I don't know about you, but our city has a hotline to report illegal suites. Tell your landlord that they have two choices: either they press the issue and you can make a call to city hall resulting in $20,000 worth of upgrades to meet code, or a nominal increase to offset the extra utility load.
Their request is excessive in my opinion, and personally would challenge their demand.
Revenge is a dish best served cold...
With a side plate of steaming entrails,
And a nice Bordeaux!