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The Canadian real estate investment landscape has seen significant changes over the past several years, largely in response to the Covid-19 pandemic. Office workers across the board have been reluctant to return to the office and in turn many prime commercial properties continue to report high vacancy levels. Heightened interest rates have rendered buy and hold opportunities for vacant and industrial lands less lucrative. And the shift in consumers to online shopping from traditional brick and mortar storefronts has been accelerated exponentially. Given the foregoing shifts, many investors who historically focused on retail, commercial, or industrial real estate opportunities are now looking for new avenues to diversify their portfolios, and residential real estate may be the answer. After all, everyone has to live somewhere, and with approximately one-third (1/3) of Canadians currently renting, there is no shortage of opportunities available. Moreover, Canada is presently experiencing a nation-wide housing shortage, and in turn government incentives and tax benefits to encourage investment in affordable housing have been sprouting up across the country. On the flip side, this increased government attention has also led to ever-evolving legislative protections for tenants, who are viewed as vulnerable parties with unequal bargaining power in comparison to landlords.
Each province and territory in Canada has its own residential tenancy legislation. However, the particulars of each such piece of legislation can vary significantly, specifically with respect to the protections in place for tenants. Even extensive past experience as a commercial landlord does not properly equip one to be a successful residential landlord, for while commercial tenancies legislation does exist, commercial parties are largely permitted to freely negotiate leasing arrangements which can modify or exclude otherwise available legislative protections for the tenant. By contrast, residential tenancy legislation significantly limits the options available, from prescribed forms of documents to be used, to mandatory standards of care, to prohibitions against certain contractual provisions.
It follows that investors newly entering the residential real estate market should understand the applicable tenancy laws to avoid unintentional and costly contraventions. For example, several jurisdictions impose rent control restrictions, including British Columbia, Manitoba and Ontario. Some jurisdictions prohibit no-fault evictions, such as Ontario. Others impose detailed and specific maintenance and repair obligations on landlords, such as Alberta. And others impose significant monetary fines for contravening such requirements. Over and above the tenancy-specific legislation, there are also various federal and provincial legislations (human rights, housing and health standards, privacy, etc.) that are applicable to residential leases. Particularly, if a new investor comes from a background of commercial leasing arrangements where bargaining power between a landlord and tenant is equal and government oversight is relatively light, the rules of conduct for residential tenancies may come as a shock.
To illustrate this point, we have highlighted number of note-worthy provisions of Ontario’s Residential Tenancies Act (the “RTA”) to discuss:
No no-fault evictions. In Ontario, one of the biggest differences between residential versus commercial leasing is that a residential tenant cannot be evicted at the expiry of a lease term, save in very limited circumstances. Rather, a landlord is obliged to continue honoring the terms of the lease agreement so long as a tenant chooses to remain in occupancy. Other than in response to a tenant default, the only circumstances under which a landlord can terminate a lease is if the term has expired AND (i) the landlord or a purchaser requires the unit personally or for a family member or caregiver; (ii) the landlord needs to complete extensive repairs that require a building permit and vacant possession; or (iii) the unit is being demolished or converted to non-residential use. Option (i) above is not available in the case of corporate landlords, and all three options impose additional obligations on the landlord depending on the circumstances. These obligations include: providing alternative accommodations, paying prescribed termination payments, or providing the tenant with the right to move back in following repairs being completed.
Strict process to terminate leases. The Landlord and Tenant Board (the “LTB”, being the tribunal that administers the RTA), has the exclusive jurisdiction to oversee residential tenancy matters in Ontario. Therefore, in order to enforce the termination of lease, landlords in Ontario must follow a strict process involving prescribed forms, mandated cure periods, and hearings and appeals at the LTB. Only once that process has been fully adhered to and an eviction order granted may a landlord avail itself of the local Sherriff’s office to assist with enforcement of an eviction order. This is contrasted to commercial leasing arrangements, where a landlord has multiple avenues of recourse in the event of tenant default (locking the doors, seizing assets, etc.), limited only by the agreed-upon contractual arrangement between the parties.
Litigation of disputes at the LTB is not for the faint of heart. The LTB has exclusive jurisdiction over matters under the RTA and establishes its own process. It is not bound to follow precedent like our common law courts, therefore decisions are unpredictable. Generally, it views the RTA (probably not unreasonably) as consumer protection legislation and when interests conflict tends to protect those of the tenant. In addition, the LTB will rarely award costs to a landlord who is successful in an application to the LTB. For that reason, most commercial litigators do not practice before the LTB. The parties are often self-represented or represented by non-lawyer agents (law clerks or paraprofessionals) who specialize in RTA disputes and can do so economically.
