Tenant Utility Arrears – Important Law for Commercial Landlords

Commercial landlords should be aware of the law making them potentially liable for utility arrears incurred by their tenants. This article sets out the preliminary points for landlords’ consideration.
First, the legal framework for this obligation is found in the Municipal Act, 2001 which contains provisions – formerly embodied in the Ontario Public Utilities Act – allowing municipalities to add to the tax bill of a property any utility arrears incurred by tenants. These charges can be added at the local board’s request, and (in keeping with Ontario Regulation 581/06) can cover fees and charges relating to sewage/waste management, or the supply of water or steam. Under the Act, these charges have priority lien status; the overall result is that since they are added to the rental property’s tax roll, the landlord/property owner can become liable for them.
This legislative provision is significant to landlords, as it essentially overrides previous court decisions holding it unreasonable for a landlord to be held liable – essentially as a guarantor – for utility charges that the landlord did not personally incur. It affects particularly those property owners with commercial, office and industrial tenancies, because in Ontario the vast majority of such leases are drafted to allocate all risks relating to occupancy costs onto the tenants, including those relating to utility consumption. Therefore, commercial landlords will need to consider how to respond to these potential obligations in connection with both existing and future tenancies. Landlords should consider taking the following steps:

The review of existing tenancies should also consider the risk relating to prior utilities consumption, by assessing the strength of any general or specific lease term allowing a landlord to recover unpaid utility arrears from tenants.  
Landlords should develop a strategy to get voluntary compliance from tenants with high-risk tenancies and inadequate leases. They may also want to protect themselves through adjustments to existing leases: for example, where tenants require the consent (e.g. for the assignment or subletting of a lease, changes in use, etc.), landlords may want to impose a condition requiring the lease to be amended to address liability for tenant utility arrears, before that consent will be given. This will require landlords to consider their existing legal rights and obligations under both the lease, and under legislation such as the Commercial Tenancies Act.