The Residential Tenancies Act, which came into force almost a year ago, changed the percentage at which landlords have to pay interest on LMR. It will now equal the rent increase percentage, which will make LMR interest calculations much easier in certain situations. By Russell Levy
Before we get started, we should explain what's going on. On January 31, 2007, the Ontario Legislature brought the Residential Tenancies Act (RTA) into law. This bill was a major revamping of the rules governing how landlords and tenants interact. Previously, the guideline rent increase and the interest a landlord was required to pay on collected LMR (Last Month's Rent) were not related at all; while the guideline rent increase percentage fluctuated every year, a landlord was always required to pay 6% on the LMR. With the introduction of the RTA, both numbers are equal, and are based on the Ontario Consumer Price Index (CPI).
Previously, there were many ways that a landlord would deal with the interest he was required to pay out on the LMR. Here are the four most common ways:
Each of these methods has its weaknessses. The first three methods require some sort of calculation, as some of the interest for each tenant is applied to their LMR to update it to their increased rent. The rest then requires work: in (1) or (3a), a letter must be distributed to every tenant explaining to them the credit to apply to their rent, and in (2) and (3b), a cheque has to be printed for every tenant getting a refund, and then distributed to each one. Issuing credits has another downside, as inevitably some tenants will misunderstand the letter. Cheques require you to do your bank reconciliation, and some tenants may take months to deposit this cheque. It goes without saying that (4) may upset some tenants who expect to get the interest every year.
With the new legislation, calculating interest at the end of the year will cause the least work in normal circumstances. What are normal circumstances? The tenant 1) had his/her LMR equal to their rent, 2) his/her rent went up by the maximum according to the government guideline, and 3) he/she did not update their LMR during the year. In such a situation, the interest on their LMR at the end of the year will equal the amount their rent increased during the year, which is also the amount that their LMR needs to be updated. That means that the whole interest would get transfered to their LMR, and there would be no need to issue any cheques or credits whatsoever!
Of course, you will have exceptions. Some tenants may have moved in in the middle of the year, or had their rent increased by less than the maximum amount. However, in the vast majority of cases, this method will save you time.
Rent Magic has the ability to do these interest calculations on a yearly basis to all tenants in all of the ways described above. You can contact our office anytime to set up a training session on how to do this, or read up on it in our documention here.
Russell Levy is the President of Rent Magic Software, a Toronto-based software company that develops cost-effective property management solutions that are powerful, yet easy to use. Their website is http://www.rentmagic.ca.