Docket A-007-94
Order LR95-4IN THE MATTER of the Rental of Residential Property Act, R.S.P.E.I. 1988, C. R 13.1,
and
IN THE MATTER of an appeal, under Section 25 of the Rental of Residential Property Act, by Hambly Enterprises Ltd. (the Lessor) against Order No. LD94-144 of the Director of Residential Property dated October 25, 1994.
Wednesday, April 19, 1995
Linda Webber, Chair
James Nicholson, Commissioner
Emmett Kelly, Commissioner
Order
Participants
1. For the Appellant:Wayne Hambly
President, Hambly Enterprises Ltd.Bonnie Arsenault
Office Manager, Hambly Enterprises Ltd.Leonard McNally
Accountant, Hambly Enterprises Ltd.2. For the Respondent:
Irene Dawson
Spokesperson for Residents of Chateau Estates
Reasons for Order
1 Introduction
Chateau Estates is a mobile home park in North River, P.E.I. operated by Hambly Enterprises Ltd. Hambly Enterprises Ltd. was represented by its President, H. Wayne Hambly.
On June 29, 1994 the Appellant, as Lessor made application pursuant to s.23 of the Rental of Residential Property Act, R.S.P.E.I. 1988 Cap. R-13.1 for approval of rent increases for Chateau Estates.
A hearing into this matter was held on August 19, 1994. The Lessor presented evidence on his behalf. Twenty-nine residents of Chateau Estates were present at the hearing and four letters from residents were filed with the Commission.
The Decision of the Director was issued October 25, 1994.
An Appeal of the decision was filed by H. Wayne Hambly on November 10, 1994.
The hearing of this appeal took place on December 8, 1994 and December 13, 1994. Evidence on behalf of the Appellant was given by Wayne Hambly, Bonnie Arsenault, Office Manager, and Leonard McNally, Accountant. Irene Dawson, a resident of Chateau Estates, acted as spokesperson for the residents. Seventeen residents attended the hearing. Three letters were filed in opposition to the application. Two residents called to oppose the application and indicate they were unable to attend.
In addition to the twenty-six exhibits filed at the hearing, the Commission received the following from the Appellant after the hearing:
1) A letter dated February 21, 1995 from Coopers and Lybrand answering questions about financing matters raised by the Commission.
2) A copy of the computer printout of expenses, June 1 to October 31,1994; June 1, 1993 to May 31, 1994; and June 1, 1992 to May 31, 1993; referred to by the Appellant during the hearing.
2 Background
The Notice of Appeal gave the following reason for the appeal:
The approved increase does not fairly allow reimbursement for increased costs of operation caused by Water and Sewer charges from the Village of North River.
An attached letter also objected to the 5% management fee allowed, arguing that managing a mobile home community cost more than managing a residential rental building. It also objected to the rate of return on equity allowed by the Director, arguing that the risk of investment in a mobile home park was much greater than "a risk free long term financial investment".
The increases sought were different for different tenants:
|
Current $ |
Proposed $ |
Increase % |
|
78.25 |
101.25 |
29.41 |
|
81.25-81.75 |
104.50 |
28.6 |
|
83.25 |
106.50 |
27.9 |
|
84.25-85.25 |
107.50 |
27.6 |
|
86.75-87.50 |
110.00 |
26.8 |
|
89.25-90.00 |
112.50 |
26.05 |
|
110.00 |
134.00 |
21.85 |
|
112.00 |
136.00 |
21.43 |
The income and expenses of the Appellant were listed as set out in Table 1:
Table l
Period Ending May 1994
INCOME
| 1. Rental Income at 100% Occupancy |
$170,172.00 |
| 2. Other Income (e.g. laundry, parking, etc.) |
1,800.00 |
| 3. Total Income at 100% Occupancy (Add #1 & #2) |
171,972.00 |
| 4. Less: Vacancy/Arrears Losses |
8,037.36 |
| 5. Net Building Income Before Expenses (Subtract #4 from #3) |
163,934.64 |
EXPENSES
| 6. First Mortgage Payments-particulars to be shown on reverse (principal & interest only) |
Nil |
| 7. Second Mortgage Payments-particulars to be shown on reverse (principal & interest only) |
Nil |
| 8. Fuel |
$ 1,112.97 |
| 9. Water and/or Sewerage Charges |
44,389.34 |
| 10. Electricity |
6,988.31 |
| 11. Insurance |
312.00 |
| 12. Provincial Property Tax |
3,074.00 |
| 13. Municipal Property Tax |
1,075.90 |
| 14. Management Fees |
39,227.58 |
| 15. Maintenance |
36,211.73 |
| 16. Capital Expenditures-as shown on reverse |
8,014.00 |
| 17. Other Specify - Truck |
11,267.60 |
| - Bank Charges, Interest |
5,780.38 |
| 18. Total Operating Expenses (Add #6 to #17) |
157,453.81 |
| OPERATING INCOME | |
| 19. Net Profit (or Loss) (Subtract #18 form #5) |
6,480.83 |
These were adjusted by the Director as follows:
1) Management fee reduced to meet requirements of Section 18(e) of the Regulations.
