Summary:
1. Lawful deposits and inability to contract out of the RTA.
2. Prepaid rent vs. deposits.
3. Is voluntary prepaid rent always lawful?
4. What qualifies as "voluntary"?
5. A note on how to figure out if the key deposit amount may be excessive.
1.
Lawful deposits and inability to contract out of the RTA
2 - a refundable key deposit, "not greater than the expected direct replacement cost" of the keys (O. Reg. 516/06 subsection 17(3)).
This means that damage deposits, pet deposits or fees, guest deposits or fees, etc are all unlawful for RTA-covered tenancies, even if they are refundable and even if they are voluntary. And tenants can file T1 applications at the LTB under RTA section 135 to claw back these amounts, even if they had offered to pay them completely voluntarily (RTA section 4).
It is also an offence under the Act to "require or receive" security deposits contrary to RTA section 105 (see RTA subsection 234(d)) or to "charge and collect" additional charges contrary to RTA section 134 (see RTA subsection 234(l)). This means that tenants can involve the Rental Housing Enforcement Unit. See, for example, this case where a landlord and a property manager were each fined $2,250 for failing to refund key deposits to three tenants.
2.
Prepaid rent vs. deposit
However, it appears that prepaid rent does not have the same status as a "deposit" and can be viewed instead as a "method of payment" (voluntarily agreed-upon methods of payment are binding).
This is what we see in Corvers v. Bumbia, 2013 CanLII 92049 (ON SC), <https://canlii.ca/t/g6q8f>, where a tenant volunteered $90,000 in prepaid rent, then tried to claw it back later, but lost due to voluntariness of her advance rent payment.
It is important to note that voluntariness does not legalize other payments, e.g. voluntary pet deposits, damage deposits, guest charges, etc would still be unlawful to collect even if the tenant offered to pay them voluntary, i.e. the tenant could still claw them back later via a T1 application at the LTB. See, for example, SOT-70837-16 (Re), 2016 CanLII 44351 (ON LTB), <https://canlii.ca/t/gsk2x>, at para. 12 - 21 (where the adjudicator ruled that it would be "an incongruous result to uphold a damage deposit as legal and enforceable" just because it was voluntary), and many others, though Corvers v. Bumbia itself seems to leave that question open (or doesn't address it) when it mentions voluntariness of damage deposit at para. 19:
"[19] There is no evidence that the $7,500 security deposit, which is applied towards damages, was voluntarily offered by the Applicant to the Respondent."
SOT-70837-16 (Re), 2016 CanLII 44351 (ON LTB), <https://canlii.ca/t/gsk2x>
"17. I must distinguish Corvers v. Bumbia from this matter. Corvers primarily dealt with the pre-payment of rent owed for the entire 12 months of the lease. Relying on Royal Bank of Canada v. MacPherson [2009] O.J. No. 3806, the court held that a tenant is not prohibited from voluntarily pre-paying rent to the landlord; and the landlord is not prohibited from accepting pre-paid rent voluntarily offered by the tenant. Corvers and MacPherson stand for the proposition that voluntariness, as opposed to the Landlord’s requirement of payment, would “save” pre-paid rent from the prohibition under Sections 105 and 106 of the Act. In MacPherson, the court noted that laypersons would not characterize pre-paid rent as a rent deposit, rather as advance payment of rent properly owed for occupying the unit. More significantly, the court referred to the underlying objective of the Act and held that Sections 105 and 106 serve to protect tenants from landlords demanding large sums of money in advance. Therefore, to treat a tenant’s voluntary pre-payment of rent as an unenforceable agreement would penalize the very party the provisions were meant to protect, which would be an absurd result."
3.
So what would happen if voluntary prepaid rent is held for later?
Even if the tenant offers advance rent payments completely voluntarily, agreeing to hold them for later (rather than applying them to the upcoming rent payments) would render such advance rent payments unlawful, because such amounts would count as a "deposit" and not just a method of payment / prepaid rent. So prepaid rent needs to be applied to the upcoming months immediately and not held for later (e.g. not to be applied to a few last months of the tenancy), if the landlord doesn't want it to turn into a "deposit" and doesn't want it to fall under the rules prohibiting collection of additional funds spelled out in RTA sections 105, 106, 134, 234(d), 234(l)).
See two LTB examples below:
"4. The Landlord’s Legal Representative relies on Corvers v. Bumbia [2013] O.J. No 6283 wherein the Ontario Court of Justice held that when the pre-payment of rent is voluntary by the Tenant and not demanded by the Landlord it is not illegally collected.
5. In accordance with the reasoning of the Ontario Court of Justice in Corvers v. Bumbia [2013] O.J. No 6283, I find that the payment of 3 months’ rent when the tenancy commenced was not "required" by the Landlord.
6. The Tenant, through her realtor brought up the payment and voluntary paid 3 months’ rent to alleviate any concerns with her credit history or lack thereof.
7. However, unlike in Corvers v. Bumbia [2013] O.J. No 6283 and Royal Bank v. MacPherson (2009), 311 D.L.R. (4th) 361, the prepaid rent was not applied to the first few months of the tenancy. As set out in the written tenancy agreement, it is to be applied at the end of the fixed term tenancy and therefore represents a deposit. Pursuant to subsection 106(2) of the Act the maximum amount of the deposit that the Landlord can hold is one month's rent.
