Purchasing Rental PropertiesGemma L. Brown
When contemplating purchasing rental property, there are some key elements that need to be considered. In addition to general inquiries regarding the property, such as structural issues, water damage, septic system, existence of a survey certificate, be diligent in finding out as much information about the rental property as you can. For example, inquire of the seller (either personally if not using a real estate agent, or directly through your realtor) as to whether there are written lease agreements; whether the rental is month to month or an annual tenancy; the rent payments for each unit/ suite; whether rent is paid by a third party (ie. Manitoba Housing), if security deposits were paid, and if so, when and how much; whether the tenants are to remain tenants following the purchase; the rental history of the tenants; and whether any rent increases have been made in the preceding 12 month period (if so, when and how much). The answers to some or all of these questions can greatly assist you in assessing your potential exposure to certain Residential Tenancies Act (the "Act") provisions.
When preparing an offer to purchase for consideration by a seller, it is our firm's suggestion that the buyer obtain the seller's representation that the property is in compliance with The Residential Tenancies Act, and that the seller consent to the buyer obtaining a Rent Status Report from the Residential Tenancies Branch (the "RTB"). A rent status report issued by the RTB provides information on a property's rent history and can alert people to potential rent increase problems. The RTB's filing fees for rent status reports are: $150.00 for residential complexes with four or fewer rental units; and $300.00 for residential complexes with five or more rental units. It is important to note however, that there are many rental units that are not properly registered with the RTB, which, if a search is requested of the RTB, one must understand, there is a potential to open a disastrous "can of worms".
Non-compliance with the provisions of The Residential Tenancies Act, whether or not a property is registered with the RTB, are very common. For example, it is common to discover, during the course of investigation, that a prior landlord has not given the necessary 3 months notice of a rent increase to the tenants; or that a landlord has increased the rent by more than the permitted guideline amount (which is subject to annual review by the RTB - currently 2.5%); or where a landlord withdraws or reduces a service that may have previously been included in rent (for example, access to a common rec room or removing or cancelling cable service); or that a landlord has increased the rent on a particular unit before the anniversary date or more than once in a 12 month period.
Why should you be concerned with these issues and obtain appropriate representations from a seller? To begin with, as a new landlord, you may be liable if a previous landlord did not comply with the Act, which could potentially cost you, as the new landlord, loss of significant rental income. Landlords also must comply with certain obligations under the Act, whether or not the property is registered with the RTB. For example, subject to limited exceptions, a landlord is required to give 3 months written notice to tenants of rent increases; a landlord must file copies of notices to tenants with the RTB within 14 days of the notice being given to a tenant and must be filed at least 60 days prior to the proposed increase; landlords cannot increase rents above guideline limits without applying to the RTB and receiving an order; and landlords cannot increase the rent more than once in a 12 month period. If the requirements of the Act are not met (ie. no notice, or increase above guideline amount), then the rental increase may be disallowed, and the RTB may roll-back the rent increase and order the landlord to refund the rent overpayment to the tenants. If you, as buyer, take ownership of the property, and it is discovered that a prior landlord violated any of the requirements of the Act, the new landlord may be responsible for any rent roll back refunds for up to 2 years. Not only would a new landlord be liable for overpayment of rents for a 2 year period, but the rents will be rolled back to the amount from the date of the FIRST unauthorized rent increases, potentially decreasing expected revenue from the property. Obviously, when purchasing a rental property consisting of more than 1 unit, this potential liability could be significant.
This article addresses only some of the issues with The Residential Tenancies Act. If you intend to purchase a rental property for the purpose of continuing to rent it, we recommend that you visit the RTB's website at http://www.gov.mb.ca/finance/cca/rtb/ and download the Landlord's brochure and familiarize yourself with it. In addition to those issues, there are other considerations in purchasing a rental property to be aware of as well that we can help you with. For example, you must ensure that your lender (if any) is agreeable with allowing you to use the property as a rental property, as your lender may then want additional security (such as an additional mortgage on the home you reside in, or assignment of rental payments). There may be additional costs to arranging that additional security. You should check to ensure the property is properly zoned for it's current usage. In addition, you should be aware of potential GST issues, particularly if you are buying through a corporation, or the seller is a corporation. And, as with all properties, as a buyer you need to consider land transfer tax and other closing costs. This is not an exhaustive list, so we recommend you contact us if you are considering the purchase of a rental property. A lawyer in our office would be glad to discuss these and other issues relating to purchasing rental properties at your convenience.Download the printable version of this article