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9. Apportionment of Utility Costs

(a) Overview

Simultaneous with the coming into force of the electricity-conservation directed 'suite meter' rules (discussed in s.8 above), the RTA was also amended on 01 January 2011 to set out separate 'utility cost apportionment' rules. These 'apportionment' rules provide landlords of small buildings (six residential rental units or less), whose present tenancy agreements provide that utilities (water, electricity and heat) are 'included in rent', with rules about how they can convert them into a 'pass-through' arrangement. Under such arrangements the landlord still maintains the direct payment relationship with the utility supplier, but the tenants pay their apportioned share to the landlord.

The shift to apportionment can occur with respect to any one or more of the three utilities of water, electricity or heat. As well, while normally any utility expense paid directly to the landlord comes under the legal definition of "rent" [RTA s.2(1)], when a shift to utility cost apportionment is made that is no longer the case [RTA 138(2)]. The effected utility or utilities then form a separate account between the landlord and the tenant, and it is excluded from rent. This legal change has several implications, including that increases and decreases in the utility costs are no longer governed by the elaborate rent regulation rules of the RTA, and that non-payment of the utility bill does not mean that the tenant is in arrears of rent so as to justify termination and eviction.

The 'apportionment' rules provide for either of two calculation options for utility cost apportionment: the first being a simple equal-share 'bill-splitting', and the second a proportional 'square footage' allocation amongst the tenants [RTA s.138(1)].

The apportionment provisions differ from the 'suite meter' rules in several respects, but primarily because they apply more broadly to "utilities" than to electricity alone [the term "utilities" in the RTA means "heat, electricity and water": RTA s.2(1)]. Once implication of this is that apportionment may take place with respect to any one or more of these utility services, and another of course is that if 'suite metering' has been applied with respect to electricity costs then they may not also be subject to these apportionment rules.

But like the suite meter rules, a shift to a utility cost apportionment arrangement (all these issues are discussed more below):
  • does provide for a rent reduction (to compensate for the fact that the expense is now no longer included in "rent"),

  • imposes on the landlord duties of both information-provision to prospective tenants;

  • imposes on the landlord a duty to maintain compliance with conservation and efficiency standards for appliances and otherwise; and

  • makes available a Landlord and Tenant Board (the "Board") application procedure to enforce these rules.
Finally, while a shift to apportionment shares many features with the move to a suite meter program, the procedures for apportionment are yet not addressed by the Board with the same formality as they are for suite meters. The Board has issued several suite meter forms for such things as information-provision and tenant consent, but none for similar procedures regarding a shift to apportionment. For that reason parties should pay close attention to the procedural details discussed below to make sure that they are properly complied with in their own particular situations.

(b) Utility Cost Apportionment Requirements

While it is certainly open to a tenant to raise with the landlord the possibility of moving to these utility cost apportionment rules, the initiative will normally be that of the landlord. To summarize, the landlord can initiate such a shift where the following present and future conditions are met:
  • Small Building

    The involved building contains six or fewer residential rental units.

  • Utilities Presently Included Within "Rent"

    Any or all of the following utility charges are presently included in rent: heat, electricity, water. A shift to apportionment can occur with respect to any or all of these.

  • Notice of Shift to Apportionment

    Proper notice must be given to the tenant before a conversion to utility cost apportionment can take place [RTA 138(1)(a)]. Such notice must [SMAUC 14(1)]:

    . be in writing;

    . be given to the tenant 30 days before apportioned charges are first charged to the tenant by the landlord;

    . state the amount of the rent reduction and it's effective date; and

    . state the apportionment method which will be applied, with a description of the calculation.

    Note that, unlike the requirement for suite meter conversion consent [SMAUC Reg 5(2)], with a shift to apportionment there is no express warning required that the tenant does not have to give their consent. One can argue that such a caution is inherent in the term 'consent', but it does nonetheless reflect a reduced consumer protection for tenants where utility cost apportionment is being sought.

  • Tenant Consent

    The tenant consents to the shift.

    Note that, unlike the situation for suite meter conversion, there is no Board-issued form for this purpose.

  • Rent Reduction

    The landlord reduces rent as the rules require [see (d) below].
(c) Apportionment Options

The two apportionment options that are available to the landlord (with tenant consent) may be identified as the 'building bill-splitting' and the 'square footage' options [SMAUC Reg 13]. Both apply to 'buildings', not to 'residential complexes' - which could potentially include several related buildings [RTA s.2(1)].

'Bill-splitting' involves a simple and equal dividing of the total utility costs (ie. those for all the residential units and the common areas of the building) being apportioned between the units involved [SMAUC Reg 13(2)]. Under this option each unit pays the same utility costs, regardless of the size of the unit or the tenant's actual usage.

