B.C. landlord can increase rent by 23.5% after variable mortgage rate led to financial losses: RTB

Are the high interest rates of the last few years a reason enough to allow landlords to increase rents above the allowable limit? The Residential Tenancy Branch said that was the case in at least one ruling, where one landlord was approved to hike rents by 23.5 per cent over two years.

In a decision posted earlier this year, the RTB said the landlords’ application for an additional increase of that amount over two years was approved, adding they “must impose this increase in accordance with the Act and the Regulation.”

“I find the Landlords have been successful. They have proven, on a balance of probabilities, all the elements required to be able to impose an additional rent increase for a financial loss for financing costs of purchasing the residential property under section 23 of the Regulation,” the ruling reads.

“The Landlords seek an additional rent increase of 23.5%. Section 23(4) of the Regulation states when considering an additional rent increase application for a financial loss for financing costs of purchasing the residential property, the director may order that the increase granted under subsection (1) be phased in over a period of time. I find this rent increase significant in one installment, and I order it may be applied over two years.”

According to the ruling, the landlords told the RTB their “current financial situation is unsustainable,” adding while they “did have a buffer … no one saw this going to this level.”

Even with the 23.5 per cent increase, the landlords claim they won’t breakeven.

“I find the Landlord’s evidence about incurring a financial loss for the financing costs of purchasing the residential property could not have been foreseen under reasonable circumstances credible,” the RTB explained. “The Landlords testified that they have always used a variable mortgage interest rate. Over the years, the variable rate has been stable, and it would be reasonable that the interest rate may increase by a few percent at renewal. The Landlords stated they did have a cushion to buffer in case of rate increases, but the rate increase in 2023 was substantial and quick. I find the Landlords experienced dramatic interest rate increases which have made managing the property unsustainable.”

The RTB decision continued by explaining “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 leader,” which was one of the big banks.

“I find the Landlords exercised care, foresight, judgement, 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 RTB ruled that in the first year, the landlords will be allowed to raise rents for each of the four units by 3.5 per cent — the annual allowable — plus an additional 12 per cent. The second year could rise by whatever the provincial maximum is set at, plus 11.5 per cent.

The board explains that a landlord can apply for additional rent increases “if they, acting reasonably, have incurred a financial loss for the financing costs of purchasing the residential property, if the financing costs could not have been foreseen under reasonable circumstances.”

The RTB says the landlords in this situation purchased the fourplex rental property — their first such building — in October 2021. Initially, their borrowing rate was 1.9 per cent

“The landlords testified that they have always used a variable rate mortgage and at the time of setting up the mortgage, the rates had been stable. At the time, there was no definitive indication that the interest rate would increase as much as it did,” the board wrote.

By July 2023, the RTB says the landlords’ mortgage rate jumped to 6.65 per cent. As of May 2024, the RTB said the landlords’ rate remained 6.65 per cent.

Fixing their mortgage in 2023 was reportedly not an option, with the RTB saying the landlords’ noted they were “too early in their mortgage term” and that doing so would incur a penalty that was “very large.”

However, tenants cited in the RTB’s decision argued that it was “reasonably foreseeable that the rate will change,” as the landlords had a variable rate mortgage. “The Landlords should enter these kinds of financing circumstances with a cushion to absorb the rate variability,” they said.

“The Landlords reached out to the Tenants in April 2023 and asked if they would be agreeable to an additional rent increase over the annual allowable limit. Tenant M.S. said the Landlords asked the Tenants for a $500.00 per month increase. The Tenants were not agreeable. Some Tenants argued that this is the Landlords’ investment, so how can this be classified as a loss when the Landlords are ‘going to come away with a million dollar house,'” the ruling reads.

As a standard, landlords in B.C. may only increase rents annually to a certain cap set by the provincial government. For 2024, the maximum was set at 3.5 per cent.

“Tenants must pay the increased rent, unless the increase is unlawful,” the province states on its website. “Landlords can only increase rent if they provide tenants with at least 3 full months notice. Rent can only be increased once every 12 months and must be within the yearly rent increase limit, as set by the Residential Tenancy Branch.”

LandlordBC CEO David Hutniak was not available for an interview. While he was unable to review this decision specifically, he tells 1130 NewsRadio via email that “our sector is experiencing huge fiscal challenges due to the escalating operational costs especially those out of our control like taxes, insurance, utilities, and fees.”

“High interest rates have exacerbated an already bad situation. Furthermore, a steady stream of regulation, layered upon layer, with rent control being the most notable, are pushing more and more rental housing providers to abandon the sector” Hutniak wrote.

“So although I’ve not reviewed this specific decision, the challenges this rental housing provider has experienced I know are not unique and the approved increase is likely deficient. Nevertheless, it is encouraging to see an Arbitrator at the RTB recognize the need to make the ruling that they did.”

In a statement to 1130 NewsRadio, Minister of Housing Ravi Kahlon says the province is taking action to fight the housing crisis by ensuring 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,” said Kahlon.

“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.” 

1130 NewsRadio has reached out to the Tenant Resource and Advisory Centre for comment.