You may currently own a residential investment property, or may be considering acquiring one. Ownership of such properties typically involves the vetting of prospective tenancy candidates via a rental application process followed by the negotiation of a formal lease. This article discusses a recent decision of the Ontario Court of Appeal which explored the meaning of the term ‘rent deposit’. The court’s decision may surprise you.
Musilla v. Avcan Management Inc.
In this case, Sarah Musilla filled out a rental application form for a one-year tenancy and provided it to the landlord along with the required deposit cheque equivalent to one month’s rent. Six weeks before the tenancy was to begin, she backed out of the agreement and refused to sign the lease as per the rental application. She never took possession of the property. Ms. Musilla then sued to get her deposit back. This would seem like an easy win for the landlord, but not so.
Ms. Musilla relied on subsection 107(1) of the Residential Tenancies Act (“RTA”) which states that a landlord “…shall repay the amount received as a rent deposit in respect of a rental unit if vacant possession of the unit is not given to the prospective tenant.” Ms. Musilla argued that she was entitled to a refund because she had not taken possession of the unit – regardless of the reason why. The Landlord and Tenant Board and Ontario Divisional Court disagreed and held that tenants cannot unilaterally terminate tenancies prior to taking possession and then claim the deposit back. It makes sense for the landlord to keep the deposit… Well, not for Ms. Musilla, who appealed to the Ontario Court of Appeal.
The Court considered whether the deposit provided by Ms. Musilla actually represented a “security deposit”. The Court reasoned that the rental application signed by Ms. Musilla was not a lease; this was confirmed by the wording on the very application form which contemplated that an accepted prospective tenant would execute a formal lease prior to moving in. Moreover, the RTA states that payment of last month’s rent is the only circumstance where a landlord can retain a “security deposit”. As such, the deposit provided by Ms. Musilla with her rental application did not constitute a “security deposit” as there was no tenancy established at that point given no lease was signed. The result in this case was that Avcan Management Inc. was not authorized under the RTA to keep Ms. Musilla’s money for her failure to enter into the lease.
Conclusion
Rental application forms such as the one considered in this case are commonly used by landlords as a way of vetting potential tenants; deposit cheques are typically provided with such applications. As you can appreciate, the Court’s decision in this matter has potential to create problems vis-à-vis this established practice. Deposits are required so as to establish that prospective tenants are serious in applying to rent a unit as well as to incentivize landlords into holding the desired units.
It will be interesting to see how this decision affects matters going forward. If you are a prospective residential landlord, it may not be a bad idea to have your rental application form reviewed by a lawyer experienced in this field.
Jayson Schwarz LL.M. is a Toronto real estate lawyer and senior partner in the law firm Schwarz Law LLP. If you have a topic in mind, email info@schwarzlaw.ca and give us your questions, concerns, critiques and quandaries.
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