On the other hand, the 'square footage' option involves an allocation of those same costs based on the floor area (measured by the square footage) of each unit, taken as the percentage of the floor area that the unit is of the total floor area of all the rental units [SMAUC Reg 13(3)].

Whichever option is taken it must be applied to all rental units in the building [SMAUC Reg 13(1)2]. As well, neither option allows "penalties or charges related to late payment" to count as a utility expense which can be passed-through to a tenant [SMAUC Reg 13(4)].

(d) Rent Reduction

. Overview

The rent reduction must take effect at the beginning of the month in which apportionment charges are first made to the tenant, or earlier [SMAUC Reg 15(1)1]. Calculations of the rent reduction under the two available apportionment options are set out below.

. 'Bill-Splitting' Apportionment

The 'bill-splitting' apportionment method takes the total utility costs of the building that are atributable to rental residential units and related common areas for the prior 12 months and simply divides that by the number of residential units in the building. That figure, expressed as a monthly cost, is the amount of the rent reduction to be applied [SMAUC Reg 15(2)].

The date at which the prior 12 months is counted is the last 12 months available before the notice set out in (b) above is served.

. 'Square Footage' Apportionment

The 'square footage' apportionment method takes the total utility costs of the building that are attributable to rental residential units and related common areas for the prior 12 months and allocates that to each unit in the proportion of floor area (in square feet) that the unit bears to the total floor area of all the units combined (not counting the common areas). That figure, expressed on a monthly cost basis, is the amount of the rent reduction to be applied [SMAUC Reg 15(3)].

The date at which the prior 12 months is counted is the last 12 months available before the notice set out in (b) above is served.

. Exemptions from Rent Reduction Requirements

Most rental units that are either government-owned or that were created or converted into public or rent-geared-to-income (RGI) housing under a government program are exempt from the rent reduction duties imposed under these utility apportionment rules.

Sorting out which units are exempt can be complex, as they reflect the complex and intricate history of the development and operation of public housing at all three levels or government and in joint public-private co-operation. Tenants to whom these exemptions may apply must trace the past and present status of their housing provider carefully to see if the exemption applies. Most tenants in clearly 'private' arrangements need not worry about residual and passing funding that their landlord may have received in past - these exemptions are all about long-term, permanent government support.

The following rental units are exempt from these rent reduction rules [SMAUC Reg 19]:
  • those owned, operated or administered by on on behalf of the Ontario Mortgage and Housing Corporation (OMHC), Canada or either of their agents, unless the tenant pays rent to a party other than any of them;

  • those in a designated housing project as defined in the Housing Services Act, 2011 that is owned, operated or managed by a service manager or local housing corporation as defined in that Act;

  • those in a non-profit housing project or any other housing that was developed or acquired under a federal, provincial or municipal program that is prescribed for the purposes of paragraph 3 of subsection 7 (1) of the RTA and is presently operated under the Housing Services Act, 2011;

  • those that are non-member units in a non-profit housing co-operative;

  • those where the tenant pays RGI rent due to public funding;

  • those developed or acquired, and that continue to operate, under the Rural and Native Rental Housing Program established under the National Housing Act (Canada); and

  • those developed or acquired under any of the following programs

    - Canada-Ontario Affordable Housing Program - Rental and Supportive Housing;

    - Canada-Ontario Affordable Housing Program - Northern Housing;

    - Residential Rehabilitation Assistance Program;

    - Supporting Communities Partnership Initiative; and

    - Municipal capital facility by-laws for housing or other council-approved municipal housing programs;

    if:

    - the unit is subject of a housing services agreement between the LL and either a municipality or its agent, a municipally-run non-profit housing corporation, or a "local housing corporation" or a "service manager" as defined in the Housing Services Act, 2011;

    - the unit is a subsidized unit developed or acquired under any of the above-listed programs and subject to a housing services agreement referred to immediately above, which agreement the tenant has received notice of in their tenancy agreement (for post-31 Jan 2007 agreements) or otherwise in writing (for agreements on and before 31 Jan 2007); and

    - at the time the tenancy agreement was entered into, the tenant was on or was eligible to be on, a social housing waiting list.
(e) No Termination and Eviction for Non-Payment of Apportioned Utility Costs

One implication of apportioned utility costs being removed from the legal definition of "rent" is that a tenant can no longer be terminated and evicted for their non-payment, nor can landlords seek a Board order for the payment of arrears of such charges [RTA 138(2,3)]. Where non-payment of apportioned utility costs occurs the remedies to the utility provider lie in cut-off of the services or the civil courts (here the Small Claims Court) under non-RTA law. The landlord may find themselves an awkward and inconvenienced 'middle-man' in such situations.

