Bill 37: CORPIQ at a public hearing

Last Thursday, June 2, a Committee on Planning and the Public Domain was held at the National Assembly. In a public hearing, CORPIQ presented its point of view regarding Bill 37, which intends to modify the F clause in the lease by reducing from 5 to 3 years the period not subject to the rent setting criteria for a new building; the bill also aims to give the right of pre-emption to the province's municipalities.

The executive director of CORPIQ, Benoit Ste-Marie, began by presenting the rationale behind F clause, which is intended to be a counterweight to the risks incurred by builders of new rental buildings. It is a risky business model because the revenues are to be expected in the years to come, unlike the sale of condos where the sums are collected before the occupant even takes possession of his unit. Moreover, one must take into consideration the operating costs: whereas in a condo building, it is the occupants who manage the maintenance of the building over the years and assume the corresponding costs, it is the owner of an apartment building who must assume this risk.

This 5-year period represents what is known in the real estate construction industry as the stabilization period.

By moving to 3 years, "it is absolutely certain that builders will have to put a much higher rental price, at the risk of not having time to fill [the rental units, editor's note], but they will not take the risk of offering a price that is too low," says CORPIQ's executive director. By reducing the years, the increases are likely to be much higher from one year to the next.

Concerning the right of pre-emption, we must be careful, because it is a power given to municipalities that can be very pernicious. CORPIQ suggests that the mechanics behind this right be revisited, because it could devalue buildings, and that the right given to cities be supervised to avoid abuse.

Minister of Municipal Affairs and Housing Laforest asked Mr. Ste-Marie how builders establish a rent price. With an existing product, it's easy to establish a price because you make comparisons between the same type of unit in the same area. For a new rental building, it is too difficult to establish a precise price before the delivery of the units, unlike a condo building. Also, when a developer delivers condos, it is easy to calculate the profitability for the sale of these units since the long-term needs and risks are managed by the occupant as soon as he takes possession (through the condo fees that adjust from year to year).

To the question of knowing why the rental sector would have undergone drastic increases for the last 2 years, the executive director of the CORPIQ answers that it is a sector which is not profitable, and the F clause was initially supposed to allow (established by the legislator in 1980) to be an incentive to favor the profitability of a dwelling. If we look at the media cases of rent increases considered abusive, we recall that these specific cases took place in regions, and most of the time, by inexperienced landlords. The pandemic has also caused some areas with a relatively balanced vacancy rate to experience a drastic drop to close to zero percent. A phenomenon historically unseen in Quebec.

Mr. Ste-Marie reminds us that the F clause is not entirely without a legal framework: landlords must present a similar rent increase to all tenants so as not to target a portion of tenants and that too large an increase would drive out a particular tenant. "We are facing a construction challenge in Quebec, and not only for the rental sector, where we will have to find a way to build despite all the unfavorable economic conditions [interest rates, rising cost of materials, scarcity of labor, editor's note]," he concludes in his exchange with the Minister.

The Member of the National Assembly for Viau wonders how CORPIQ members view the modification of the F clause. According to testimonies received from builders, Mr. Ste-Marie says that it is difficult to evaluate the price of a unit because often, when building real estate projects, the sector is in constant change for a few years, which influences the rent. Landlords affected by the proposal to amend clause F are upset as it represents a lifeline in a turbulent environment since the pandemic. Clause F should remain as is for 5 years even though it is perceived to be an irritant to tenants.

During the speech by the Member of Parliament for Laurier-Dorion, Mr. Fontecilla, he expressed his concern about what he considered to be the arbitrary nature of the rent increases. "It's not arbitrary, the builders have to make the building profitable quickly, and obviously they didn't rent the units at a high enough price," said Ste-Marie. The fundamental problem is not the price of the rent, which is obviously successful in keeping tenants in place, but rather a communication problem on the part of these landlords who have been in the news for not taking care to adequately communicate how Clause F and future rent increases will work.

The member for Gaspé wanted to know the profile of the owner who uses the F clause. The answer from the executive director of CORPIQ is that there is no typical profile, it is simply builders who want to ensure that their project remains profitable despite all the risks involved. And even if there is technically no limit to rent increases, builders and owners avoid drastic increases in order not to lose their tenants.