AGI UPDATE FOR 2017: NEW FEES, PROCESS AND FORMS, AND POTENTIAL MINEFIELD!
FEES: The fees for most Landlord Tenant Board (“LTB”) applications are scheduled to increase January 16, 2017. The fees for Above Guideline Rent Increases (AGIs) will increase nominally from $200 plus $10 per additional unit to $220.00 plus $10 per additional unit. The maximum filing fee remains capped at $1,000.00.
THE PROCESS: Most AGI Applications are resolved through voluntary mediation on the scheduled hearing date. The LTB Mediator encourages the Landlord and Tenants to discuss the application and negotiate an outcome without the need to go into a lengthy hearing. Applications that are not resolved through mediation usually proceed immediately to a hearing.
Beginning in March 2017 the Board will adopt a “case management” approach to capital expenditure AGI applications. The Board will schedule a preliminary case management hearing and the parties will be expected to attend to discuss the details of the application and negotiate for a settlement of the proposed increase. If a resolution is reached then a “consent order” will issue and the matter will end. If the application is not resolved then the parties will have to re-attend with their witnesses at a later date (perhaps months later) for a formal hearing before an adjudicator.
The benefits to the case management approach include the early opportunity to negotiate an AGI Order, or at a minimum to get disclosure of the tenants’ case. The downside is the prospect of delays if tenants are not prepared, or if they decline to seriously discuss settlement knowing that a hearing date is months off in the future. The current process puts mediation as a “last resort” and if it is not successful, then parties will usually go to a hearing immediately and this encourages successful mediation. With case management as an interim step, there may be less incentive to reach a resolution right away if the parties recognize there are no imminent consequences since the hearing is put off to a later date.
FORM CHANGES: In order to implement case management hearings for AGIs the L5 Application Form will undergo modification to require additional disclosure and details about the capital expenditures and the eligibility of the items that are being claimed. This means more upfront work for landlords when the application is submitted to the LTB.
COSTS NO LONGER BORNE: THE “TICKING TIME BOMB”
When the Residential Tenancies Act (“RTA”) was enacted in 2007 it introduced a “cost no longer borne” provision for capital expenditure AGI increases. When a Landlord receives an AGI Order based on capital expenditures, the Landlord is entitled to collect the increase for the duration of the “useful life” determined by the LTB in the Order. Once the useful life period expires (ie: 10 years for lighting, carpet) then the Landlord must reduce the rent charged to the tenant by the amount of the AGI increase, if that tenant was in the unit and subject to the AGI when the Order issued.
The minimum useful life for capital expenditure AGIs is 10 years; therefore, beginning in 2017 and each year thereafter, AGI Orders will be maturing and a legal risk will arise with respect to long term tenants who were subject to capital expenditure AGI Orders many years ago. There are a number of AGI applications where Landlords received a 9.0% rent increase and they may now face a 9.0% rent decrease with respect to some long term tenants, even if the current Landlord is not the Landlord who applied for and obtained the AGI years ago.
This is a legal minefield for Landlords who have not budgeted for a reduction in cash flow, or where returns have been guaranteed to investors that now may not be fulfilled if a rent reduction is imposed. This liability will be especially troubling for Landlords who bought buildings after 2007 that were subject of a capital expenditure AGIs made under the RTA but where the Landlord was provided with little or no records of past AGI orders. There is no formal record or process that we are aware of at the LTB for notifying tenants when an AGI Order matures and the rent reduction must take effect. Regardless, in our experience, sooner or later these long-buried issues can come to the surface. Landlords should review their potential exposure and develop a strategy for maintaining revenue and avoiding the risks of a cost no longer borne rent reduction.
We can assist Landlords in identifying such risks and in options for mitigating future rent reductions. For more information about AGIs and cost no longer borne risk management strategies please contact Paul Cappa, email@example.com ; Shannon Kiekens, Kiekens@cohenhighley.com ; or, Joe Hoffer, firstname.lastname@example.org
Finally, all of us at Cohen Highley will take this opportunity to wish all of you a safe, healthy and happy Holiday Season and, despite our talk of legal minefields, a prosperous 2017!