“My landlord charged me 6 months’ rent upfront as a deposit because I had bad credit. Now he’s bankrupt, and the Bank is knocking on my door” – Understanding the Residential Tenancies Act – Illegal & Unenforceable Terms and Conditions and Deposits

blog-1 September 26, 2016

Commercial

This is one of various examples of the challenges and pitfalls faced by parties to a contract, who without any legal background or legal/professional advice, start putting together terms and conditions in an attempt to secure specific rights and obligations to protect their interests in a Tenancy.

The focus of this Blog will be on leases governed by the Residential Tenancies Act (hereinafter referred to as the “Act”) and not the Commercial Tenancies Act.

Like taking more than 1 months’ rent up front in a fixed term tenancy, other clauses such as ‘No Pet’ provisions, requiring 12 post-dated cheques and security deposits (for damage/risk of taking a risky Tenant), landlords and Tenants should consult the Residential Tenancies Act and/or a lawyer to insure that the contract is legally binding. Moreover, the parties should ensure that the contract can be used as a tool for the enforcement of a specific right or the fulfillment of an obligation as agreed to by all parties pursuant to the terms and conditions of the Lease Agreement.

The challenges of dealing with Tenancies and Tenancy contracts (lease agreements) stem from Apathetic landlords making assumptions that the “MY WAY OR THE HIGHWAY” approach is suffice when it comes to negotiating the terms and conditions in a contract. The problem here is that the majority of laypersons fail to understand that there are certain terms which are implied into certain contracts through various pieces of legislation. And although it is in specific instances possible to override implied provisions through the terms of the contract (i.e. you can contract out of certain provisions implied by law by saying in the contract that the provision does not apply), some provisions remain unimpeachable as the government seeks to insure that the layperson isn't taken advantage of by party who is in a position of power or has an unfair advantage. On the same note, even though the parties may have the intention to insert specific provisions into a contract, it is possible that the provisions added are not enforceable at law. As such, when dealing with leases, this normally means that the Courts will strike out the unenforceable provision leaving the remaining contract legally binding with full force and effect.

The line of thought that “if the Tenant signs the lease willingly, I can hold them accountable” is akin to the example of someone saying “please kill me, I’ll sign, seal, and deliver any document so that you won’t be subject to prosecution”. Albeit an extreme example, not everything you sign in a contract is enforceable at law and more importantly may implicate you by subjecting you to liability for contravention of the law. NB: Fines with the Landlord Tenancy Board ON can be up to $25,000 for individuals and $100,000 for corporations[1].

Rent Deposits:

Under the Residential Tenancies Act, a Landlord can collect a rent deposit on or before the day the landlord and Tenant enter into the Tenancy Agreement. This deposit must be the lesser of 1 month’s rent or the rent for one rental period (i.e. weekly tenancy = 1 week rent) and cannot be more[2]. Landlords and Tenants must understand that this deposit is NOT a security deposit for damages and is intended to apply to the Last months’ rent. This means that once the Landlord or Tenant have provided notice to terminate the tenancy, this deposit will be applied to the last month and the Tenant will not be required to remit payment for this month.

Under the provisions of the Act, any deposit (regardless of its name – i.e. security deposit, damage deposit, good faith deposit etc.) above the maximum as set out under the act is an illegal deposit and cannot be charged. Potentially, what this means is, is that even though the Tenant has agreed to provide a good faith deposit over and above the amount prescribed by the Act, the Tenant may be able to turn around and file an illegal rent/charge with the Tribunal and have the monies rebated. The landlord in this situation may not only be required to rebate the rent, they could also be subject to penalties as set out under the Act.

The rationale behind such prohibitions in law can be envisioned by the title of this article. It becomes apparent that taking more than permitted under the Act is prohibited for the protection of the Tenant. Relevant considerations include the fact that more than likely, the Deposit monies held by the Landlord would be held in a personal account rather than a Trust Account. Although this normally is the case and is not so much a cause for concern, it does become a concern when more than the prescribed amount is taken by the landlord and deposited in a personal account. The Tenant’s money is at risk (potentially) in the event that the Landlord dissipates the funds or becomes insolvent. Moreover, if a Tenant provides more than what is permitted under the Act and the Landlord defaults on payment of their Mortgage, the Mortgagee (lender) pursuant to the provisions of the Mortgage Act has the right to enforce Power of Sale (most common recourse) of the property. This means that the Tenant may be held accountable for the remittance of their rent to the Bank. By providing more than 1 month as a deposit, the Tenant can be faced with a formidable situation as failure to comply may result in the lawful eviction of the Tenant. It seems that the Act seeks to prevent such situations from arising by making it illegal to collect more than the permitted amount under the Act.

There is also a misconception that both the first + last month’s rent (i.e. in a yearly tenancy) are being collected. In fact, in such a situations the first month is not a deposit and is to be applied against the first month’s rent.

