A large source of landlord and tenant conflict stems from the Operating Costs clause; a critical clause that is used to determine how much Additional Rent is charged to the tenant. This clause is brutal to read and causes confusion. The common solution: ignore it and hope for the best! The problem: if you don’t deal with the confusion you are guaranteed mismanaged expectations, conflict and exploitation.

Is this legal?

I recently received a call from Ms. D, a sharp business woman. She was certain her landlord charged her an illegal $50,000 increase in additional rent. “This is unfair and therefore clearly illegal!” Ms. D then justified her reaction: “I wasn’t warned that such an increase would occur, the previous year’s additional rent was less and it was a huge increase.” Unfortunately, Ms. D had to learn the hard way: what is legal has nothing to do with what is fair and signing before understanding what you’re signing is foolish.

What should I know?

Read on for a high level cheat-sheet that helps you manage the confusion and avoid a nasty and seemingly illegal Additional Rent hike.

What to add?

• Always include the words “without duplication”. Base Rent is where the landlord makes a profit. Additional Rent (or TMI, Operating Costs), on the other hand, is only used to reimburse the landlord for the costs it incurs to run a building. It should never be used as another source of revenue. Some landlords, however, violate this rule by intentionally making the Operating Clause confusing. The solution: insert wording that prohibits the landlord from being able to “duplicate” fees (that is, add factious fees on top of real costs to produce a profit) and, therefore, make a profit. If the landlord refuses to put in writing that it will not make up fees that create a windfall for the landlord, get nervous.
• Your right to audit: A tenant should always have the right to challenge and inspect the landlord’s operating statement and ensure that no “fake fees” are being charged. Be sure to include a detailed list of what information must be on the statement and who must prepare the statement. Furthermore, add in timelines. For example, request that the landlord produce the statement 10 business days after the tenant makes the request. The landlord should also reimburse the tenant for any overpayments and for the costs the tenant incurred to inspect the landlord’s operating costs.
• All risks insurance: It’s common for building insurance to be part of the operating cost definition.  The issue, however, has to do with the type of coverage. It’s prudent for the tenant to require that the landlord carry “all risks” versus only “fire insurance”, as the former is much broader and offers the tenant more protection from potential costs in case of a calamity.
• Excluding tax inputs: The tenant is typically responsible for any HST that the landlord must pay due to its acquisition of services and goods to operate the building. The tenant, however, should require that any HST for which the landlord gets a tax input must be excluded from the operating costs. This is because the landlord is already making this money back!

What to define?

• Define any reference to costs for “permits”, “administrative fees”, “compliance”, “market research”, “management” and “marketing fees”. The tenant shouldn’t be paying for permits unrelated to running the building or for marketing costs associated with leasing a space to a new tenant. What happens if the “permits” or “market research” relate to an expensive expansion or redevelopment project that only makes the landlord richer? The tenant may be stuck with an enormous bill and may be inconvenienced by the whole process.
• How are fees charged? If a management fee is legitimate, ensure that it’s calculated only on top of operating costs and not on top of realty taxes or costs incurred for carrying out capital improvements.
• What programs? Landlords frequently list “all costs associated with any service program established by landlord or required by authorities.” What programs is the landlord planning and who are the authorities? If the landlord can’t answer, ensure that you insert language requiring the landlord to “act reasonably”.

What to strike out?

• Commissions are a cost of doing business; a cost that is already recouped in the Base Rent.
• Capital costs or replacement of anything related to the structure or HVAC systems of the building, unless those costs are amortized over a significant period of time: It’s prudent for a tenant to attempt to cap any increases in Additional Rent if the property is likely due for an overhaul.  Tenants may also limit capital costs to items that reduce operating costs, such as replacing outdated electrical systems with “energy friendly” ones.
• Costs for any tenant improvements: The landlord already recoups this cost in Base Rent. If this is added into the operating costs, then the landlord is clearly defining operating costs broad enough so that it may use Additional Rent.
• Costs for marketing property for other tenants: Again, this is already baked into the Base Rent and has nothing to do with managing or operating the business. The landlord may argue that marketing the property is critical to managing the building. This is a grey area.
• Investigating, testing, monitoring, controlling, removing and disclosing hazardous substances: The landlord should have done its due diligence when buying the building and if there is an issue, this is the responsibility of the landlord, not the tenant.
• Fair Market Rental Value for Landlord’s Space: The landlord may try to charge you rent for the landlord’s use of a room in the building or for un-rentable rooms such as electrical closets or janitorial closets.  This is a bit much as the tenant’s rent is already being charged on “grossed up” space that forces the tenant to already pay for shared or unusable space.  If the landlord can’t rent a space – tough! That’s the price of doing business.

