Commercial tenants and their residential counterparts have different needs and accordingly are governed by different legislation. Landlords, whether residential or commercial, have a similar objective, that being a sound investment, part of which is determined by their tenants and the legislation governing them. Potential investors should familiarize themselves with both types of investment and assess how each one fits their personal preferences. Commercial real estate is legislated by the Ontario Commercial Tenancies Act, 1990, whereas residential tenancies in Ontario are governed in accordance with the Residential Tenancies Act, 2006.
What’s good for the goose – not necessarily good for the gander
This take on an old expression nicely situates the needs of the commercial tenant vs. the commercial landlord and similarly, the rental landlord vs. the rental tenant. For those new to the expression as written above, what is good for one party is not necessarily good for the other party.
Residential landlords and tenants should be aware that in Ontario, residential matters are not only subject to the Residential Tenancies Act, 2006, but they are also subject to governance and rulings by the Landlord Tenant Board (LTB), which adds another layer of bureaucracy. As well, if the rental property is located in Toronto, it is now also subject to a third layer of control in the form of the RentSafe TO program which requires landlords to regularly upgrade and maintain their property and the tenant accommodations or risk suffering financial and legal consequences. Though some residential tenants have complained about their landlords, some with justification according to the media, tenants have a strong legal system invested in them. Their legislated rights place obligations and limits on residential landlords.
This is not to say that residential properties are not necessarily good investments.Item 4 in a recent Forbes article, “Strategies for wealth creation,” directs the investor to purchase and “rent out residential real estate,” advising, “Overall, a one-off residential property can offer more flexibility than other types of real estate. If you lose a tenant in your strip mall, the value of the mall goes down. A residence can hold its value, rented or not.” Forbes: Seven Investment Strategies To Build Real Wealth
The ‘flip side’: commercial tenancies and investment
Society and government place a premium on obligating private landlords to provide Ontario tenants with optimal housing; those same rental tenants will find a different set of circumstances if they rent a commercial property for their business. The commercial tenant in Ontario is not protected by the Landlord Tenant Act, nor is the Toronto commercial tenant protected by RentSafeTo – and there are no commercial equivalents of either program. Accordingly, landlords of commercial properties have much less government regulation. What the government does not provide for commercial tenancies, tenants are well advised to try to provide for themselves through the terms of the lease.
Now called a Residential Tenancy Agreement: As of April 30, 2018, the Ontario government created and mandated a standard lease outlining the responsibilities and rights of both landlord and tenant. Landlords must provide tenants with a copy within 21 days of signing. It is very specific for both parties in terms of rights and responsibilities, but it does restrict the landlord in a number of ways.
There is no legislated lease, although leases are a necessity for both parties. The terms of the lease are flexible and negotiable, and can potentially override the Commercial legislation if both landlord and tenant agree. Leases can and do protect both lessee and lessor if negotiated fairly. Landlords should be aware that if there is a residential aspect of the tenancy, the lessee will be protected by the residential legislation. Legal advice is recommended for both parties.
The Ontario government stipulates the permitted percentage by which the lessor can raise the rent annually, capped at a maximum of 2%. Lessors can apply for a raise above the guidelines for specific types of extra-ordinary expenses to maintain the building, such as a new roof or brick repair. Once the financial outlays have been recovered, within a three year period at most, that portion of the rental increase must be retired from further calculations.
There is no rent control, so increases are flexible and varied. Rents are negotiable and generally driven by the market. Leases can be negotiated for multiple years with renewal options, which affords both landlord and tenant a degree of stability. Because this flexibility to negotiate beyond the legislation guidelines adds to the complexity of the lease, once again, obtaining legal advice is recommended for both parties.
Social Issues: Smoking and Marijuana
Landlords must apply to the LTB (Landlord Tenant Board). There are various forms, such as the N4 and L1 which must be filled out precisely, served to the tenant and submitted to the LTB. Several hearings might be required and the process can easily take months for a landlord to get a judgment. Even at that, the tenant can choose neither to pay nor vacate, requiring the landlord to engage the services of a sheriff to evict. By this time, the tenant might be in arrears thousands of dollars with little chance for the landlord to recover. The advice for landlords is to carefully vet tenants and obtain the services of a reputable company that specializes in this. Recovering missed rent requires going to small claims court, but even winning there does not guarantee payment.
Landlords can pursue missed rent almost immediately. The act permits them to padlock the tenant’s premises sixteen days after non-payment. (This is illegal for the residential landlord.) Commercial landlords can also enter the premises without notice. As well, after giving notice of intent and waiting five days, they can seize and sell the tenant’s property to recover back rent. Tenants can protect themselves to some degree by inserting clauses in the lease requiring notice and limiting some of the landlord’s legal options, if the landlord will agree to the terms. Landlords can also sue the tenant or take the matter to court. For both landlord and tenant, legal advice can play a significant role in obtaining better outcomes if the tenant cannot or will not pay rent.
Social Issues: Smoking and Marijuana
Smoking is banned in common areas of residential buildings, but tenants can generally smoke in their units; however, other tenants have the right to be protected from second hand smoke, potentially creating conflict. As of July 17, 2018, Ontario residents are allowed to grow four marijuana plants in their homes, but must follow the rules of the lease: smoking in their apartments might be permitted in older leases. The new lease allows landlords to exclude smoking, but they cannot modify existing leases. Tenants can conceivably appeal to the human rights commission claiming that they are being made to suffer undue hardship. At the moment, competing legislation has confused the issues; this is a situation in constant flux, and there is now the issue of medical marijuana to contend with
Since a commercial tenancy is not a home, tenants cannot legally grow marijuana plants. Landlords can easily stipulate a smoking and marijuana ban in their leases, and there is much less threat of a human rights appeal for commercial property lessors. Landlords, however, might want to ensure that no tenant is using their property for a grow-op (as should residential landlords). Commercial properties are far more insulated from smoking and marijuana matters and generally, other social issues as well, given that the social contract between government and its citizens is far more involved with the idea of the need for human shelter and so the focus is primarily on tenants in residential matters.
The takeaway is that residential tenancies in Ontario are prescriptive, although in a few areas, due to new and somewhat conflicting laws and changing social expectations, some situations are muddled. Commercial landlords, on the other hand, need only comply with one legislation and are not subject to the many restrictions of residential tenancies. Commercial lessees, therefore, much more than their residential counterparts, must try to negotiate the terms of the lease as a means of protecting their tenancies.
Forbes says that Len Lebovic, the article’s author, “built a real estate empire acquiring thousands of properties in 20 years.” I suspect that Mr. Lebovic, in addition to the real estate advice he offers, would stress the importance of obtaining sound legal advice as well. Accordingly, to help you decide what’s right for you and how to protect yourself, please contact Howard Nightingale Professional Corporation for our complementary half-hour consultation.