Tenant Utility Arrears: Another Surprise Cost of Property Ownership?

May 4th, 2015 by Marc Kemerer

Background

In 2001 the Municipal Act in Ontario was completely revamped, becoming the Municipal Act, 2001 (the “Act”). As part of those changes, many of the provisions of the Public Utilities Act (the “Utilities Act”) were repealed and brought within the ambit of the Act.

Little noticed among the changes at that time was the inclusion of a provision in the Act allowing municipalities to add utility arrears incurred by a tenant to the tax bill of the property owner. Section 398(2) of the Act provides that a local municipality may, and upon the request of a local board, shall, add fees and charges imposed by the municipality or local board to the tax roll. In the case of debts owed to a public utility, those debts may be added to the tax roll of the property to which the public utility was supplied. Property owners may be burdened with utility arrears they have no control over.

Ontario Regulation 581/06 permits fees and charges for the supply of water, gas, steam or hot water, sewage and/or waste management placed on the tax roll to have priority lien status under the Act. This provides a municipality with a number of means of collection in addition to the sale of land for tax arrears (which requires a three year wait on the part of the municipality), including by going to court to enforce the debt or by seizing personal property in the possession of the taxpayer.

The addition of this particular provision reversed the common law principle that it was not reasonable that a landlord should guarantee a utility charge where the landlord is not the consumer of the service. It is also at odds with section 50(4) of the Utilities Act which recognizes that the consumer is the person/entity responsible for providing the deposit (often the tenant).

A number of municipalities, such as the Cities of Cambridge and Markham and the Township of Springwater have taken advantage of this provision to position landlords as the party ultimately responsible for water, waste water and fire protection servicing costs.

The New Due Diligence

As it is difficult to overstate the magnitude of the potential change in the allocation of contingent risk of financial loss from utility arrears as between landlords and tenants in Ontario posed by the amendments to the Act, property owners, purchasers and even tenants now need to make themselves aware of any municipal policies/by-laws that allow utility arrears to be added to the tax roll. They also need to be aware as to whether they can obtain information on the status of individual utility accounts. This could prove difficult as utilities will likely refuse to answer any such queries on privacy grounds without written authorization from the tenant.

As a starting point, landlords should immediately contact the municipality in all jurisdictions where they hold property to determine what the existing municipal policy is in respect of tenant utility arrears. These individual municipal policies should be confirmed in writing by the landlord to the applicable municipalities with a request to be advised in writing (with commercially reasonable notice and in advance) if the municipal policy in respect of tenant utility arrears is to change. The correspondence should also be clear that, in the event the municipality fails to notify the landlord of such a policy change, the landlord will rely on the correspondence as a form of estopple to prevent the municipality from adding arrears to the tax bill.

With respect to existing tenancies, landlords should act promptly to complete lease reviews of lease to determine whether there is any ability under the terms of existing leases to: enforce a request to obtain current information the status of tenant utilities; interrupt the supply of utilities to a tenant without liability, and; recover any sums paid to a utility by a landlord from tenants in respect of utility consumption in the event of a failure of any tenant to make payment of utilities. They should also engage local utility providers to minimize defaulting utility accounts.

Moreover, over time as their tenants seek landlord consent to lease amendments, landlords should consider whether, as a term of granting consent, they are lawfully entitled to require lease amendment to address the issues arising out of the risk of tenant utility arrears. This is an area which requires careful analysis of parties rights and obligation under leases, the common law and the Commercial Tenancies Act.

In respect of every new tenancy, landlords would be well advised to ensure any offer to lease or lease specifically addresses the issues created by tenancy default in payment of utilities. Specific lease terms should be drafted to allocate risk in accordance with the intentions of the parties.

Property Owners: Residential Tenancies

While the amount of arrears will generally be more of a concern for commercial, office and industrial landlords, given the size and nature of their tenants, those landlords have more of an ability to limit their exposure than owners of residential property. Under the Residential Tenancies Act, the only deposit that a landlord may legally require from a tenant is one month’s advance rent. Accordingly, residential landlords faced with the addition of utility arrears to their property tax bill will have to be creative, for example by seeking a higher rent for a unit, or they may have to go to court to recover the costs. There should be a provision in the lease where the tenant indemnifies the landlord for any outstanding utility costs.

Purchasers

Where a municipal policy allowing for the imposition of utility arrears on the property tax bill exists, purchasers should determine whether they are able to obtain information from utilities on the state of an account where they are not the listed consumers. For a potential purchaser, wording to address this issue, for example an indemnity, may need to be included in any agreement of purchase and sale or a specific requirement to obtain authorization from such tenants. A vendor will want to respond with caution to such wording. A purchaser may also want to see the wording of any existing leases to determine the extent of any future liabilities.

Tenants

Finally, the above concerns on the part of landlords will clearly impact the potential costs of leasing a premises. It will also be an important issue for tenants where a property is multi-tenanted and all tenants are required to share in the costs of the provision of the utility. Tenants may find that they have to subsidize the consumer habits of a defaulting tenant. Such potential liability should shape a tenant’s approach to leasing space as tenants will have to determine what billing set up and deposit they are willing to accommodate.

Conclusion

Even if the sky for property owners, purchasers and tenants is not falling under the contingent financial exposure and weight of unpaid utility arrears, this is an area that clearly merits attention and creative, sound strategies.

We would be happy to answer any queries you may have on this topic.


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