2) Electricity rate reduced to reflect no longer a need for the pumping system.
3) Maintenance cost increased to reflect 5-year average.
The Director further determined that a rate of return of 12% was reasonable and that this required an income of $189,966. The following Table 2 (which contains one error which will be dealt with later) reflects these changes as set out in the Director's decision:
Table 2
| INCOME |
PROJECTED ROI @12% |
| 1. Rental Income at 100% Occupancy |
$189,966.37 |
| 2. Other Income |
1,800.00 |
| 3. Total Income |
188,166.37 |
| 4. Less: Vacancy/Arrears Losses |
8,037.00 |
| 5. Net Building Income Before Expenses |
180,129.37 |
| EXPENSES | |
| 6. First Mortgage Payments |
$ 0.00 |
| 7. Second Mortgage Payments |
0.00 |
| 8. Fuel |
1,112.97 |
| 9. Water and/or Sewerage Charges |
57,967.00 |
| 10. Electricity |
3,988.00 |
| 11. Insurance |
312.00 |
| 12. Provincial Property Tax |
3,074.00 |
| 13. Municipal Property Tax |
1,075.90 |
| 14. Management |
8,598.60 |
| 15. Maintenance |
50,500.00 |
| 16. Capital Expenditures |
8,014.00 |
| 17. Other |
17,047.98 |
| 18. Total Operating Expenses |
151,690.45 |
| 19. Operating Income |
28,438.92 |
| 20. Income Tax |
5,903.92 |
| 21. Net Income |
22,535.00 |
3 Decision
The Appellant's position in this matter is more one of disagreement with the Act and Regulations than with the methodology used by the Director to calculate the allowable increase in rent. Although the Appellant objected to the many individual points in the Director's analysis as being in error, it was clear from the proceedings that the main submission of the Appellant concerned objections against applying a regulatory concept such as rate of return to its mobile home park. Mr. Hambly considers that the annual allowable rent increases are set to ensure his company continues to make at least as much profit as he made the year before -- and hopefully to increase his profits.
This is not, however, our interpretation of the purpose and design of the Act. The Act is designed to balance the interests of landlords and tenants, with a perhaps greater emphasis on the protection of tenants.
Section 23.(8) of the Act lists what the Director shall "consider" at the hearing:
(8) At the hearing both parties are entitled to appear and be heard and the Director shall consider the following factors:
(a) whether the increase in rent is necessary in order to prevent the lessor sustaining a financial loss in the operation of the building in which the premises are situate;
(b) increase operating costs or capital expenditures as advised by the lessor;
(c) the expectation of the lessor to have a reasonable return on his capital investment;
(d) such other matters as may be prescribed by the regulations.
What the cases make clear is that while these matters need to be considered, they do not determine the outcome of any hearing. Even if the lessor suffers an operating loss, there may be good reason not to allow the increase applied for. If capital and operating costs have increased there may be good reason not to allow an increase to offset these costs. The balance of interests means the landlord may have to suffer a loss so that the tenants aren't subjected to unreasonable increases.
In this case the general approach taken by the Director is reasonable. The Appeal Hearing reviewed in great detail a number of items of income and expense. Some of these will be referred to below.
The Appellant's complaint about the 5% management fee allowance is disposed of by the fact that the Regulations to the Act define management fee as the lesser of actual cost or 5% of the gross rental income for the previous year. Applying the 5% to the total income figure of $171,972.00 (see Table 1) produces a management fee of $8,598.60 which is the figure used by the Director (see Table 2). The Appellant argues that the use of this amount is unfair when his actual management fee was $39,227.58. However, as we pointed out during the hearing, even if we sympathized with the Appellant and agreed that it would be fair to allow actual costs to be used we have no authority to change or ignore the Regulations. Since those Regulations put an upper limit on the amount that may be attributed to management fees, and since the Director applied the appropriate upper limit, an appeal on this basis must fail.
The Appellant's criticism about the rate of return on equity allowed by the Director is not substantiated by any evidence produced by the Appellant. Mr. Hambly expressed his dissatisfaction with the 12% allowed by the Director, stating his opinion that he could buy a 15-year investment and get 10% guaranteed without doing any work. His argument was that the work he had to put in should justify a much greater return on his investment.
Unfortunately, Mr. Hambly produced no evidence to support the opinions he expressed and did not even venture to answer the question of what might be a proper rate of return for his type of business. Rather, he responded "We are not a utility" and voiced further objection to having his profits limited by legislation.