While the above list is the tip of a much larger iceberg, it challenges the idea that ignorance is bliss. It’s not. It’s expensive.

 

(Article By N. Falcomer)

Premier Christy Clark unveiled a new loan program today to help first-time home buyers come up with their down payment.

The BC Home Owner Mortgage and Equity (HOME) Partnership program will offer qualifying home buyers loans of up to $37,500, interest and payment free, for five years.

The province will begin accepting applications on January 16, 2017.

To qualify, buyers must:

• be buying their first home;
• obtain a high-ratio, insured first mortgage for at least 80 per cent of the purchase price;
• have a combined gross household income not exceeding $150,000;
• have saved a down payment amount at least equal to the loan amount;
• be a Canadian citizen or permanent resident for at least five years; and
• have lived in BC for at least the full year preceding their application.

The loans will be due in full if the buyer defaults on a payment, ceases to use the home as a principle residence or resells the home.

Key facts:

• The loans will match a home buyer’s contribution to a down payment up to five per cent of the home’s purchase price.
• The maximum purchase price to qualify for a loan is $750,000 (excluding taxes and fees).
• After five years, buyers can either repay their loan or enter into monthly payments at current interest rates.
• Loans through the program are due after 25 years.

“This program will boost sales to first-time home buyers. Without question, they’ll take advantage of it wherever they can,” said Helmut Pastrick, Central 1 Credit Union chief economist.

The province estimates this initiative will help at least 42,000 buyers or households province-wide over the next three years. About half of these buyers will be in the Lower Mainland, according to Pastrick.

Click here for more information.

Vancouver, BC – December 15, 2016. The British Columbia Real Estate Association (BCREA) reports that 6,419 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in November, down 20.1 per cent from the same month last year. Total sales dollar volume was $4.02 billion in November, a decline of 25.2 per cent compared to the previous year. The average MLS® residential price in the province was $625,871, a decline of 6.4 per cent compared to the same month last year.

“Moderating consumer demand in the province’s largest population centres continues to trend home sales toward the ten-year average,” said Cameron Muir, BCREA Chief Economist. The seasonally adjusted annual rate of MLS® residential sales was approximately 89,000 units last month. The ten-year average is 83,000 unit sales, while the 15-year average is 85,300 unit sales.

“A relatively higher number of transactions outside of the Lower Mainland is largely responsible for pulling the provincial average MLS® price lower,” added Muir.

Year-to-date, BC residential sales dollar volume increased 22.8 per cent to $74.5 billion, when compared with the same period in 2015. Residential unit sales climbed by 12.1 per cent to 107,488 units, while the average MLS® residential price was up 9.6 per cent to $692,745.

In a move to help BC citizens and residents buy their first home, the BC government announced today that it is launching a new program to augment down payments for first-time buyers. The B.C. Home Owner Mortgage and Equity Partnership program contributes to the amount first-time homebuyers have already saved for their down payment, providing up to $37,500, or up to 5% of the purchase price, with a 25-year loan that is interest-free and payment-free for the first five years. Through the program, the Province is investing about $703 million over the next three years to help an estimated 42,000 B.C. households enter the market for the first time.

During the first five years, no monthly interest or principal payments are required as long as the home remains the homebuyer’s principal residence. After the first five years, homebuyers begin making monthly payments at current interest rates. Homebuyers will repay the loan over the remaining 20 years, but may make extra payments or repay it in full at any time without penalty. The loan must be repaid in full when the home is sold or transferred to another owner.

To be eligible, buyers must be preapproved for an insured high-ratio first mortgage (mortgage down payment is less than 20% of the home price). On completion of the sale, program funds will be advanced and the loan will be registered as a second mortgage on the property’s title.1?

Applications will be accepted starting January 16, 2017. This will be a three-year program with loans advanced from February 15, 2017 until March 31, 2020.

Eligible homebuyers

All individuals with a registered interest on title must reside in the home and:

• Be a first-time homebuyer
• Have been a Canadian citizen or permanent resident for at least five years
• Have resided in BC for at least 12 months
• Have a combined gross income of $150,000 or less
• Have saved at least half of the minimum down payment they will require
• Must be pre-approved for the first mortgage before applying

The first mortgage must be high-ratio insured from an NHA approved lender for more than 80% of the purchase price.

