End of Mortgage Under the Housing Services Act: What Non-Profit Housing Providers Need to Know

Article by Kate Schoffer

As affordable housing providers across Ontario reach the end of their operating mortgages, many are confronting decisions that will have a lasting impact on their organizations, residents, and communities. For providers governed by the Housing Services Act, 2011 (“HSA”), the end of mortgage is not the end of the provider’s obligations. Understanding what comes next is an important first step.

The new framework governing end of mortgage for EOM providers is set out in Ontario Regulation 367/11 under the HSA. The new framework represents a significant shift from the old operating agreement model, moving away from a prescriptive, formula-driven funding approach toward a more flexible, negotiated framework between providers and their Service Managers.

Unlike federal (“EOA”) providers, whose funding and legal obligations end automatically when their operating agreements expire, provincial (“EOM”) providers remain subject to the HSA even after the mortgage is paid off. This means continuing to provide rent-geared-to-income (“RGI”) housing, remaining subject to oversight, and facing restrictions on asset sales and the use of proceeds. While there is no strict deadline, EOM providers that have reached the end of their mortgage must eventually enter into either a new service agreement or an exit agreement with their Service Manager.

New service agreements

A new service agreement is available to providers who have reached end of mortgage and are prepared to develop a joint financial plan with their Service Manager. The joint financial plan replaces the old benchmark funding formula and forms the foundation of the new regime. The joint financial plan must demonstrate how revenue will meet operating expenses and projected capital expenditures. The plan must address property tax, capital repair needs, market rent levels, and RGI unit targets.

There are important implications of choosing to enter into a new service agreement. Entering a new service agreement preserves access to RGI funding, provincial and federal funding programs such as COCHI, bulk programs like group insurance, and the ongoing support of your Service Manager. However, the provider continues to be subject to ongoing oversight, reporting requirements and restrictions on the way it operates, manages and disposes of its assets. This can be administratively burdensome and may not align with the organization’s goals.

There are specific regulatory requirements that apply to all new service agreements, which should be carefully reviewed and considered with legal counsel. By way of overview, these requirements include a minimum ten-year term, as well as prescribed provisions addressing the number of RGI units to be provided, a dispute resolution framework, and minimum funding commitments.

Unlike the old regime, Service Managers have significant flexibility in how they structure these new agreements. This means there is real room to negotiate terms that reflect the specific needs, circumstances, and goals of your organization, rather than being locked into a one-size-fits-all framework. Key matters to negotiate include the RGI and market unit mix, market rent levels, capital planning, redevelopment opportunities, and reporting requirements.

Exit agreements

An exit agreement allows an EOM provider to formally de-list from the HSA and end its relationship with the Service Manager entirely. For some providers, this is an attractive option. Exiting the HSA means freedom from ongoing government oversight, reporting requirements, and restrictions on operations and asset management. The provider regains full control over how it manages its buildings, sets its rents, and makes decisions about its future. For organizations that are financially strong and have a clear vision for their future that does not depend on ongoing subsidy support, an exit agreement may be the right path.

Exit is not, however, a clean break from all obligations. Providers must have a plan to protect all current residents and must continue to fund existing RGI subsidy units internally without Service Manager support. The provider’s plan must address whether the organization will continue operating, redevelop, or reinvest sale proceeds into other affordable housing. A financial plan demonstrating long-term viability will also be expected.

That financial plan will be critical. Service Managers will want to see convincing evidence that the provider can sustain its operations and meet its ongoing obligations to existing RGI households without subsidy support. Boards considering this path should be prepared to present a thorough and credible financial picture, including a realistic assessment of revenues, operating costs, capital repair needs, and reserve fund adequacy.

There are important implications to exiting the HSA. Once a provider exits, re-entry into the HSA is not guaranteed. There is no established mechanism for re-entry, and any future agreement would be entirely at the Service Manager’s discretion. Exit also eliminates eligibility for future federal and provincial funding programs, including grants for capital repairs. From the Service Managers’ perspective, exit agreements should be reserved for rare circumstances and must, at a minimum, preserve affordable housing, protect existing tenancies, and continue to provide ongoing subsidy to existing RGI households. Providers should go into this process with a clear understanding that exit is intended to be a permanent decision and should plan accordingly.

How we can help

Negotiating either a new service agreement or an exit agreement is a legally complex process. These agreements involve significant financial commitments, long-term obligations, and terms that will govern your organization for years to come. Having experienced legal counsel at the table can make a meaningful difference in ensuring that the agreement you enter reflects your organization’s interests and that you fully understand the obligations you are taking on.

Cohen Highley LLP has long-standing experience advising non-profit housing providers across a wide range of legal matters. As this is a relatively new regulatory framework, we are working through these issues alongside our clients and bringing the depth of our housing law experience to bear on the questions that arise. If your organization is approaching end of mortgage or is already in discussions with your Service Manager, we welcome the opportunity to assist you in understanding your obligations, assessing your options, and working toward an outcome that best serves your organization and residents.