Additionally, both Landlords and Tenants are generally unaware that pursuant to the provisions of the Act, a Tenant can request that the Landlord pay interest on the deposit being held against the last month’s rent. The interest amount is determined by the percentage increase permitted by the rent increase guideline as published by the Ministry of Municipal Affairs and Housing. This means that the Landlord can be required to pay interest on the deposit in the event that the Tenant makes such a request. Normally, when both parties are aware of this right, the Landlord will provide notice for rent increase followed by the Tenant’s request for payment of interest in which case the interest and the rent increase cancel one another out.

Post-Dated Cheques:

Although post-dated cheques cannot be required as a result of a condition in the lease contract, if the Tenant willingly provides the Landlord with post-dated cheques then the Landlord may be permitted to accept them.

No-Pet Provisions:

A ‘no-pet’ provision in a lease Agreement is generally inserted to prohibit the Tenants from keeping pets in the occupied premises. Under the provisions of the Act, no pet provisions are unenforceable. This means that even though the Tenant has signed, sealed, and delivered the lease with such a provision, they would be able to keep pets as this provision is unenforceable at law. Although Landlords can prohibit illegal pets (i.e. animals that are prohibited as domestic pets by law), Landlords cannot prohibit animals that can be lawfully owned. The only exception to this rule applies to Condominiums. Pursuant to the by-laws of the condominium corporation, should the by-laws restrict or outright ban pets, the landlord can insert a pet provision which will be enforceable at law.

In the event that a pet is causing problems, there may be legal grounds for eviction if for example the pet is interfering with the reasonable use and enjoyment of the property (i.e. causing a nuisance for other Tenants or the Landlord), if the pet is causing severe allergic reactions, or if the pet is damaging the property etc… Thus, having a no pet provision in the Contract does not benefit either party as such a provision is unenforceable. The Landlord cannot prevent the Tenant from owning a lawful pet and further cannot prevent the Tenant from sheltering the animal in the leased premises.

Protecting Your Rights:

You should hire an experienced Real Estate Salesperson/Broker who can help Broker the deal. Prudent Salespersons and Brokers will be in a position to shed light on potential issues and can help protect the interests of their respective Clients. Although the Representative may not be licensed to provide legal advice as a lawyer, they are in a position to help Broker a contract which can contain a provision which allows for the approval of the terms and conditions of the contract by the relevant party’s lawyer(s). This way the contract can be put together, signed, sealed, and delivered and will remain conditional until the terms and conditions are approved by the Lawyers.

Always be sure to consult a Lawyer to insure that the provisions of the contract are legal and enforceable. Any doubt should be mediated by consulting a lawyer as failure to comply with the Act may cause long-term grief between the relevant parties.

Conclusion:

Taking more than the prescribed amount under the Act for the purposes of a deposit (good faith deposit, damage deposit, security deposit etc.) is considered an illegal rent charge. Reasons including bad credit, no job, no references etc… are not justification for taking more than the prescribed amount under the act regardless of mutual agreement of such provisions in the Lease Agreement. The landlord/Landlord’s Salesperson/Broker should do their due diligence and ensure that the Tenant is worthy rather than rely on illegal rent deposits. Your Public Choice Realtor can help you conduct the necessary checks and verify the Tenant’s particulars and advise on the credibility of the potential Tenant.

No-pet provisions are not enforceable subject to the exception of a Tenanted condo where the by-laws prohibit/restrict pets. Regardless of the no-pet provision in the contract, such provisions are unenforceable at law and the Landlord may not have any legal recourse enabling the removal of the animal.

Owning Real Estate is like owning a Business. There’s profit and loss, maintenance and upkeep, and you’re required to maintain long-term professional relationships with your customers (Tenants). I've always told my Landlord Clients that Tenants should be treated like gold. For the overwhelming majority of Landlords a Tenancy is an opportunity to help reduce the monthly carrying costs associated with property ownership. Like any prudent business owner or Customer desiring a product or service, do your due diligence and if required, seek legal advice. And remember, speak with your Public Choice Real Estate Salesperson/Broker. We’re here to help.

[1] http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_06r17_e.htm (Part XVI)

[2]http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_06r17_e.htm

DISCLAIMER:

Balwant (Ricky) Singh Rathore., BComm., LL.B (Hons.), Broker of Record – Public Choice Realty Inc., Brokerage is not a licensed Barrister or Solicitor. He is a law school graduate and licensed Real Estate Broker of Record.

The material on our website is intended to provide only general information and comment only. Members of our staff use their best efforts to ensure that the information found on our website is accurate and timely. However such information should be confirmed by the reader and should not be relied on as Legal advice.

Do not, under any circumstances, rely on information found on our website as legal advice. Legal matters are often complicated and a legal professional should be consulted.

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