Tuesday, April 1, 2014

Deposit Decision at Divisional Court Muddies the Water

I must admit I was shocked when I read this recent decision about last month's rent deposits, allowing a landlord and tenant to agree on a rent deposit of more than the one month, the limit set out in the Residential Tenancies Act.

Corvers v. Bumbia , 2014 ONSC 985

The Residential Tenancies Act seems to prohibit the collection of a rent deposit, once negotiated, in an amount greater than the equivilent of one month's rent:
106.  (1)  A landlord may require a tenant to pay a rent deposit with respect to a tenancy if the landlord does so on or before entering into the tenancy agreement. 2006, c. 17, s. 106 (1).
(2)  The amount of a rent deposit shall not be more than the lesser of the amount of rent for one rent period and the amount of rent for one month. 2006, c. 17, s. 106 (2).
I've read this new decision, I've also read the Divisional Court decision Royal Bank v. Macpherson, which this decision relied on.  In Macpherson, which was an appeal from LTB file TNL-07849, the Court upheld the Board’s decision that the tenant could rely upon a prepayment of rent made to the former landlord as against the current landlord, a mortgagee in possession. In Macpherson, the Court found (in paragraph 27) that while it is illegal for a landlord to demand a rent deposit in an amount greater than one month's rent, it does not prevent a tenant from offering a large deposit, or pre-paid rent. "The tenant does not commit an offence in paying more than one month's rent in advance".

However the facts in Corvers are very different from those in Macpherson. In Corvers, the Tribunal found that the payment was voluntary. Moreover in Macperson, the bank asked the Court not to take into account a large prepayment of rent after they became a mortgagee in possession.  Justice Wilson, writing for the Court in Macperson acknowledged that even if they were wrong about the legality of the deposit, "this does not mean that the tenant would be precluded from relying on his prepayment of rent when faced with a demand for rent".

It's my opinion that section 3 of the Residential Tenancies Act makes a voluntary payment that contravenes the Act, illegal.
3. (1) This Act applies with respect to rental units in residential complexes, despite any other Act and despite any agreement or waiver to the contrary.
I don’t know if in this new case anyone for the tenant argued either of two appeals, Joe Barber v. 108689, from the Divisional Court, or Montgomery v. Van.  In Joe Barber, the landlord and tenant had agreed to forgo any future rent increases in exchange for a larger than normal one-time rent increase so that the landlord could make some upgrades to the complex.  Despite this agreement, the Divisional Court decided several years later that the landlord could raise the rent as the Act permitted it and the agreement ran contrary to s.3 of the Act.  The Court wrote:

[18] The policy rationale behind ss. 2(1) is to treat tenants and landlords equally. The subsection is designed to prevent parties from bargaining away or waiving their statutory rights no matter what the circumstances. Both Crown Trust Co. v. Rosenberg and Pinheiro v. Bowes found that the provision was meant to operate as a blanket prohibition. To permit a departure would create a significant loophole which could dramatically impair the entire scheme of the Act.
Montgomery v. Van was a decision that went to the court of appeal a couple of years ago as an adjunct to a personal injury claim when the court was asked whether, even by agreement, a landlord could require a tenant to shovel the snow despite the landlord's obligation to do so found in s.20 of the Act.

The Court of Appeal decided that they could only contract outside the Act if it was in the context of a separate agreement outside the tenancy agreement. In effect, Montgomery and Van would have had to draft a separate agreement, not as landlord and tenant, but as Mr. Montgomery and Mr. Van, for snow shoveling or grass cutting.

The judges in Corvers appear to have based their decision on a finding of fact made by the adjudicator that the deposit was voluntary.  They were unwilling, which is the norm, to disturb a finding of fact unless it amounts to a palpable and overriding error of fact. What I think they missed is that you can't really have a voluntary payment of something that the Act anticipates, and which is part of the negotiating process.  The landlord may have well refused the prospective tenant if the offer had not been made.

This recent decision leaves the door open to terrible abuses. Section 3 has always been sacrosanct, in my mind the most important single section of the Act. At very least, it provided us as practitioners with clarity and predictability. Now, it seems anything goes. What if a tenant is bidding for a coveted rental, and offers to pay increases annually exceeding the guideline?  It seems that using the reasoning in Corvers, that would be permitted.

Statutes like the Residential Tenancies Act are said to be remedial, that is, they address an imbalance of power.  Volunteering to work for less than minimum wage to put food on your family's table, or paying a six month rent deposit because you might be new to the country with no credit history, is hardly a bargain among equals.  At the end of the day, even if the Court's legal analysis is correct, we are now in a situation where adjudicators at the LTB will have to decide whether it was an "agreement" based on bargaining strengths, or a bona fide offer by a tenant, to pay lump sums of rent in advance.  There are also Human Rights Code issues here, as there may be a discriminatory effect on a person in "negotiating" a lump sum deposit, for instance if the tenant is on social assistance.

I’d love to see my friends at ACTO (Advocacy Centre for Tenants, Ontario) take this to the Court of Appeal. I’m a landlord side paralegal, but I still think this was wrongly decided.


Wendy S. Thomsen said...

I wholeheartedly agree Harry. The Landlord and Tenant board is to have exclusive jurisdiction in Landlord Tenant matters.

It is further exasperated by discrimination against the tenants who are new to Canada and do not have a credit history.

I sincerely hope to hear this decision is appealed.

In my mind, this is a miscarriage of justice!

Wendy S. Thomsen said...

I wholeheartedly agree Harry. The Landlord and Tenant board is to have exclusive jurisdiction in Landlord Tenant matters.

It is further exasperated by discrimination against the tenants who are new to Canada and do not have a credit history.

I sincerely hope to hear this decision is appealed.

In my mind, this is a miscarriage of justice!

Benjamin said...

Haha, what a mess.

If the extra money is being paid as valuable consideration for the tenancy, any first-year contracts student will tell you that voluntariness - or whose idea it was - doesn't matter.

And if the money wasn't paid for any consideration, the landlord holds it in trust, and must give it back on demand. I always thought that when you try to keep someone else's money without a lawful right to do so, that's unjust enrichment.

But then again, maybe this is a severable contract of the type contemplated by the OCA in Montgomery v. Van... the tenant is really just giving the landlord a loan, in consideration for interest at the guideline rate! This seems like cheapest form of credit that your clients are ever going to get ;)

Erynn said...

I'm not sure the LTB even has proper jurisdiction to determine whether there was an "agreement" as an "agreement" is contract and/or tort law (in that it leaves financial injury to a party, caused by another).

I do see this one getting appealed though!

Magickal Mum said...

Thank you for your qualified, and unbiased, insightful opinions, Mr. Fine. This is certainly an injustice, and I am inspired to read what you have said on the matter.

C C Jones said...

As a Canadian that is living in Florida/NY, I can't believe the Ontario Tenant Law. I believe that the law would be struck down by the US Supreme Court, like many other laws here have been, because it favours one party over the other. The Province of Ontario rental laws are biased in favour of tenants. The existence of these laws demonstrates the province of Ontario is unfair. Ontario residents need to recognize and expose these legislators. When did things get so out of control. Take your province back people!

Anonymous said...

I think the decision is right lLandlord cannot give their property for rent if the would be tenant cannot provide the job letter and credit checks In my case tenant came from other country did not have job , credit check, no reference and no garantor. They offered first and last five month rent in advance voluntarily. They broke the lease after seven months. We kept the last two month rent and gave them back last two month rent . Now they took us to court for charging last five month rent in advance which they gave voluntarily and they want the rent back which was paid against the two month notice . They are already out of country and not coming back But they are harassing us by dragging us to courts.