Monday, July 18, 2011

Important case from Ontario Court of Appeal on Rent Deposits

I’ve just read a recent case, decided in July by the province’s highest court, the Ontario Court of Appeal.  The decision reversed (or at least modified) the reasoning in an earlier decision of the Ontario Divisional Court which allowed a landlord to retain a last month’s rent deposit when a tenant refused to move in.  I would suggest you read the decision.  


In this case, the tenant’s rental application was approved, and a lease was signed.  However six weeks before the commencement date, the tenant advised the landlord they would not be moving in.  The landlord, foolishly in my opinion, stood firm and said that they were prepared to have the tenant move in.  The landlord would have been better off getting the tenant to rescind the agreement in writing, and then trying to re-rent the unit. 

ACTO disagreed with the ruling at Divisional Court and filed an appeal on behalf of the tenant.  The decision of the Court of Appeal overturned the earlier decision of the LTB and the Divisional Court, based on the specific facts of the case.  The Court of Appeal agreed with the Divisional Court in theory, in that a tenant does not have an automatic right to have the deposit refunded where the landlord has done everything required to give possession of the unit to the tenant, but the tenant unilaterally repudiates the agreement.  However the Court of Appeal allowed the tenant’s appeal, and found that in this case, the landlord’s rental application was not clear about the disposition of the rent deposit if the tenant failed to move in, and also contained an illegal provision in stating that the deposit would be forfeited.  As a last month’s rent deposit can only be used as rent for the last month of the tenancy, the forfeiture of the deposit would be illegal.  A rent deposit can be applied….if it’s clear what it was meant to be, but it cannot be forfeited. 

The Court of Appeal agreed that if an application for tenancy is worded properly, the landlord should be able to retain a last month’s rent deposit if the tenant then fails to move in so long as they are not double-recovering.  In other words, if the tenant gives the landlord lots of notice of their intention to not move in despite the approved application, the landlord must attempt to re-rent and would return the deposit if and only if they were able to re-rent without loss of income.

I’ve have a good rental application form at my online form that some of my clients use.  I’ve made some changes to it in keeping with the decision.  Use whatever application you wish, but be careful about wording related to the rent deposit.  I’ve updated the section on the deposit to make it clear that if the tenant fails to sign a lease once the application is approved, or if the tenant refuses to move in once the application has been approved, that the landlord can retain the deposit and apply it as security against rent..  I’ve been careful to use wording to track the Court of Appeal decision so that the rent deposit can be retained as security against lost rent, even if the approved tenant does not sign a tenancy agreement.

It’s important to remember that when one party to an agreement breaches a term or condition, the other party has an obligation to mitigate, that is, to minimize their losses.

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