The value of the landlord’s own labour as determined in accordance with the regulations

b. Subtract from the above amount, any grant or other assistance from any level of government, any insurance, salvage, resale or trade-in proceeds related to the work undertaken or the item purchased

2. Then the amount of capital expenditure is multiplied by the rent for the affected unit, and divided by the sum of the rent for all rental units in the residential complex that are affected by the capital expenditures (this is done separately for each capital expenditure)

3. Then all the amounts calculated in the previous paragraph are added together, and amortized over the weighted useful life of the capital expenditure, in equal monthly instalments of blended principal and interest

a. The weighted useful life is calculated as follows,

b. Divide the amount determined under paragraph 2 by the amount determined in paragraph 3

c. Multiply the amount by the useful life of the capital expenditure (these are laid out in the Schedule of Regulation 516/06)

d. Add the results together and round to the nearest full number e. This equals the weighted useful life of the capital expenditure in years

4. The amortization is calculated using the interest rate of the chartered bank administered conventional five-year mortgage interest rate on the last Wednesday of the month before the month in which the application is made, as reported by the Bank of Canada.

5. This amortized amount is then divided by the monthly rent for the unit and multiplied by 100.

6. The above figure will equal the percentage rent increase that is justified by the capital expenditures.

The maximum annual increase above the guideline amount is 3%. Where more than 3% may be justified by the above calculations, rent can be increased by 3% one year, and an additional 3% the following year.

Conclusion

While it is possible for landlords to increase the rent that they charge above the guideline amount, the avenues to do so are far from straightforward. If you have any questions or concerns regarding this process, feel free to contact our office and schedule a consultation.