8. Therefore, pursuant to section 204 of the Act, I consider it appropriate and fair to allow the Tenant to offset the rent for May and June 2015 from the extra rent deposit that the Landlord is in receipt of."
“The Tenant delivers upon acceptance by negotiable cheque payable to [Landlord’s agent] in the amount of Nine Thousand Canadian Dollars (CDN$9,000.00) as a deposit to be held in trust or security for the faithful performance by the Tenant of all terms, covenants and conditions of the Agreement and to be applied by the Landlord against the 1st, 8th, 9th, 10th, 11th and last month’s rent.”
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"2. One of the terms of the lease required the Tenant to pay $9,000.00 to the Landlord at the outset of the tenancy. The provision in the lease, which is a term or condition of the Agreement states in part as follows:
“The Tenant delivers upon acceptance by negotiable cheque payable to [Landlord’s agent] in the amount of Nine Thousand Canadian Dollars (CDN$9,000.00) as a deposit to be held in trust or security for the faithful performance by the Tenant of all terms, covenants and conditions of the Agreement and to be applied by the Landlord against the 1st, 8th, 9th, 10th, 11th and last month’s rent.”
3. The Tenant paid $9,000.00 to the Landlord’s agent by money order on August 24, 2017.
4. The Landlord’s representative contended that this amount was a voluntary prepayment of rent by the Tenant and therefore was not contrary to the provisions of the Residential Tenancies Act, 2006 (the ‘Act’), relying on the Divisional Court decision in Corvers v. Bumbia 2014 ONSC 985.
5. I do not agree.
6. S. 105(1) of the Act prohibits a Landlord from collecting a security deposit other than a rent deposit not to exceed one month’s rent.
7. “security deposit” is defined in S. 105(2) to mean “money…given by or on behalf of a tenant of a rental unit to a landlord or to anyone on the landlord’s behalf to be held by, or for the account of the landlord as security for the performance of an obligation or the payment of a liability of the tenant…”
8. It is clear from the language in the tenancy agreement that the money paid by the Tenant was a “deposit to be held in trust or security for the faithful performance by the Tenant of all terms, covenants and conditions of the Agreement…”. Thus by the terms of the parties’ own agreement, the amount paid is a deposit in an amount which is contrary to the Act. A provision in a tenancy agreement that is inconsistent with the Act is void.
9. Moreover, the correspondence between the Tenant’s agent and the Tenant on August 22, 2017 makes it clear that the Landlord or the Landlord’s agent required a deposit of 6 months’ rent in order to consider the Tenant’s offer to rent the unit. The Tenant, whose wife was well along in her pregnancy at the time, felt that he had no option but to pay the deposit requested to secure the rental unit. This does not constitute a voluntary pre-payment of rent by the Tenant.
10. I find, based on the evidence that the Landlord collected an illegal deposit from the Tenant, contrary to the Act."
4.
What qualifies as "voluntary"?
Even if the wording of the agreement states that it's "voluntary", it may not always be the case. For example, the tenant might have texts / audio recordings / etc showing that, prior to signing the tenancy agreement, the landlord required that the tenant "voluntarily" offer prepaid rent (as a condition of entering into this agreement). RTA section 202 ("the Board shall ascertain the real substance of all transactions and activities ...") is important.
If disputed, it can become complicated in practice. See examples below.
"6. The Tenant said that in October 2016, he decided to move back to British Columbia. The Tenant also sent an email to the Landlord on October 20, 2016 advising him that he was moving back to British Columbia and asking about getting “some kind of refund.” The Tenant testified that he moved out October 23, 2016. The Landlord refused to refund the rent for the second semester and told the Tenant he was required to sublet. This was the second time the Tenant had requested to have money refunded.
7. The lease agreement shows the rental period, is from August 16, 2016 to April 23, 2017. The lease also shows a per diem of $34.06, which the Tenant paid from August 18, 2016 until September 11, 2016 until the first semester started. A fax sent to the Tenant after the Landlords received the confirmation deposit of $500.00 indicated that the rent could be paid in two instalments. Half on or before August 5, 2016 and the second half on or before December 15, 2016. The parties agreed that the Tenant rented the unit for 2 semesters.
8. Given these facts, I find that the end date of the lease term is April 23, 2017 and the Tenant was obligated under the contract to pay rent until the end of the lease term. The Tenant vacated prior to the end of the lease term, October 23, 2016. I find that the Tenant failed to give lawful notice to the Landlord and is responsible for rent for the duration of the lease.
9. Since there was no proper termination in this case, even if I find that the pre-payment of rent is illegal, the Tenant would only be entitled to the return of the money paid towards the second semester if the Landlord failed to minimize losses pursuant to s. 16 of the Residential Tenancies Act,2006, S.O., 2006 c.17.(“RTA”)
Was the Prepayment of Rent Illegal?
10. Pursuant to section 106 of the RTA, 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. However, section 106(2) provides:
i. 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.
11. In the case before me, the Landlord clearly collected more than a month’s rent. However, the Divisional Court has held that the collection of a prepayment of rent is only illegal where the prepayment is not voluntary.
