As most landlords who manage a commercial property(s) will tell you, rent increases are more often than not a tricky business. You may find yourself being accused of greed, even when you make a justifiable rent increase, say, to cover the increased operating expenses of your property.
Tenants, on the other hand, hardly welcome a rent increase because it will most likely ruin their bottom line or, worse, they may not be able to afford it.
What’s the best way forward then? Don’t forget that residential and commercial properties don’t share the same laws in Ontario.
Well, in a short while, you’ll have all the answers and solutions to issues surrounding a commercial rent increase in Ontario. To begin with, let’s see what the law has to say about it.
What are the Laws?
A commercial lease is usually viewed as a contract between knowledgeable experienced business people. Thus, the act governing commercial releases treats both you and the tenant as equals, meaning none of you gets extra protective rights from it.
Just like landlords, the majority of tenants in a commercial lease are business oriented and have plenty of experience in leases and other related activities, thus less government protection is available for them. Some renters even hire attorneys or real estate professionals to take care of the above activities.
Taking into consideration the negotiating ability and greater bargaining power the two of you have, the general belief is that both you and the tenant should be able to negotiate the lease terms, including the rent and rent increases, to your liking.
Even though there are a few commercial rent increase guidelines in Ontario established by the Commercial Tenancies Act, rents are mostly determined by the market rates and the negotiations between you and the tenant. And once the details of your agreement regarding rent increases are put in the lease, its terms will overrule any guidelines contained in the Act.
However, if a landlord wants to increase the rent beyond what the lease allows, they’ll have to wait until its expiry. Also, in most leases, the tenant has the right to renew a lease for a predetermined amount of rent. It’s a fair clause because it protects tenants from steep or unreasonable rent raises/evictions by unjust landlords.
Please note that where there’s no lease and you decide to raise the rent, the tenant is not obligated to pay the increased rent in the event they decide to end the tenancy. All they have to do is serve you notice that they intend to leave and pay the initial rent for the last month.
How Much Can Commercial Rent Be Raised in Ontario?
Legally speaking, there’s no limit on how much you can increase the rent by every year as a landlord. This not only applies to commercial properties, but also to social housing units, nursing homes, and vacant residential units.
But before deciding to raise the rent, it would be better to take into consideration things like the tenant business type and the economy. Remember, business revenues can vary in a given period, particularly where the demand is seasonal or follows a particular cycle.
Another way to go about it is to try and balance the need to retain the tenant with their capacity to pay.
Usually, it’s best to negotiate with the client even though this too can get quite complicated. This is because the tenant is aware of the cost of doing business and the expected revenues and so, they’ll want to fit the rent into their costs so that they can be sure of making a certain amount of profit.
On the other hand, you as the property owner are aware of the cost of ownership and the amount of rent you need to get in order to be guaranteed positive cash flow. Thus, it would only be fair to both of you if you reach a win-win situation where everyone’s needs are accommodated.
How Do You Decide on a Fair Amount to Increase Rent?
Previously, the rising cost of operating a commercial building was simply covered by a rise in rent when the lease got renewed or a new one was created for another tenant.
Today, the majority of landlords have figured out better ways to deal with unpredictable changes in the real estate market, the most common being the addition of an escalation clause in a lease agreement. Just like before, the clause gives you the right to increase the rent when the cost of operating your property goes up.
It’s recommended that you negotiate the escalation clause with your tenant in order to arrive at a standard commercial rent increase percentage that is fair to both of you. Some of the common escalation clauses you can adopt include:
- Increase rent regularly over the course of the lease.
- Pro-rate the taxes, maintenance, heat, and other direct expenses.
- Raise rent automatically based on the Consumer Price Index or other related inflation indexes.
Also, as we mentioned earlier, examine the business’s current status, from its capacity to pay to the existing and potential revenues.
Check the prevailing market rents as well. Find out the rates in the neighborhood and other nearby locations and then compare them with your new rate. If possible, talk to your partners or commercial property management company to get ideas. Go ahead and find out the latest market lease rates and use the information you’ll gather to find an ideal rate for your commercial property.
Generally, before you go ahead and increase that rent, it would be great to re-examine your copy of the lease. Take note of all clauses that guide a commercial rent increase in Ontario. For example, find out if you need to give notice of rent increases or you can simply raise it without any advance notice. What are your rights in relation to the same?
If possible, enlist the help of a commercial lawyer or property management firm during the process of raising your rent. Make sure they have plenty of experience in dealing with commercial real estate aspects. It would even be great if they can share more beyond what we’ve just discussed.
Remember, commercial leases can be quite complex and a simple mistake could end up being costly. To avoid that, make sure everything is done correctly from start to finish.