Rental increase guidelines. Unless one of the limited exemptions are available, landlords are only permitted to raise rent once annually, to the maximum of an annually published rent increase guideline. For example, the maximum allowed rental increase for 2025 has been set at 2.5%.
Inability to contract out of the RTA. Landlords and tenants are restricted from contracting out of the RTA, meaning that even if a landlord and tenant agreed under contract to exclude their leasing arrangements from the RTA, either party would have the ability to resort to the protections of the RTA, and the other could not rely on any contractual provisions providing otherwise.
Certain provisions unenforceable. Further, clauses within a lease agreement may be void and unenforceable if they are not in compliance with the RTA. To highlight a few examples, the following provisions, if included within residential lease, would be unenforceable:
- shifting the onus for mandatory landlord responsibilities to tenant (e.g. snow removal);
- confirming the lease will terminate at the end of the term;
- contracting out of the rent increase guidelines;
- “no pet” restrictions;
- damage deposits;
- post-dated rent cheques;
- any pre-paid rent save last month’s rent;
- NSF fees over $20.00; and
- limitations on guests and additional occupants.
Standard form of lease. A standard form of lease is prescribed for residential leases entered into after April 2018. The standard form of lease expressly sets out the tenant’s rights and limitations of contracting out of the RTA, to ensure that all tenants are well aware of their rights.
Steep penalties for landlords. In the event a landlord contravenes the RTA, the fines can be significant: up to $50,000 for an individual and $250,000 for a corporation. These maximums are set to increase in the near future as well, to $100,000 and $500,000 respectively.
Given the heavily regulated landscape, how can an investor just starting out as a residential landlord best set themselves up for success?
Picking the right tenants. The ability for landlords to screen and diligence prospective tenants is the most powerful tool in a residential landlord’s arsenal. Keeping in mind applicable Human Rights obligations, a landlord should utilize all screening methods available in the relevant jurisdiction. For example, under the RTA, a landlord is expressly permitted to complete credit checks, reference checks, and similar methods during the tenant selection process.
Proper diligence of existing leases. If you are seeking to acquire a tenanted complex, it is vital to extensively review the existing leases to identify any possible contraventions of the legislation you may be inheriting by taking over as landlord, and to confirm whether or not the rental rates currently being charged are both sufficient based on your investment and cashflow goals and legal. Further, if any tenants are in default of their leases, it would be prudent to require the vendor landlord to undertake the potentially lengthy and arduous process of evicting the tenant as a precondition of closing. There may also be an opportunity to, as a condition of closing, require the vendor landlord to negotiate a mutually agreeable arrangement with a tenant to terminate the lease before you purchase, so that you have the opportunity to start fresh. Such “cash for keys” scenarios can be costly and time consuming, particularly if there is a large number of units, so shifting the onus to the vendor to complete this step has its benefits.
Carefully drafted lease agreements. Notwithstanding the restrictions and requirements for form and content of leasing arrangements as discussed above, careful consideration for lease drafting is still vital to set yourself up for success. For example, in Ontario where the standard form of lease is mandated, landlords are permitted to append a schedule of additional terms to the standard form of lease. Although these additional terms cannot contradict the standard portion of the lease or the requirements of the RTA, they may allow landlords the flexibility to address specific maintenance and occupancy rules, add requirements for guarantors in support of tenant obligations (for example in the case of student rentals), or even provide for creative provisions such as roommate cooperation agreements for student rentals, etc.
Building your team. It is important to build a team of trusted advisors for both acquisition and ongoing operations of a residential real estate portfolio (property managers, lawyers, realtors, accountants, etc.) that are up to speed on the mandatory and ever-evolving legislative regime that must be navigated.
In sum, due to the increased differing, and demanding, legislation governing residential tenancies across Canada, entering into the residential real estate space comes with a unique set of pitfalls and challenges. So, while expanding your portfolio to incorporate residential holdings may be a great opportunity, no matter how experienced of an investor you may be, there are certain risks, costs and inconveniences involved that must be on your radar. With the use of proper foresight, planning, and legal review, it remains possible to navigate this tenant-friendly regime and operate a rental residential portfolio as a profitable long-term investment. Do not hesitate to contact Miller Thomson’s Transactions and Leasing Group for guidance.