12. In Royal Bank of Canada v. MacPherson [2009] O.J. No. 3806, where the Tenant voluntarily prepaid rent, the Divisional Court agreed with the Board’s finding that the tenant was entitled to credit for a bona fide prepayment of rent and could not be evicted by a mortgagee in possession. In so doing, the Court held
i. the plain language of these sections does not make pre-payment by a tenant of a rent in excess of one month's rent illegal. It makes the act of a landlord demanding such prepayment illegal. [at para.27]
13. The approach was confirmed by the Divisional Court again in Corvers v. Bumbia, 2014 ONSC 985 (CanLII). The question before me then is whether the prepayment of rent in this case was voluntary.
14. The Tenant testified that when he and his father arrived August 16, 2016 they were advised by R.H, the facility manager, to pay for both semesters at once. The Tenant said his father paid the Landlords in three payments on August 18, 2016 a total of $9,003.80 supported by receipts for credit and debit payments (Exhibit #2). The Tenant had also paid a deposit to hold the unit in the amount of $500.00 prior to arriving. The Tenant stated that a short time later, maybe in early September 2016 he realized that he could pay one semester at a time and didn’t have to pay up front so he contacted the Landlord, M.C., and asked for a return of the money paid for the second semester. The Tenant testified that this was the first time he had asked the Landlords for a refund, but the Landlords never refunded the money. M.C. does not deny that he held the money after the Tenant had requested a refund. M.C. testified that their policy is to refund the money if requested, but in this case he thought the Tenant was a flight risk and may skip out on the contract so decided not to return the funds. As it turned out the Tenant did vacate the following month.
15. In response to the tenant’s testimony, R.H. said he asked the Tenant’s father how he was going to pay but never told the Tenant’s father he had to pay the full amount.
16. Although the fax that was sent to the Tenant after the Landlords received the confirmation deposit indicated that the second half could be paid on or before December 15, 2016, the lease agreement shows that pre-payment of the full amount was required unless a different agreement was entered into between the parties. The lease agreement, headed “Reservation Check in Slip” (Exhibit # 4) expressly states as follows: “ ALL FEES are pre-paid. Guest agrees to pay fees and upgrade charges as posted. Payment options upon request with separate agreement.” The posted amount on the form indicates $8,514.37 for room charges and $800.00 for services. The statement of account attached shows a balance due of $8,814.37. I find it is clear from the Check-In Slip, prepayment of all rent is required and it is not voluntary.
17. Given these facts, I find that the Tenant did not voluntarily prepay the rent. The lease sets out the requirement to pay all the rent in advance unless a separate agreement is entered into. The parties did not enter into a separate payment arrangement and the Landlords’ own document indicates that all rent or “ALL FEES” are pre-paid. I accept the evidence of the Tenant that they were required to pay for both semesters at once. In any event, the Tenant subsequently requested a refund of the second semester payment, which was never processed, further supporting the Tenant’s assertion that payment in full was a requirement to enter into the lease. The Landlords failure to process the refund means, the Landlord, at the very least, retained the money illegally if it was not a requirement to enter into the lease.
18. The Landlords collected money from the Tenant for prepaid rent in the amount of $4,751.90 and collected $800.00 from the Tenant for cleaning. I find that the Landlord has collected and retained money illegally pursuant to section 135 of the Residential Tenancies Act, 2006.
19. As set out above, the Tenants would only be entitled to a refund if the Landlords failed to minimize losses since there was no valid termination of the tenancy in this case.
Did the Landlords Minimize Their Losses:
20. “ Section 16 of the RTA provides:
When a landlord or a tenant becomes liable to pay any amount as a result of a breach of a tenancy agreement, the person entitled to claim the amount has a duty to take reasonable steps to minimize the person’s losses.”
21. The Tenant moved out of the rental unit on October 23, 2016. The second semester commenced January 2017. The Landlord, M.C. testified that he has an advertisement running on the first page of Google all of the time but failed to submit a copy of the advertisement at the hearing. According to M.C. it is a generic ad that advertises the property and services offered. The ad does not explain if there is a unit available for immediate occupancy. M.C. said that he had no other vacancies at the time the Tenant left. M.C. said that he couldn’t remember if anyone had expressed any interest in the rental unit when the Tenants vacated, but didn’t think so. He said that it is difficult to rent because he markets to students who do not often enter into tenancies midway through the school year.
22. In Dudley v. Mackay [2000] O.J. No. 287 the Divisional Court found that there was “no evidence that the landlords advertised the rental unit for immediate occupation” and that “the landlords’ evidence was vague about when the landlords showed the unit”. The Court found that “the landlords must demonstrate that they have made reasonable attempts to minimize their losses before they can recover rent when the tenants vacate premises early”.
23. I find that the evidence of the Landlord M.C. was vague with respect to what reasonable steps he took to re-rent the Tenant’s unit specifically. There was no direct evidence with respect to dates and times the unit was shown or who had filled out applications for the unit. The Landlord M.C. was asked if the advertisements say immediate occupancy. The Landlord responded by saying no.