(f) Landlord Compliance with Conservation and Efficiency Standards

Once the shift to utility cost apportionment has taken place under these rules - or in any situation where utility cost apportionment exists (ie. pre-existing or 'new tenancy' arrangements), the landlord has an ongoing duty to comply with conservation and efficiency standards as follows [RTA 138(5); SMAUC Reg 17]:
  • any refrigerator supplied by the landlord under the tenancy agreement must have been manufactured on or after 01 January, 1994, although where the tenant has been paying a portion of electricity costs to the landlord since 13 October 2010 (either under a suite meter program or under a pre-existing apportionment arrangement) then the landlord has until 01 January 2013 to comply; and

  • any replacement refrigerator must have been manufactured on or after 31 December, 2002.
(g) Landlord Information Duties Re Prospective Tenants

Once the landlord has shifted to apportionment they have duties to disclose relevant information to new prospective tenants, as follows [RTA 138(4); SMAUC Reg 16]:
  • the percentage share of the building's utility costs that the tenant would be paying;

  • the building's total utility costs for the most recent 12 months preceding for which information is available; and

  • the number and duration of any vacancies in the building over the period for which the above figures are given.
As is the case with the consent and notice requirements associated with a shift to apportionment under these rules, the Board has not issued any forms which contain or call for this information (which might be conveniently distributed to prospective tenants). It is up to landlords themselves to draft letters which are properly compliant with these information duties.

(h) Tenant's Application to Enforce Utility Cost Apportionment Rules

. Determination

Tenants and former tenants may apply to the Board for a determination of whether the landlord has breached these utility cost apportionment rules [RTA 138(6)].

. Orders Available Where Conservation and Information Duty Breaches

If the Board finds that the landlord has breached their duties respecting either conservation and efficiency standards [(f) above] or information for prospective tenants [(g) above] then it may issue any or all of the following orders [RTA 138(7)]:
  • authorize the tenant in their having made past or in making future repair, replacement or work - with it's cost to be paid by the landlord to the tenant;

  • order the landlord to do specific repair, replacement or work within a specific time;

  • order an abatement of rent;

  • order a rent reduction, with appropriate rebate;

  • "make any other order that it considers appropriate."
The distinction between an 'abatement' of rent and a 'rent reduction' is that an abatement is a specific temporary reduction in rent (for example, $50 for six months) which has no permanent effect on the 'legal rent' amount, while a reduction is (subject to other normal factors that can increase rent into the future) a 'permanent' reduction of the legal rent. Rent reduction orders, if made retroactive, will also attract a rent rebate order to compensate for the past periods over which the reduction is now effective.

Applications for remedies respecting non-compliance with the landlord's duties respecting information for prospective tenants must be brought within one year of the date of the alleged breach. There is no time limitation on the bringing of applications for remedies respecting non-compliance with the conservation and efficiency standard duties [SMAUC Reg 18].

. Orders Available Where Apportionment Shift Illegal

If the Board finds that the landlord has undertaken a shift to apportionment [these are all breaches of RTA 138(1) covered in (b) above]:
  • without the consent of the tenant;

  • with improper notice to the tenants, or

  • without proper rent reduction
then then it may additionally order the following [RTA 138(8)]:
  • termination of the tenancy [ancillary to this the Board may also order eviction: RTA 138(9)].

  • that the landlord assume the cost of the utility, in which case the Board will declare the new legal rent.
Applications for remedies respecting non-compliance with any of these LL duties must be brought within one year of the date of the alleged breach [SMAUC Reg 18].

(i) These Apportionment Rules Not Available Where Pre-Existing Apportionment Already In Place

. Overview

The main operative provisions of the utility cost apportionment rules are all excepted (ie. they do not apply) where there was, at 31 December 2010 (the day before the apportionment rules came into force) any sort of apportionment arrangement already in effect with respect to the utility being considered (I will call these "pre-existing apportionment arrangements").

The wording used in the RTA to achieve this exception for the utility and rent reduction calculations [SMAUC Reg 13(1)3 and 15(1)3] is: "if ... the landlord was charging any tenant in the building a portion of the cost of that utility". A similar provision excepts the 'notice' requirement for a shift to apportionment [SMAUC Reg 14(2)].

. Comment

In my opinion these exceptions are odd and conflict with other aspects of RTA law. Prior to the new apportionment rules coming into force on 01 January 2011, any utility cost apportionment (ie. where the landlord 'passes through' their utility expense to the tenant) was essentially illegal. They were illegal because a pass-through arrangement would quite normally result, on a regular basis, in periodic decreases and increases in the amount of the tenant's portion.

