Prepayment of Rent

Residential Tenancies Act, 2006, S.O

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.

(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.

(3) If the lawful rent increases after a tenant has paid a rent deposit, the landlord may require the tenant to pay an additional amount to increase the rent deposit up to the amount permitted by subsection (2).

(4) A new landlord of a rental unit or a person who is deemed to be a landlord under subsection 47 (1) of the Mortgages Act shall not require a tenant to pay a rent deposit if the tenant has already paid a rent deposit to the prior landlord of the rental unit.

(6) A landlord of a rental unit shall pay interest to the tenant annually on the amount of the rent deposit at a rate equal to the guideline determined under section 120 that is in effect at the time payment becomes due.

(10) A landlord shall apply a rent deposit that a tenant has paid to the landlord or to a former landlord in payment of the rent for the last rent period before the tenancy terminates.

SWT-01750-17 (Re), 2017 CanLII 51511 (ON LTB)

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:

(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.

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.

Corvers v. Bumbia, 2014 ONSC 985 (CanLII)

[1] There was finding of fact that the rent deposit of $90,000 was voluntary. That finding of fact was based on the evidence before the application judge. There is no palpable or overriding error in that finding.

[2] It is our view that this case is consistent with Royal Bank v. MacPherson (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.

Royal Bank of Canada v. MacPherson (2009) O.J. No. 3806

10 The respondent, John MacPherson, entered into a one-year written tenancy agreement to lease a house in Newmarket with Sandra Wilson, the owner. The lease was negotiated by a rental agency.

11 The rent was $2,000 per month, and the tenant was required to pay a deposit of $2,000. The tenant paid the deposit. The tenant also pre-paid the entire year's rent of $24,000, prior to taking possession on June 15, 2007. The tenant received a discount in the amount of $4,800.00 as consideration for pre-paying one year of rent.

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.

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.

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

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.