24. Had the Landlords properly advertised the unit and there was no uptake from students, it would be reasonable to accept the assertion that students will not enter into tenancies mid-way through the school year. However, the Landlord had an obligation to at least attempt to advertise the rental unit for immediate occupation. It is implausible that some students may require residency in the middle of the school year or seek to find alternate accommodations at the beginning of a new semester. Simply relying on a generic ad that failed to specify that the tenant’s specific unit was available for renting in the new semester, several months after the tenants left, is, in my view, insufficient.
25. I find that the Landlords did not comply with section 16 because they failed take reasonable steps to minimize their losses flowing from the Tenant vacating the rental unit without first serving a notice of termination in accordance with the Act’s requirements.
26. Given the Landlords have failed minimize their losses, I find that the prepaid rent collected for the second semester must be returned to the Tenant, since, given the failure of the Landlords to minimize losses, the money cannot be applied to the rent for the second semester."
"10. The Landlord cited the case of Corvers v. Bumbia, (2013) O.J. No. 6283 (Div. Court) to support the Landlord’s position that “the Landlord is not prohibited from accepting pre-paid rent voluntarily offered by the tenant.”
I found that the evidence in this case does not support a finding that the rent deposit was voluntarily offered by the Tenants to the Landlord.The common “dictionary definition” (according to Gage Canadian Dictionary) of the word “voluntary” is “acting of one’s own free will or choice” By signing the tenancy agreement, the Tenants had “agreed” to give 6 months’ rent to the Landlord as first three month’s rent and three months’ rent deposit. However, there is no evidence to indicate that the Tenants did so out of their “free will” or “choice.”
The two tenants in this case arrived in Canada two months prior to their signing this tenancy agreement. They were facing cultural and language barriers and they had little or no knowledge about their rights under the law. They are dependent on their parents for financial support and do not have any “credit” in Canada. The Tenant testified that she was “told” by her real estate agent that they “must” pay 6 months’ rent up front if they wanted to rent this unit. They really have “no choice” but to comply.I found that the Tenants did not offer the 6-month prepaid rent and deposit voluntarily; they did not do so out of their “free will” or “choice.”
11. To conclude, the Tenants have “used”the three-month prepaid rent by the time the tenancy was terminated.The Landlord collected a rent deposit (of three months’ rent) which is in excess of the amount allowed by the Act. The Landlord must return the full amount of rent deposit to the Tenants."
14. The goal of sections 105, 106 and 234(d) is to protect tenants from having to satisfy a landlord’s demand for large sums of money in advance.
15. Pursuant to section 135(1) of the Act, a tenant may apply to collect monies paid to a landlord which are collected or retained in contravention of the Act. Clearly the legislature did not intend a tenant to be without recourse where a provision of the tenancy agreement is contrary to the Act.
16. The court in C v. B, 2014 ONSC 985, (Divisional Court) noted that there was a finding of fact that the rent deposit of $90,000.00 was voluntary. The court noted that “[i]t is our view that this case is consistent with RB v. M (2009), 311 D.L.R. (4th) 361 and that therefore the rent deposit was not ‘required’ for the purposes of s. 106 of the Residential Tenancies Act. Therefore, there was no contravention under s. 135 of the Residential Tenancies Act. Therefore, there is no basis upon which we can interfere with the decision of the application judge.
17. I do not find that the Tenant’s three month deposit in the amount of $4,200.00 was voluntary. I find that the Landlord required this amount to be paid by the Tenant.
18. The Tenant was represented by a real estate agent and signed the Lease agreement.
19. The Landlord testified that he was skeptical to lease to the Tenant because the Tenant was new to the country, did not have any bank/credit history, and had just started a new job. The Landlord’s reluctance to lease to the Tenant was communicated by the Landlord’s real estate agent to the Tenant’s real estate agent. It is the Landlord’s evidence that the Tenant’s agent offered an additional two months. The Landlord rejected the Tenant’s offer of an additional two months, and asked instead for a three months deposit. These three months were in addition to first and last month rent deposit.
20. In paragraph15 of Schedule A to the Lease Agreement it notes that the tenant willingly offered to pay the landlord a three month deposit. I find that paragraph 15 is consistent with the Landlord’s evidence above. It shows that the Tenant’s offer to provide an extra two month deposit was rejected by the Landlord, and that the Landlord required a three month deposit instead. Upon observation of the paragraph, you see the type written ‘two’ month deposit is crossed out and in hand-writing, the word ‘three’ was added, to reference that a three month deposit is being given. Also, ‘and 9th’ was added to show that the deposits were to be applied to the 10th and 11th and 9th month’s rent.
21. Based on the facts presented at the hearing, I find that the present case is distinguishable from C v. B. In particular I do not find that the three month deposit was voluntary. The Landlord, once he rejected the Tenant’s voluntary offer of two additional months, changed the voluntary aspect of the extra two month deposit, and made it a requirement that the Tenant provide the Landlord a three month deposit.
22. The Landlord here required an amount greater than permitted by the Act. The Landlord collected three additional months as a deposit from the Tenant as a security deposit. The Landlord required this amount to be paid in order to satisfy the Landlord to enter the lease agreement. This is prohibited by the Act."
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Corvers v. Bumbia & Royal Bank v. MacPherson:
"Is the Landlord prohibited from demanding that a tenant prepay rent?
