Additional Rent Increase for Capital Expenditures
Recently, the Regulation to the Residential Tenancy Act was amended to permit a landlord to apply for a rent increase in excess of the standard annual amount in circumstances where the landlord has incurred major costs to improve the building in question.
A standard annual increase is intended to keep pace with inflationary costs of operating a rental unit. It is not intended to, nor does it, reimburse an owner for major capital expenditures performed to keep the building well maintained. It used to be the case that landlords could increase a tenant’s rent 2% in additional to the inflationary amount. This 2% was intended to compensate the landlord for capital expenditures. However, this was taken away by the Province several years ago.
This new legislation represents the Province’s recognition that annual standard increases do not compensate a landlord for the cost of major capital expenditures, and that without a recovery mechanism for capital expenditures, landlords cannot afford to do major repairs and renovations required to keep a building well-maintained. Essentially, landlords are no longer presumptively entitled to increase a tenant’s rent by 2% each year, above the inflationary amount, for capital costs. Landlords must now prove their entitlement to this increase through an additional rent increase application. The process is explained below.
Rent Increases for Residential Tenancies
A tenant’s rent may only be increased in accordance with the Residential Tenancy Act, SBC 2002, c 78 (the “Act”) and Residential Tenancy Regulation, BC Reg 477/2003 (the “Regulation”). There are three ways a landlord may increase a tenant’s rent (section 43 of the Act):
annually, in accordance with the regulations. This is known as the annual rent increase;
(as ordered by the director of the Residential Tenancy Branch of British Columbia (the “RTB”). This is known as an additional rent increase; or
as mutually agreed between the landlord and tenant. This is known as an agreed rent increase.
Annual Rent Increase vs. Additional Rent Increase
Annual rent increases allow a landlord to raise a tenant’s rent once per year, at a rate set by the Government of British Columbia. For the last few years, the limit of the allowable rent increase has typically been tied to the rate of inflation for that year. An exception to this was the allowable rent increase for 2023, due to the unusually high rate of inflation. The allowable rent increase limit for 2023 was set at 2%, significantly less than the rate of inflation.
In addition to the annual rent increase, a landlord may apply to the Residential Tenancy Branch of British Columbia (the “RTB”) for an additional rent increase if the landlord has incurred expenses for eligible capital expenditures related to the residential property where a rental unit is located. This process allows a landlord to recover a portion of the cost of eligible capital expenditures in the form of an additional rent increase.
Importance of Legal Representation During the ARI Process
RTB hearings relating to additional rent increase applications are more complex than other RTB hearings. Additional rent increase applications have different service deadlines, the hearings are set for longer periods of time, and they typically include substantial documentary evidence explaining the capital expenditures, the reasons these expenses were incurred, the timing as to when the expenses were incurred, and a review of maintenance and service records for the residential property.
Our firm has successfully applied to the RTB on behalf of various landlords to recover the costs of capital expenditures to rental housing through the additional rent increase application process. We anticipate seeing an increase in these types of applications before the RTB. A significant number of renters in BC live in rental buildings constructed prior to 1990. These buildings are now over 30 years old. As these buildings age, they require increasing capital expenditures as various building components and major systems reach the end of their useful life and need to be replaced.
What is an Eligible Capital Expenditure for an Additional Rent Increase Application?
Eligible capital expenditures are expenditures that meet the following criteria:
were incurred no more than 18 months before the landlord makes the application for the additional rent increase;
are not expected to recur for at least five years; and
were incurred to install, repair, or replace a major system or major component of the residential property for one of the following reasons:
to maintain the residential property in compliance with section 32(1) of the Act. Section 32(1) of the Act requires landlords to maintain residential property in a state of decoration and repair that complies with the health, safety, and housing standards required by law, and, having regard to the age, character, and location of the rental unit, makes it suitable for occupation by a tenant;
the major system or major component has failed or is malfunctioning or inoperative, or is close to the end of its useful life; or
to reduce energy use or greenhouse gas emissions or to improve the security of the residential property.
To be eligible, the capital expenditure must have been incurred in the 18-month period preceding the date the landlord submits their application. However, some projects may take more than 18 months to complete. Capital expenditures for the entire project will still be eligible for an additional rent increase if the final payment for the project was incurred in the 18-month period. This makes sense, because an ARI application may only be made once the work associated with the capital expenditure is complete.
The reason for the requirement that a capital expenditure needs to last at least 5 years to be eligible is because ARIs are not meant to permit landlords to recover costs for routine maintenance or routine repairs to residential property. For example, annual maintenance to an apartment building is not an eligible capital expenditure, but replacing the elevator would be an eligible capital expenditure because an elevator replacement only occurs once every 20-40 years.
Finally, a “major system” is defined in the Regulation to mean an electrical system, mechanical system, structural system, or similar system that is integral to the residential property or to providing services to the tenants and occupants of the residential property. A “major component” is also defined in the Regulation to mean a component of the residential property that is integral to the residential property or is a significant component of a major system. Examples of major systems and major components include, but are not limited to, windows, electrical wiring, heating systems, elevators, siding, and the roof.
If an otherwise eligible capital expenditure is incurred by the landlord due to inadequate repair or maintenance, the capital expenditure will be ineligible for an additional rent increase. In addition, if a landlord has received funds towards an otherwise eligible capital expenditure from another source, such as a rebate program, the expenditure is no longer eligible for an additional rent increase application. A landlord also may not pass through the cost of their own labour as an additional rent increase.
How is an Additional Rent Increase Implemented?
If the RTB approves an additional rent increase, the maximum amount a landlord can increase the rent is 3% in one to three phases, depending on the amount of the additional rent increase. All tenants in the same residential property are subject to this 3% increase, and each tenant’s rent must be increased by the same percentage. The amount of the additional rent increase(s) are in addition to the annual rent increase that a landlord may raise the rent each year.
Given the 3% cap for additional rent increases, these types of applications are most helpful to landlords of larger residential properties with multiple dwelling units. However, additional rent increases are available to all landlords, regardless of the number of units in a given residential rental property.
The additional rent increase application process can be complex, but these applications are an important tool to help landlords make necessary capital expenditures to residential property.
If you have questions about these or other residential tenancy issues, please contact us. All our lawyers act for both landlords and tenants before the RTB and would be happy to assist you.