July 15th 2024
The relationship between landlords and tenants should in theory be a pretty simple one. Landlords provide a product for tenants to use. In the case of residential property that product is a dwelling for them to live in. In the case of commercial property it may be a building for them to run a business from. In either case, the tenant in return for the right to occupy the bricks and mortar, pays the landlord rent. With that rent, the landlord pays his expenses: mortgage, taxes, insurance, etc. And hopefully realizes a return on his investment. Pretty straight forward.
So why is it that in the case of commercial real estate rentals, the landlord/tenant relationship for the most part works pretty well. But in many cases, when it comes to residential real estate rentals, things often are not so smooth? And the situation is only getting worse. The culprit quite simply is the Residential Tenancies Act and it’s enforcement through the Landlord and Tenant Board.
But before we get into the specifics of the Act and its enforcement, let’s take a quick look at what has happened to create the problem in the first place.
To understand the problem, we need to look at the economic situation that has occurred over the last 3 or 4 years. How it is essentially the ‘perfect storm’ for tenant/landlord unrest. Let’s start at the period just prior to the onset of Covid. Prices had risen to a certain extent, but not to any extreme. And interest rates were holding steady. Then commencing in the spring of 2020 real estate prices began to rise. And rise. And rise. And while they have settled somewhat since Covid, the average house price is still very elevated compared to what it was prior to 2020. And that’s only half the story. Also since Covid, mortgage rates have steadily risen from a low of under 2% to a current level of 5% – 6%.
Imagine what that has done to carrying costs for landlords. Not only do they have to pay twice what they would have paid just a few years ago to acquire the property, they also are faced with interest costs triple what they were in the past.
Now throw the Residential Tenancies Act into the mix, which essentially imposes rent controls, holding rents at about where they were pre-Covid even while carrying costs like taxes and utilities have risen in the neighbourhood of 10% a year, and you’ve got some serious issues to contend with.
Landlords are in many cases, saddled with long-term tenants who are paying minimal rent, perhaps less than half market rent, while trying to carry enormous costs. It just becomes unworkable. Landlords need to get the tenants out since that is the only way they can raise the rent to market levels. At the same time, the tenants have become aware that they are suddenly in the driver seat and control a very valuable asset. So, they reason if they are asked to move, they should be compensated. Heavily. As a result, when a tenant is approached to move, even in the case of a no-fault eviction because the property has sold and the new owner needs to move in, the tenant may well refuse to move. However, they let the landlord know they can be persuaded if enough cash is thrown their way.
So dramatic increases in costs of housing, together with substantial increases in interest rates and cost of living, combined with rent controls that keep the rents at unrealistically low levels have conspired together to in many cases pit landlords against tenants. And while the Residential Tenancies Act encourages these problems, the issues can be fixed with minimal legislative change. Next issue we’ll look specifically at what needs to be done.