"[5] Sections 105 and 106 of the Residential Tenancies Act, 5.0. 2006, c17 (RTA) prohibit a Landlord from demanding prepaid rent. See also Royal Bank of Canada v. MacPherson [2009] O.J. No. 3806 at paragraph 27.
[6] Simply put if the Respondent demanded that the Applicant pay the $90,000 up front that action would be unlawful.
[7] The Applicant’s position is that the Landlord demanded that she pay the $90,000 as prepaid rent up front, because the Applicant was not ordinarily resident in Canada and did not have a credit rating.
Is a tenant prohibited from voluntarily pre-paying the Landlord rent?
[8] In Royal Bank of Canada supra Mr. MacPherson entered into a one year lease with the Landlord. He voluntarily paid a security deposit of $2,000 and one year’s rent less a discount of $4,800 in consideration of prepayment.
[9] Mr. MacPherson defaulted on his mortgage payments and the Royal Bank became the mortgagee-in possession.
[10] The Royal Bank filed an application with the Landlord and Tenant Board seeking arrears of rent of $4,800 and an order for eviction of the tenant for non-payment of rent. The Board found that the Bank was bound by the terms of the lease.
[11] The Ontario Court of Appeal upheld the Board’s decision explaining at para 25-27 as follows:
“The Bank argues that the term for the prepayment of rent is void and unenforceable by the tenant because ss. 105 and 106 of the RTA, which prohibit rental deposits of more than one month’s rent. I disagree with this argument for two reasons. First, the plain language of these sections does not make pre-payment by a tenant of a rent in excess of one month’s rent illegal. It makes the act of a Landlord demanding such prepayment illegal. Moreover, s. 234(d) of the Act makes it an offence for a person to require or receive a security deposit from a tenant contrary to s.105. The tenant does not commit an offence in paying more than one month’s rent in advance.”
[12] Thus a tenant is not prohibited from voluntarily pre-paying rent to the Landlord and in answer to issue (c) the Landlord is not prohibited from accepting pre-paid rent voluntarily offered by the tenant.
[13] The Respondent asserts that the Applicant voluntarily offered to pre-pay her rent.
[14] In negotiating the lease agreement the Applicant was represented by Real Estate Agent, Carolyn Reilly and the Respondent was represented by Real Estate Agent, Aatef Wali.
[15] In the Applicant’s affidavit, she stated that she proposed that she provide 12 post-dated cheques, however, the Respondent required her to pay all the rent due, up front, which she did. See the affidavit of Alison Covers dated September 13, 2013.
[16] In an affidavit, also dated September 13, 2013, the Respondent’s Agent, Mr. Wali, asserts that it was the Applicant who offered to prepay the rent and the Respondent agreed to rent the premises, to the Applicant, only because the Applicant made that offer.
[17] In support of his assertion, Mr. Wali attached a copy of a text he received from the Applicant’s agent. This document is attached to his affidavit as Exhibit “C”.
The message reads:
“Hi Aatef, Alison will pay the 12 months up front and she will provide a letter from her sister to you on Monday. Let me know if that works for your clients. Thx! Carolyn.”
[18] Upon a review of all the evidence, I am satisfied that it was the Applicant who voluntarily offered to pay the Landlord the 12 months rent up front. The Respondent did not demand that the Applicant pre-pay the rent up front.
[19] There is no evidence that the $7,500 security deposit, which is applied towards damages, was voluntarily offered by the Applicant to the Respondent.
[20] The amount of $7,500, described above, was thus paid to the Respondent in contravention of s.106 of the Residential Tenancies Act (“the RTA”).
[21] The Respondent, as Landlord, is entitled to an amount of “rent deposit not more than the lesser of the amount of rent for one rent period and the amount of rent for one month”.: See s.106(2) of the RTA. The Respondent is not entitled to request $7,500 as a security deposit to cover damages: See s.105 of the RTA.
[22] In the result, the Applicant’s application is dismissed in part. The $90,000 can be retained by the Respondent and the $7,500 returned to the Applicant as ordered."
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7) Royal Bank v. MacPherson, 2009 CarswellOnt 5391, [2009] O.J. No. 3806, 181 A.C.W.S. (3d) 358, 311 D.L.R. (4th) 361, 86 R.P.R. (4th) 253
"17 The Bank argued before the Board and in this appeal that the maximum amount a landlord can accept as a rent security deposit is an amount equal to one month's rent in accordance with ss. 105 and 106 of the RTA. Pre-payment of rent is in essence a security deposit for future rent. Since $24,000 exceeds the rent for one month, the pre-payment was in contravention of the RTA. The Bank argued before the Board, unsuccessfully, that the lease term was illegal as it contravened s. 106 of the RTA, and therefore the tenant could not rely upon it in defence of the Bank's claims.
