The pandemic shed light on issues affecting small-business owners that the general public was not aware of before COVID: labor shortages, the high cost of running an operation, and the struggle to pay rents and remain profitable.
One less publicly known problem many brick-and-mortar businesses face is that commercial rent carries a no rent-increasing cap, unlike in the residential world. That’s right: there is no limit to how much a tenant’s commercial rent can be increased once their lease is up and they are set to renew.
In 2023, the maximum residential landlords can raise a tenant’s rent without the approval of the Landlord and Tenant Board is 2.5 per cent a year, and the landlord must give the tenant at least 90 days’ written notice. But while there is strong protection for residential tenants, Ontario’s Commercial Tenancies Act (CTA) “does not regulate rent increases. If there is no tenancy agreement, the landlord can increase the rent by any amount, at any time.”
Zoe Knowles, a spokesperson for Ontario’s housing minister Steve Clark, told the Toronto Star that the Commercial Tenancies Act is designed to give flexibility to both landlords and commercial tenants. “The CTA allows landlords and tenants to agree to terms that let tenants operate their businesses effectively and not restrict landlords’ ability to protect their investments,” she said.
And while there are commercial landlords who look after the best interests of their investments while remaining flexible with their tenants, the lack of regulation can affect vulnerable small business owners on a daily basis.
For example, if commercial landlords believe another business would pay double what the current one pays, they can legally ask the existing tenants to double their rent payments if they want to renew their lease. This lack of regulation makes it impossible for small businesses to predict rent expenses beyond their current lease terms, making it hard to plan for the future.
Not only can commercial landlords increase rent, they can also change the terms of the original agreement — which is what happened to James Choi, owner-operator of Sharpfle Waffle, a small waffle and coffee business in Hintonburg. His landlord changed the conditions of the lease when it came time to renew: in the new contract, his business would only be allowed to operate as a take-out establishment. It wasn’t worth staying under these conditions; after two years of building the business, Choi shut it down.
Commercial rent is usually divided in two: base rent, a fixed amount paid for rented space per square foot; and operating expenses/common elements, an estimated amount the tenant pays to maintain the property, such as snow removal, garbage removal, landscaping. At the end of each year, if the landlord spent more than estimated in operating expenses, an additional “rent adjustment” bill goes to the tenant for immediate payment.
“Unlike residential rents, commercial landlords can bill tenants for operating expenses that the landlord had not initially budgeted for (or budgeted for correctly) at year-end,” said Jessica Carpinone, owner of Bread By Us and a staff member of the Better Way Alliance, an Ontario organization that advocates for ethical business practices.
“The billing process is obscure and there isn’t much recourse to push back against it. Some years I’ve had rent ‘adjustments’ upwards of $10,000. I brace myself (every year) because I have no idea what to expect,” she said.
These unpredictable rent adjustments mean landlords never have to eat the unforeseen costs of maintaining their properties; their tenants eat them instead. Imagine I saw my year-end financials and realized that my business had a $10,000 deficit that year, and I then handed that bill to my customers, telling them it was due immediately. That’s what’s happening here: landlords can recover their shortfalls in real time by handing commercial tenants the bill.
Another way landlords can harm a business is by passing on capital expenditures to their tenants. Capital expenditures are improvements that increase the value of a rental property, such as repaving the parking lot, replacing the frontage of the unit, changing elevators, etc. The unscrupulous will use this clause come renewal time as a way to squeeze out existing tenants in support of different ones that might be able to pay more.
“I had a landlord use capital expenditures in that way through a clause in the lease during renewal,” said Thomas Williams, owner of Hintonburger, a former popular burger joint in Hintonburg. “The roof was leaking and the floor was washing out. We were renegotiating our lease and stating them as conditions. They said that we would have to pay for them out of pocket and then be reimbursed, less the amortized cost,” he said. Expecting a small business to pay for capital expenditures out-of-pocket as a condition to renew a lease is unrealistic.
According to a recent report by the Better Way Alliance, one in six Ontario businesses have experienced a rent increase of 50 per cent or more. The only way to resolve a commercial landlord dispute in Ontario is by going to court.
It is time to regulate commercial rents so that there is more business continuity and predictability, as well as thriving neighborhoods with long-term, independent businesses. Rent-increase caps would go a long way in helping a business plan for its future. Standardized, easy-to-understand leases would expedite transactions and would reduce legal fees. Lastly, a commercial-tenant protection body of some sort would provide tenants a place to go to solve rent issues that could put their businesses in jeopardy.
I reached out to three different commercial landlords in Ottawa for their perspective but so far have not had a response.
Small businesses have suffered enough, and far too many have closed due to unfair practices and disputes in which the power dynamic favors sometimes-uncrupulous landlords. It’s time for a change.
Are our local MPPs listening?
Karla Briones is a local immigrant entrepreneur and owner of Global Pet Foods Kanata & Hintonburg; founder of the Immigrants Developing Entrepreneurs Academy; and an independent business consultant. The opinions here are her own.
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