Eligible Properties

Any legal, self-contained, mortgageable residence located in BC

• Must be used as a principal residence for the first 5 years
• Rental properties and seasonal or recreational properties are not eligible
• The purchase price cannot exceed $750,000

Home Partnership Loans

• Up to 25-year term, registered as a second mortgage
• No interest or principal payments for the first 5 years
• Monthly principal and interest payments begin in year 6, amortized over remaining 20 years
• Interest rate for years 6 to 10 set near first mortgage rate at time mortgage is registered
• Interest rate reset to near first mortgage rate at years 10, 15, and 20
• Homeowner may repay in full or part at any time without penalty.

The loan is due and payable in full upon

• The home ceasing to be the primary resident in the first 5 years
• Default on the first mortgage
• Sale of home or change of ownership
• Any other default on the Home Partnership second mortgage

Bottom Line: This is a bold and innovative step to help potential new buyers to meet the greatest hurdle of first-time homeownership—the down payment. The Federal Government’s new mortgage regulations released in October hit first-time homebuyers hard, so this program will be welcome relief for B.C. residents. The B.C. government estimates that it will make more than 42,000 new loans over the three-year life of this program, amounting to $703 million in new funding available for qualified first-time homebuyers to come up with their down payments. This is particularly important for BC, which has the highest home prices in Canada.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

BC Home Sales to Decline in 2017 from Record Pace 
BCREA 2016 Fourth Quarter Housing Forecast

Vancouver, BC – November 29, 2016. The British Columbia Real Estate Association (BCREA) released its 2016 Fourth Quarter Housing Forecast today.

Multiple Listing Service® (MLS®) residential sales in the province are forecast to climb 11 per cent to a record 113,800 units this year, eclipsing the previous record of 106,310 units in 2005. Less robust economic conditions combined with government policy constraints are expected to slow housing demand by more than 15 per cent to 96,300 units in 2017. However, housing demand is expected to remain well above the ten-year average of 85,000 unit sales.

“”Housing demand across the province is expected to moderate next year as declining affordability related to rising prices and government policy interventions limit the number of eligible buyers,” said Cameron Muir, BCREA Chief Economist. “However, while home sales are not expected to repeat this year’s record performance, consumer demand is expected to remain well above the ten-year average.”

The average MLS® residential price in the province is forecast to increase 9.8 per cent to $698,900 this year. The supply of homes for sale is expected to trend higher next year as moderating demand is met with added new home completions. A trend toward more balance in the market will unfold next year and exert less upward pressure on home prices. In addition, a larger contraction in the number high-end home sales will contribute to moving the aggregate average price statistic lower. As a result, the average MLS® residential price in the province is forecast to decline 6.4 per cent to $654,200 in 2017.

BCREA ECONOMICS NOW

Canadian Consumer Price Inflation – November 18, 2016

Canadian inflation, as measured by the Consumer Price Index (CPI),  rose just 1.5 per year-over-year in October. That is a modest uptick from 1.3 per cent in the twelve months to September.  The Bank of Canada’s core measure of inflation, which excludes volatile components like food and gasoline, rose 1.7 per cent.   In BC, provincial consumer price inflation was 2.1 per cent in the 12 months to October. 

Inflation in Canada has trended lower following several months above the Bank’s 2 per cent target. While the Canadian economy posted very strong growth in the third quarter, much of that growth is the result of bouncing back from a wild-fire induced contraction in the second quarter. With the economy returning to a more moderate rate of growth, there is very little pressure on inflation currently and events in the United States have injected a fair amount of uncertainty into the outlook. Those factors leave the door open for a further Bank of Canada rate-cut in coming months, though our baseline forecast remains for the Bank to be on hold until 2018. 

Bank of Canada Interest Rate Announcement – October 19, 2016

The Bank of Canada announced this morning that it is holding its target for the overnight interest rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that the profile for growth in Canada over the near-term is lower than it previously expected though the Bank is still projecting stronger growth in the second half of 2016. However, the Bank has pushed out its forecast for the economy to return to full capacity to mid-2018 while inflation is projected to return to its 2 per cent target next year. 