18 The Bank relied upon the decisions of Royal Bank v. Boutis, [1994] O.J. No. 1199 (Ont. Gen. Div.) and CIBC Trust Corp. v. Mullings, [1996] O.J. No. 197 (Ont. Gen. Div.). These decisions concluded that if the tenant has prepaid the rent to the landlord, and the landlord subsequently defaults on the mortgage, that the mortgagee-in-possession may pursue the tenant for the rents prepaid
19 The Board declined to follow the decisions of Boutis and Mullings, which create an obvious hardship to the tenant.
20 The tenant relied upon Royal Trust Corp. of Canada (Trustee of) v. Parmentier, [1996] O.J. No. 162 (Ont. Gen. Div.). Royal Trust Corp. of Canada (Trustee of) was decided solely considering ss. 47(1), 47(3) and 48(1) of the Mortgages Act and did not consider the provisions of the Tenant Protection Act in force at the time. The court in Royal Trust Corp. of Canada (Trustee of) held that the prepayment of rent was a covenant that ran with the land, and as such, the mortgagee-in-possession was bound by the prepayment. Since the mortgagee-in-possession was the deemed landlord, the tenant was entitled to credit for the payment against the landlord in both law and in equity.
21 The Board agreed with the tenant's submissions. It noted that the limits on security deposits were designed to protect tenants before they enter into a tenancy agreement from unreasonable demands of landlords, and it would be unfair not to give credit to the rental prepayment made in good faith. It held the prepayment was binding on the mortgagee-in-possession as a covenant running with the land.
[...]
Issue 2: Did the Board err in applying s. 105 and s. 106(2) of the RTA?
25 The Bank argues that the term for the pre-payment of rent is void and unenforceable by the tenant because of ss. 105 and 106 of the RTA, which prohibit rental deposits of more than one month's rent.
26 I disagree with this argument for two reasons.
27 First, the plain language of these sections does not make pre-payment by a tenant of a rent in excess of one month's rent illegal. It makes the act of a landlord demanding such prepayment illegal. Moreover, s. 234(d) of the Act makes it an offence for a person to require or receive a security deposit from a tenant contrary to s. 105. The tenant does not commit an offence in paying more than one month's rent in advance.
28 Second, even assuming that ss. 105 and 106 mean that any prepayment of rent falls within the definition of a security deposit and therefore any amount paid over one month's rent is prima facie illegal, this does not mean that the tenant is precluded from relying on his prepayment of rent when faced with a demand for rent by the mortgagee-in-possession.
29 The decisions of Boutis and Mullings were decided without reference to the more purposive and principled approach to statutory illegality that has been adopted by courts. Moreover, Boutis relied on the case of Chiappino v. Bishop (1988), 49 R.P.R. 218 (Ont. Dist. Ct.), which has been rejected by a number of other decisions. See, for example, Spencer Properties Ltd. v. Zrebiec, [1992] O.J. No. 2944 (Ont. Gen. Div.); Top Link Investments Ltd. v. Hutchinson (1997), 37 O.R. (3d) 107 (Ont. Gen. Div.); and Royal Trust Corp. of Canada (Trustee of), supra. Mullings followed Boutis.
30 It was once the case that an illegal contract was always unenforceable, and no relief from the courts could be claimed by one who entered an illegal contract. The modem approach is not so categorical. See: John McCamus, The Law of Contracts (Toronto: Irwin Law Inc., 2005) at pp. 459-467. When a provision of a contract is prima facie illegal, it is incumbent on courts to assess the purpose behind the statutory prohibition and determine the consequences in light of that statutory purpose when determining whether the contract is unenforceable. As stated in Still v. Minister of National Revenue (1997), [1998] 1 F.C. 549 (Fed. C.A.) at para. 48:
Where a contract is expressly or impliedly prohibited by statute, a court may refuse to grant relief to a party when, in all of the circumstances of the case, including regard to the objects and purposes of the statutory prohibition, it would be contrary to public policy, reflected in the relief claimed, to do so.
31 Morden, J.A. in Reliable Life Insurance Co. v. M.H. Ingle & Associates Insurance Brokers Ltd. (2002), 59 O.R. (3d) 1 (Ont. C.A.) confirms that the policy of the statutory regime and facts of the case are important in assessing enforceability of a contract (at para. 42):
It would be wrong to say that the law respecting the enforceability of contracts that contravene a statute is clear and that the decisions in the cases are all consistent. Much turns on the particular terms of the statute, its underlying policy, and the facts of the case at hand.
32 The goal of ss. 105 and 106 of the RTA, as recognized by the cases, is to protect tenants from landlords demanding large sums of money to be paid in advance in order to secure housing: Mullings, supra at para. 5.
33 In this case, the tenant voluntarily negotiated the terms of a lease for the pre-payment of rent which suited his personal circumstances to prove that he had stable accommodation for his child for a one year period, and provided him with a significant discount as compensation for pre-paying his rent.
34 Sections 105 and 106 of the RTA provide a statutory mechanism for a tenant to resist demands for sums greater than one month's rent as a security deposit. They cannot, practically speaking, prevent tenants from paying sums in advance, especially since a lay person reading the provision would not likely view any prepaid rent as a "security deposit" captured by the provisions. Moreover, to treat an agreement under which a tenant has prepaid rent to his or her landlord as unenforceable would penalize the very party the provisions of the Act are meant to protect: Kiriri Cotton Co. v. Dewani (1959), [1960] A.C. 192 (East Africa P.C.).
