In a decision that could set a significant precedent for rental markets in British Columbia, the Residential Tenancy Branch (RTB) approved a landlord’s request to increase rent by 23.5% over two years at a fourplex property. The ruling has sparked debate on whether rising interest rates justify such substantial rent increases, as landlords and tenants face the effects of economic turbulence.
The Situation: Financial Strain from Rising Interest Rates
The landlords purchased their fourplex in October 2021, securing a variable mortgage with a favorable rate of 1.9%. For years, variable mortgage rates had remained relatively stable, making this financing option attractive. However, beginning in 2022, the global economic landscape changed drastically due to the COVID-19 pandemic’s aftershocks, leading to soaring interest rates. By July 2023, the mortgage rate had ballooned to 6.65%, significantly impacting the landlords’ ability to manage their property.
According to the RTB’s ruling, the landlords experienced an unexpected financial burden as their mortgage payments more than tripled. Despite having a financial cushion for potential rate increases, the rapid and substantial rise in interest rates left them unable to maintain the property under the current rental income. They argued that without a rent increase, they would continue to incur financial losses, making the situation unsustainable.
The RTB’s Decision
In light of these circumstances, the landlords applied to the RTB for an extraordinary rent increase beyond the annual allowable limit, which was set at 3.5% for 2024. Under British Columbia’s Residential Tenancy Act, landlords can request additional rent increases if they can prove financial losses that could not have been reasonably foreseen when purchasing the property. The RTB agreed that the landlords had met this burden of proof.
“I find the landlords have been successful. They have proven, on a balance of probabilities, all the elements required to impose an additional rent increase for a financial loss for financing costs of purchasing the residential property under section 23 of the Regulation,” the ruling stated. The decision was made based on the landlords’ demonstration that the extreme rise in interest rates was not foreseeable, even with their careful financial planning.
The RTB approved a phased rent increase: 15.5% in the first year (3.5% annual allowable increase plus an additional 12%) and the remaining 8% in the second year, adjusted to align with the provincial maximum for that year. Even with this increase, the landlords admitted they would still struggle to break even, highlighting the severity of their financial situation.
The Tenants’ Response
The tenants, understandably, were not pleased with the ruling. They argued that the financial risks associated with a variable mortgage were well-known and that the landlords should have been prepared for rate fluctuations. They felt that the landlords were attempting to pass on the consequences of their investment decisions to the tenants, many of whom faced their own financial challenges.
One tenant reported that the landlords initially approached them in April 2023, requesting a $500 monthly increase to cope with their rising costs. The tenants declined, leading to the formal application to the RTB. Some tenants pointed out that despite the landlords’ current financial strain, the property itself was likely to appreciate significantly over time, suggesting that the situation might not be as dire as presented.
“The landlords should enter these kinds of financing circumstances with a cushion to absorb the rate variability,” argued the tenants. They also expressed concern that this ruling could open the floodgates for other landlords to seek similar rent increases, further exacerbating the affordability crisis in BC.
Industry and Government Reactions
The decision has ignited a broader conversation about the impacts of rising interest rates on the rental market and the potential for more landlords to apply for rent increases. David Hutniak, CEO of LandlordBC, expressed understanding of the challenges faced by the landlords in this case, noting that many in the sector are grappling with escalating operational costs, including taxes, insurance, utilities, and now interest rates. He highlighted that while this specific decision might be unique, it reflects the broader difficulties faced by rental housing providers across the province.
“High interest rates have exacerbated an already bad situation. Furthermore, a steady stream of regulation, layered upon layer, with rent control being the most notable, are pushing more and more rental housing providers to abandon the sector,” Hutniak stated. Although he had not reviewed the specifics of this case, he noted that the financial pressures described are widespread among landlords.
Minister of Housing Ravi Kahlon also weighed in, acknowledging the ruling’s significance. He emphasized that while the provincial government has kept rent increases at or below inflation since 2018, the policy allowing for extraordinary rent increases due to financing losses predates the current administration. Kahlon stated that this is the first time such an application has been granted since the province began collecting data in 2021. He has directed his staff to review the policy in light of this decision, signaling potential changes to protect tenants from similar rent hikes in the future.
A Precedent for Future Cases?
The RTB’s decision raises important questions about how landlords and tenants can navigate the economic challenges brought on by high interest rates. For landlords, it underscores the risks of relying on variable-rate mortgages, especially during periods of economic uncertainty. For tenants, it highlights the potential vulnerability to rent increases if landlords face financial difficulties.
As the housing affordability crisis continues to deepen in British Columbia, this ruling may lead to more landlords seeking similar rent increases, particularly if interest rates remain high. The outcome could have widespread implications for both the rental market and the broader housing sector.
At the same time, the government’s response to this case could influence future policy changes. If Minister Kahlon’s review leads to revisions in the regulations governing rent increases, it might provide additional protections for tenants while balancing the financial realities faced by landlords.
For now, tenants at the fourplex will have to prepare for a significant rent hike, while other landlords and tenants across the province watch closely to see what this decision could mean for them.