There is downside risk to the economy given the Federal Government’s decision to tighten mortgage credit this month, though it will take some time to see the effects on economic growth. That said, even if growth moderates as a result of the housing policy changes, the Bank of Canada’s public support for that policy likely means interest rates would not be lowered in response. With growth recovering from a second quarter contraction and inflation still tame, We therefore expect the Bank to leave rates unchanged for the foreseeable future.

Canadian Housing Starts – October 11, 2016

Canadian housing starts jumped 20 per cent in September to 220,617 total units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts moved moderately higher to just under 200,000 units SAAR, above average annual growth in Canadian households. New home construction will likely slow in coming months as the consequences of government’s new mortgage regulations ripple through the housing market.

Housing starts in BC surged 40 per cent higher to 47,560 in September and were 79 per cent higher on a year-over-year basis. Single detached starts rose 27 per cent compared to last September while multiple unit starts nearly doubled. Through the first three quarters of the year, BC housing starts are up 39 per cent compared to 2015. 

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were up 110 per cent year-over-year in September, led by triple digit growth in both single and multiple units. In the Victoria CMA, housing starts tripled compared to September 2015 due to strong growth in new multiple unit starts. New home construction in the Kelowna CMA rose 16 per cent on balanced growth between single and multiple unit starts. Housing starts in the Abbotsford-Mission CMA declined 64 per cent compared to last year as multiple unit projects took a breather in September following several strong months of activity. 

Canadian Building Permits – October 6, 2016

The total value of Canadian building permits jumped 10.4 per cent from July to August, with gains largely due to higher construction intentions in the residential sectors of Ontario and British Columbia.

After two straight monthly declines, total permit activity in BC was up 15.9 per cent in August, once again surpassing $1 billion in total value. The gains were almost exclusively due to higher construction intentions for multiple family dwellings.  Those gains more than offset a 7.7 per cent monthly decline in non-residential permits. On a year-over-year basis, the dollar value of building permits in the province were up 4.5 per cent.

Construction intentions were higher in most of BC’s four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA surged 249 per cent from July to August but were down 7 per cent year-over-year while the Vancouver CMA saw a 15 per cent increase on a monthly basis but a 12 per cent drop year-over-year. In the Kelowna CMA, permits fell 13 per cent from July but were up 67 per cent year-over-year.  In Victoria, construction intentions rose 9.3 per cent on a monthly basis, and were 58.5 per cent higher than in August 2015.

The federal government announced regulation changes for new government-backed insured mortgages today. Effective October 17, 2016, insured homebuyers will have to qualify at the posted five-year qualifying rate. Previously, only variable rate mortgages and mortgages with terms less than five years were subject to a higher qualifying rate.

The qualifying rate is updated weekly and available on the Bank of Canada website. The current rate is 4.64 per cent, about 200 basis points higher than the best bank offered rates.

To qualify for mortgage insurance, a homebuyer’s debt servicing ratio must be no higher than:

• Gross Debt Service – 39 per cent of household income, including mortgage payment, taxes, and heating costs.
• Total Debt Service – 44 per cent of household income, including mortgage payment, taxes, heating costs, and all other debt payments

These changes will apply to new mortgage insurance applications received on October 17, 2016 or later. Mortgage insurance applications received after October 2, 2016 and before October 17, 2016 are also not affected by the rule change, provided that the mortgage is funded by March 1, 2017. Homeowners with an existing insured mortgage or those renewing existing insured mortgages aren’t affected by this measure.

These changes also won’t apply to mortgage loans where:

• the lender made a legally binding commitment to make the loan;
• the borrower entered into a legally binding agreement for the property against which the loan is secured.

The federal government is also instituting new eligibility rules for low-ratio (higher than 20 per cent down payment) mortgages backed by government insurance. As of November 30, 2016, to be eligible for government insurance, new mortgages must meet the following requirements:

1. A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
2. A maximum amortization length of 25 years;
3. A maximum purchase price below $1,000,000 when the loan is approved;
4. For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
5. A minimum credit score of 600 at the time the loan is approved;
6. A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
7. A property that will be owner-occupied.

These new criteria, in particular requiring a maximum purchase price below $1 million, will essentially make the majority of single family homes in Metro Vancouver ineligible for government issued insurance for low-ratio mortgages.

The government also announced measures to ensure that the exemption from capital gains tax on the sale of a principal residence is available only in appropriate cases.

Click here for more information on these changes.

(Thanks to the BC Real Estate Association’s Economics department for this analysis.)