35 The Bank argues that s. 4 of the RTA makes it clear that a provision in a tenancy agreement that is inconsistent with the Act is void, and therefore, the prepayment provision is unenforceable. It states that subject to s. 194, "a provision in a tenancy agreement that is inconsistent with this Act of the regulations is void". I agree that s. 4 would prevent a landlord from enforcing a term of an agreement requiring prepayment of rent beyond one month. However, s. 4 does not address the consequences when a tenant has prepaid all his rent.
36 It is noteworthy that s. 135(1) of the RTA provides a remedy to a tenant against a landlord who has collected money in contravention of the Act. It allows the tenant to apply to the Board to recover such funds. This provision shows that the Legislature did not intend a tenant to be without recourse where a provision of a tenancy agreement, such as a requirement for prepaid rent, is contrary to the Act.
37 Given the terms of s. 135(1), it would be consistent with the purpose of the Act to allow a tenant to rely on the terms of a tenancy agreement against a landlord who had received rent payments in advance if the landlord were to argue that the agreement was illegal and unenforceable.
38 The Bank argues that the decisions Boutis and Mullings confirm that an additional goal of ss. 105 and 106 is to protect landlords against spurious claims of tenants. I disagree. The plain wording of ss. 105 and 106 binds the landlord, not the tenant. Other cases have specifically held that the restrictions on security deposits are exclusively for the protection of the tenant: Mullings, supra; Boyd v. Earl & Jennie Lohn Ltd. (1984), 47 O.R. (2d) 111 (Ont. H.C.). In any event, in this case, there is no allegation that this is a spurious claim by the tenant.
39 The Bank also argues that the modern purposive approach to illegal contracts is available as between the parties to the contract, perhaps to avoid unjust enrichment, but it is not an appropriate tool against the Bank, an innocent third party who did not participate in or benefit from the agreement.
40 The Bank argues that the responsibilities of the mortgagee-in-possession as a landlord is limited to the period when the mortgagee became landlord, and therefore it is not responsible to the tenant for liabilities which occurred during the tenure of the original landlord. This proposition is said to be supported by 981673 Ontario Ltd. v. Jessome (1994), 21 O.R. (3d) 343 (Ont. Gen. Div.); Prenor Trust Co. of Canada v. Forrest, [1993] O.J. No. 1058 (Ont. Gen. Div.); and Graff v. Dama (1995), 53 A.C.W.S. (3d) 622 (Ont. Gen. Div.) [1995 CarswellOnt 2428 (Ont. Gen. Div.)].
41 These cases are not helpful. Of the three, only Jessome deals with advance rent, and relies upon Boutis. For reasons previously outlined, I conclude on the facts of this case that Boutis is no longer determinative. Prenor and Graff deal with claims for an abatement of rent. It may be that a tenant's claim for an abatement of rent against the mortgagee-in-possession will be limited in time to that period when the mortgagee became the landlord, but this is a very different issue than the one before this court. Section 47 of the Mortgages Act is not discussed in the analysis in Prenor and Graff.
42 Section 47 of the Mortgages Act makes it clear that the Bank steps into the shoes of the landlord/owner at the date it assumes possession. As the tenant here prepaid his rent to the landlord, the Bank has no right to claim further rent from him. The Bank has recourse against the owner for any shortfall in the rents. Therefore, the Board did not err in its application of ss. 105 and 106 of the RTA.
[...]
49 The Board did not err in interpreting sections 105 and 106 of the RTA.
50 Notwithstanding sections 105 and 106 of the RTA, the term of the lease for the prepayment of rent is a covenant that runs with the land and is binding on the mortgagee-in-possession."
________________________________________
5.
A note on key deposits
O. Reg. 516/06 subsection 17(3) states that refundable key deposits cannot be greater than "expected direct replacement cost" of the keys.
How can one prove that the amount charged as a refundable key deposit is excessive?
It can be difficult in practice, but in this ruling the receipt from the tenants who copied the keys was enough:
"16. The Landlord here claims that the keys were security keys costing $99.00 to $125.00 each. That claim is not credible given that the Tenants were able to make copies for their own use for a few dollars each."
***************
"10. When the Tenants moved in the Landlord had given them three different keys – one for the building entrance, one for the unit door, and one for the utility room. The Tenants copied them so each of the three Tenants had their own. They left all nine for the Landlord.
11. This application is brought pursuant to section 135 of the Act and is based on the rights and obligations set out in section 134.
12. Subsection 134(1)(a) says:
Unless otherwise prescribed, no landlord shall, directly or indirectly, with respect to any rental unit,
(a) collect or require or attempt to collect or require from a tenant, prospective tenant or former tenant of the rental unit a fee, premium, commission, bonus, penalty, key deposit or other like amount of money whether or not the money is refundable;
[Emphasis added.]
13. A plain reading of this provision suggests that all key deposits are illegal, but the phrase “unless otherwise prescribed” means that exceptions to that rule can be found in regulations passed pursuant to the Act.
14. Paragraph 17 of Ontario Regulation 516/06 says in part:
The following payments are exempt from subsections 134 (1) and (3) of the Act:
…
3. Payment of a refundable key, remote entry device or card deposit, not greater than the expected direct replacement costs.