Yet since any monies paid to the landlord for utilities are legally 'rent' [by virtue of the RTA definitions of "rent", "services and facilities", and "utilities" in RTA s/2(1)], any such fluctuations that increased the payment would constitute an illegal rent increase. It was for that reason (to avoid the illegality) that the new rules excluded (newly) apportioned utility payments from the legal definition of "rent" [RTA 138(2)].

So, by preventing pre-existing apportionment arrangements from shifting into a new 'legal' apportionment arrangement (ie. by using these rules), these 'illegal' pre-existing apportionment arrangements are essentially condoned by the RTA.

That said, there is nothing preventing the parties from agreeing to modify their tenancy agreements to adopt 'apportionment' using one of the same calculation models set forth in these new apportionment rules. Such a change may not even require any special agreement to increase or decrease rent [as per RTA 123, 125 or 130: discussed in Ch.12: "Other Rent Proceedings", s.3 and 4] because the whole point of a pre-existing apportionment arrangement was to mutually ignore the legal fact that such charges were contained within the legal concept of "rent".

Such a modification to the tenancy agreement would however still attract other features of the apportionment rules, namely: the notice to prospective tenants [SMAUC Reg 16], the appliance conservation duties [SMAUC Reg 17] and the ability to bring an application to enforce the (remaining) apportionment rules those two rights [SMAUC Reg 18]. These rules would apply to other apportionment schemes because they do not have the exception noted above.

Basically, it looks like the legislation has attempted to 'grand-parent' these pre-existing (and illegal) apportionment arrangements into legitimacy in the hope that they will die off as vacancies occur and as new tenancy agreements either opt for clear 'included in rent' or clear 'apportionment' arrrangements.

However in attempting to do so the legislation has not successfully removed the illegality aspects for either pre-existing apportionment arrangements that are continuing, or for new ones established outside of these 'shift to apportionment' rules. This is because the provision which dispenses with the illegality aspect for those that use these new rules [RTA 138(2)], only removes such charges from the definition of "rent" for those who apportion "in accordance with subsection (1)". Subsection 138(1) is all - and only - about those that take advantage of these new 'shift to apportionment' rules, and thus has no application to those who persist in pre-existing apportionment arrangements or who create new ones in new tenancies.

I realize that many may find this an obscure and convoluted point, and I hope that I have accurately identified a flaw in the legislation (if not I invite correction). If however I am correct it is a further indication of how confusing this extreme micro-managing is, since even it's drafters couldn't 'get it straight'. If they can't, how can unsophisticated small landlords (to whom these rules are directed) and tenants get it straight?

(j) Ancillary Changes to Above-Guideline Rent Increase Rules

When utility cost apportionment is in place (either under these rules, under pre-existing apportionment arrangements, or under new tenancy agreements), some ancillary changes apply to the rules for making above-guideline increase (AGI) rent applications [RTA 138(10)]. These changes are integrated into the discussion of that topic in Ch.11.

The changes effect the ability of LLs to claim AGIs based on "eligible capital expenditures" (ECEs), the largest single category of expenses used to justify AGIs. More specifically, any capital expenditure (which is otherwise eligible under the ECE rules) is disallowed (and thus may not be used to ground an AGI increase) if, with respect to any category of capital expenditure [RTA 137(15)] all of the following conditions are met:
  • "the landlord charged tenants a portion of the cost of a utility before the capital expenditure was made";

  • "the capital expenditure failed to promote the conservation of or more efficient use of the utility"; and

  • there was an reasonable alternative expenditure that achieved the same purpose of the ECE made, but that did promote "the conservation or more efficient use of the utility".
Basically this rule means that when utility cost apportionment is in place the landlord has a burden of electing - where reasonable - for a type of capital expenditures which promotes conservation and the efficient use of the utility
over one that doesn't.

This provision offer tenants a 'defence' against ECE-based AGI increases that have an impact on utility consumption. Tenants may now additionally perform what amounts to a utility (heat, electricity or water) 'conservation' audit with respect to the capital work done to see if the work done has a utility conservation effect wherever possible. If it doesn't, tenants may argue that the expense should be disallowed. While most capital expenditures that fall to be considered under this rule will be ones that relate directly to work relating to the heating, wiring or plumbing systems of the building, the rule is broad enough to capture any capital work that has an impact on electricity consumption and conservation - for example the situation where the method of doing the work (as distinct from the result of the work) is unnecessarily utility-intense.
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