Once again we must point out that our role is neither to rewrite nor ignore the legislation -- whether or not we agree with it. While Mr. Hambly's business may not be a utility, rents are controlled by legislation and rate of return is one of the elements we must deal with. In our view the Director considered the risk factor associated with this investment in his decision and no evidence was produced by the Appellant to support his contention that the return established by the Director was unreasonable. In our view, given the information we have available to us, the return established by the Director was reasonable.
As well, Mr. Hambly for the Appellant admitted that rate of return is normally charged on book value. He states he "can't accept it" but this is not a foundation for changing the standard approach to calculating rate of return and allowing the appellant to charge it on the market value of assets as requested.
The Appellant argues the approved increase does not allow fair reimbursement for increased direct costs of water and sewer charged by North River. As was stated above, the Act does not require such reimbursement. Increased costs to the Lessor may be the foundation for an increase in rent but only if in all the circumstances an increase is determined to be appropriate. The Director considered the factors required by the Act and his analysis was consistent with the requirements of the Act. While some increase in rates was determined to be appropriate, the failure of that increase to be equivalent to the Appellant's increased costs for water and sewer services does not make that increase invalid.
Our review of the evidence indicates that the Appellant's practices in connection with capitalization of expenditures are not clear. The invoices presented to us range over a number of years and only give a partial picture of what is and has been done.
This situation was further complicated by the "year" used by the Appellant to complete Form 15 being different from the fiscal year used by the Appellant for his own books and by his accountants. This puts the Commission, as it put the Director, in the difficult position of having to estimate/guess at the validity and applicability of much of the information required.
We feel no useful purpose would be served by pursuing those details further at this time. However, we suggest that the Appellant review his practices in light of the Act ‘s requirements and ensure that in any future proceedings relating to rent increases these items are more clearly identified and itemized in accordance with the requirements of the Act. As well, there appears to be no good reason for not using the company's fiscal year end when completing Form 15.
Therefore, with one adjustment, the findings and methodology of the Director are affirmed. The adjustment required relates to line 3 of Table 2. That line should reflect the total of lines 1 and 2 (as was the case in Table 1). In error the Director subtracted line 2 from line 1 resulting in the erroneous calculations found in Table 2.
Correcting this error results in a required rental income of $186,366.37 (to replace the $189,966.37 in line 1 of Table 2). This adjustment then also requires an adjustment to the percentage increase required -- 9.5% rather than the 11.5% ordered by the Director. This results in the following allowable rent increases:
|
Existing Rent $ |
Approved % |
Approved Rent $ |
|
78.25 |
9.5 |
85.68 |
|
81.25-81.75 |
9.5 |
88.97 |
|
83.25 |
9.5 |
91.16 |
|
84.25-85.25 |
9.5 |
92.25 |
|
86.75-87.50 |
9.5 |
94.99 |
|
89.25-90.00 |
9.5 |
97.73 |
|
110.00 |
9.5 |
120.45 |
|
112.00 |
9.5 |
123.00 |
IN THE MATTER of the Rental of Residential Property Act, R.S.P.E.I. 1988, C. R 13.1,
and
IN THE MATTER of an appeal, under Section 25 of the Rental of Residential Property Act, by Hambly Enterprises Ltd. (the Lessor) against Order No. LD94-144 of the Director of Residential Property dated October 25, 1994.
Order
WHEREAS
Hambly Enterprises Inc. filed an appeal against a decision of the Director of Residential Rental Property dated October 25, 1994; AND WHEREAS the Island Regulatory and Appeals Commission heard the appeal in Charlottetown on December 8, and December 13, 1994;NOW THEREFORE, for the reasons given in the annexed Reasons for Order,
IT IS ORDERED THAT
1. The appeal is dismissed; and
2. The Order of the Director is varied to allow rent increases in accordance with the following schedule;
|
Existing Rent $ |
Approved % |
Approved Rent $ |
|
78.25 |
9.5 |
85.68 |
|
81.25-81.75 |
9.5 |
88.97 |
|
83.25 |
9.5 |
91.16 |
|
84.25-85.25 |
9.5 |
92.25 |
|
86.75-87.50 |
9.5 |
94.99 |
|
89.25-90.00 |
9.5 |
97.73 |
|
110.00 |
9.5 |
120.45 |
|
112.00 |
9.5 |
123.00 |
DATED at Charlottetown, Prince Edward Island, this 19th day of April, 1995.
BY THE COMMISSION:
Linda Webber, Chair
James Nicholson, Commissioner
Emmett Kelly, Commissioner
NOTICE
Sections 13.(1) and 13.(2) of the Island Regulatory and Appeals Commission Act provide as follows:
13.(1) An appeal lies from a decision or order of the Commission to the Appeal Division of the Supreme Court upon a question of law or jurisdiction.
(2) The appeal shall be made by filing a notice of appeal in the Supreme Court within twenty days after the decision or order appealed from and the Civil Procedure Rules respecting appeals apply with the necessary changes.