Cents and Sensibility: Obtaining an Additional Rent Increase for Capital Expenditures

As of July 1, 2021, landlords are now permitted to apply to the BC Residential Tenancy Branch for an additional rent increase to offset a “capital expenditure”. Given that landlords have been extremely restricted in their rent increase opportunities over the last several years (and entirely banned from increasing the rent between March 30, 2020 and January 1, 2022), the opportunity to offset significant building expenses comes as welcome news. The additional rent increase opportunity originates from early recommendations from the BC Rental Housing Task Force. Its goal was a simple one: to build better homes for renters, while creating more opportunities for landlords to invest in their rental housing.

The Buck Stops Here

Not all building expenditures will open the door for an additional rent increase. A capital expenditure must involve a repair or replacement of a “major system” or “major component” of a rental property. The repair or replacement must also be a result of one or more of the following circumstances:

• Maintaining the rental property to meet health, safety and housing standards;
• Repairing or replacing a failed, malfunctioning, or inoperative building system or component;
• Repairing or replacing a building system or component that has reached the end of its useful life;
• Reducing energy use or greenhouse gas emissions (e.g. installing solar panels; replacing single-pane window with double-paned windows); or
• Improving security at the rental property (e.g. installing CCTV cameras, installing or replacing a FOB system).

Even when a capital expenditure meets this first hurdle, the landlord must still meet other requirements.  Fortunately, landlords can look to Policy Guideline #37 for guidance as to what does and does not qualify for an additional rent increase. This policy is accessible directly from the BC Residential Tenancy Branch Website. Under this policy, the Branch has made it clear that:

• The capital expenditure must have been incurred within 18 months of applying to the Branch for an additional rent increase;
• The expenditure must not be expected to re-occur for at least another 5 years;
• The expenditure must not be related to routine, ongoing or annual maintenance;
• If the repair is a result of poor repair/maintenance practices, then a landlord will not qualify for additional rent increase; and
• If the repair can be funded from another source (e.g. insurance, rebates or government grant), then the landlord will not qualify for an additional rent increase.

You Do the Math

If approved, the additional rent increase will be granted according to a formula. The formula factors in the amount of the eligible capital expenditure divided by the number of dwelling units in the building amortized over a period of 120 months. The additional rent increase amount will also be capped at a maximum of 3% per year for three years on top of the permitted annual rent increase amount for those years. To assist landlords with determining how much of an increase they might be able to obtain, the Residential Tenancy Branch has also developed a calculator on its website to help with this arithmetic. The calculator can be accessed here.

Do You Hear Me Now?

The Application for an Additional Rent Increase due to a capital expenditure resembles the same process as other Applications to the Residential Tenancy Branch. That is, on receipt of the Application, the Residential Tenancy Branch will schedule a participatory hearing so that any tenant(s) in opposition to the additional rent increase can participate and oppose. Policy Guideline #37 (which arbitrators will look to when deciding these Applications) suggests the kinds of evidence a landlord should be prepared to present, including but not limited to:

• Before and after photographs of the repair/replacement;
• Copies of permits
• Copies of applicable laws/bylaws/construction standards;
• Expert reports regarding the nature of the repair or replacement;
• Maintenance records; and
• Manufacturer’s documents establishing useful life expectancy for the building system or component.

What Next?

For landlords that have incurred a capital expenditure within the last 18 months, or those faced with replacing or repairing a major building system or building component, there is no time like the present to start the rent increase process.

Penny for your thoughts? If you need assistance with your own Application for an Additional Rent Increase, feel free to contact a member of our Strata Property or Residential Tenancy team.