15. What this provision means is that a landlord is entitled to collect from a tenant a key deposit provided that the money is refundable. It must be returned to the tenant when the keys are returned at the end of the tenancy. Further the amount collected cannot exceed the actual cost of replacing the keys.
16. The Landlord here claims that the keys were security keys costing $99.00 to $125.00 each. That claim is not credible given that the Tenants were able to make copies for their own use for a few dollars each.
17. In any case, as the keys were returned to the Landlord at the end of the tenancy the deposit should have been refunded to the Tenants.
18. It appears that what has happened here is the Landlord erroneously believed he could use the deposit to pay for the locks to be changed because that is what he wrote into the tenancy agreement. That clause in the agreement is unenforceable. Pursuant to ss. 3(1) and 4(1) any provision in a lease agreement that conflicts with the Act or regulations is void and unenforceable. Landlords and tenants cannot contract out of the Act.
19. Given all of the above, I am satisfied that the Landlord has retained a $300.00 refundable key deposit in contravention of the Act. The Landlord shall be ordered to pay this amount to the Tenants."
In another ruling, it was the receipt for the cost of replacing the locking system after the tenant failed to return the keys:
"15. The T1 application at bar is a narrow application dealing specifically with the question of a deposit for “damages, keys, smoke alarm and carbon monoxide detector”.
16. With reference to section 134 of the Act, it is correct that subsection 17(3) of Ontario Regulation 516/06 supports the premise that refundable deposits for keys are allowed but are to be refunded upon the return of the keys in question. The important element of this subsection 17(3) is that such deposits shall “not [be] greater that the expected direct replacement costs”.
17. However, with regard to any form of deposit that may be collected by landlords, I make reference to the clear provisions set out in sections 105 and 106 of the Act.
18. Between section 134 (and Ont Regs 17[3]) and sections 105/106, the collection of a deposit for damages or any other purpose (such as smoke/CO alarms) is prohibited.
19. I accept that the parties ended the tenancy with personal differences, but I do not accept that the Tenant was unable to return the keys to the Landlord when vacating the unit. Over a year-and-a-half has transpired since the ending of the tenancy, and the Tenant claims she was unable to return the keys. And in fact, the Tenant only returned the keys to the Landlord before me at the hearing.
20. As such, I find the $140.00 is to be considered the refundable key deposit for this application. Since the Tenant did not return the keys to the Landlord, she effectively forfeits the reimbursement of that deposit.
21. At the hearing, I informed the parties of my view that the $140.00 bill paid for a new locking system (LL#1, pg 2- $140.00), was a reasonable bill incurred by the Landlord for having to change the rental unit locking system. The submitted bill is accepted by me as the “expected direct replacement cost”, and that cost is to be deducted from the deposit that the Tenants had paid.
22. Also, I informed the parties that the claimed damages that formed part of the submissions under the T1 application are not being addressed by me. Whether or not there was a window screen missing is not material to the T1 application. As stated above, the T1 application is a narrow application dealing with the question of whether the $500.00 deposit that had been collected was legal or illegal; that is all.
23. Based on the testimonies and submissions of the parties, and on a balance of probabilities, I find the Landlord illegally retained the original $500.00 deposit. To be clear, the part of the deposit that I have found to be a “refundable key deposit” is a legal deposit in this case; it is only the remaining part of that deposit that is illegally retained.
24. Further, the Landlord’s argument that the Tenant waived her rights has no standing to replace well-settled legislation. The Act is the authority here, not some private agreement between parties within which the Landlord had the Tenant “waive” her rights.
25. Consequently, I am ordering the reimbursement of the $500.00 deposit to the Tenant, less the $140.00 bill paid for the new lock, plus the cost of filing the application.
It is ordered that:
1. The Landlord shall pay to the Tenant the sum of $360.00. This amount represents $500.00 collected for “damages, keys, smoke alarm and carbon monoxide detector”, less the $140.00 key deposit the Landlord had to use to replace the rental unit lock.
2. The Landlord shall also pay to the Tenant $50.00 for the cost of filing the application.
3. The total amount the Landlord owes to the Tenant is $410.00."
In this ruling, it was the landlord's own admission:
"5. It is not contested that the Tenant paid the Landlord a refundable key deposit of $200.00.
[...]
7. The Landlord acknowledged the cost to replace the key is $75.00 plus HST, which amount totals $84.75. The Landlord testified that the additional amount was to act as a penalty because of the inconvenience it would cause.
8. Section 134(1) of the Residential Tenancies Act, 2006 (the ‘Act’’) states “[u]nless otherwise prescribed, no landlord shall, directly or indirectly, with respect to any rental unit, (a) collect or require or attempt to collect or require from a tenant or prospective tenant of the rental unit a fee, premium, commission, bonus, penalty, key deposit or other like amount of money whether or not the money is refundable.”
9. Pursuant to Ontario Regulations 516/06, section 17 certain payments are exempt from section 134 of the Act. In particular, subsection 17. 3 notes that the amount a landlord may receive as a refundable key deposit may not be greater than the expected direct replacement costs.
10. The Landlord collected a refundable key deposit from the Tenant. This is lawful under the Act. However, I find that this amount of $200.00 for the key deposit is unreasonable.
11. The amount overcharged for the key deposit is $115.25."
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