How to pass increased water bills onto your tenants

We have some units with laundry equipment in them and have recently experienced a huge spike in our water bills. Can we pass these increases on to the tenants or remove the equipment?

Be advised that any increase you pass onto the tenant for increased water costs is considered a “rent increase” by the Rent Board. Therefore it cannot exceed the annual allowable rent increase, unless it is approved by the Rent Board, or fits into one of two limited exceptions.

When you encounter an increase in water bills, which you believe is the result of increased tenant usage (not Water Department penalties or improvement bonds), you should file an Operating and Maintenance Expense Petition (called an “O&M petition”) with the Rent Board to pass the increase onto the tenant. Note that water is not considered a “utility” by the Rent Board, so a Utility Passthrough Petition is improper. An O&M petition can allow for a rent increase of up to 7% beyond the normal annual allowable increase (only for tenants of at least a year). An O&M petition can in some instances include increased expenses related to property taxes, insurance, maintenance, repairs and debt service.

The O&M petition must be based on increased expenses which occurred over a recent 2-year period. To be successful, you must provide copies of all claimed charges and proof of payment of the charges – prospective increases will not be considered. The “bonus’ of the passthrough is that it will be added to the tenant’s base rent, and affect (increase) all subsequent annual rent increases.

For increased water bill passthroughs, the two exceptions to the petition process for are: (1) penalties assessed by the Water Department for water usage in excess of Water Department allocations, or (2) increases from Water System Improvement Bonds authorized in the 2002 election. If usage penalties or bond increases are imposed, you may pass 50% of those costs onto the tenant without filing a Rent Board petition. However, there are several requirements that must be met for you to qualify for these passthroughs. For instance, the penalty passthrough requires you to have installed several water-saving devices in the unit(s), and despite this still be assessed with penalties. More details on these passthroughs are set out in Sections 37.3(a)(5)(A) and (B) of the Rent Ordinance. You should consult an attorney before attempting either of these.

However, with the complications of the foregoing, you may be tempted to remove the laundry equipment. If you remove it, you will undoubtedly face a decrease in services petition filed by the tenant with the Rent Board. The laundry equipment and water are housing services included with their tenancy, and your removal of those services may entitle them to a reduction in rent. The amount of that reduction will be determined at a Rent Board hearing. In an extreme situation, the tenant might even claim that the removal of the equipment somehow resulted in their “constructive eviction” from a portion of the premises.

Finally, you should note that a sudden “spike” in the water bills may simply be due to a leak or defective equipment. We recommend that you send a professional plumber to check for leaks and efficiency of the equipment before resorting to any of the above.

By Sally Morin and James M. Millar of Millar & Associates (415)981-8100.