Reader Question about Rental Deposits

April 22nd, 2017 · 3 Comments · Kids & Family

Here’s the question for the day:

Tenant signed the lease and provided last month rent. They are set to move in in 1 week. I have received a call that they are now backing out. As the lease has been signed and last month has been provided are we able to keep the LMR (last month’s rent) to recover losses due to having to market the rental again so close to move in date?

Answer:

So the answer has nothing to do with recovering losses due to marketing, but rather recovering losses due to actual loss of rent.  Fact is 8 days before the first you are unlikely to find another qualified tenant and you may lose a whole month of rent due to this person backing out of their agreement. You may under some circumstance be able to recover even more damages as a result of the tenant breaking their lease, yes even though they haven’t moved in.

However if you are able to find another tenant within the time you have left, or even during the course of the month, then legally you have to refund the tenant the leftover portion.  It is possible to find another tenant within the time frame to move in on the 20th of the month then you should refund them the difference.

Landlords are not allowed to charge double rent this is called unjust enrichment.

How I handle it

I had a tenant back out of a rental just this month.  This was for a tenancy beginning May 1st

  • March 14th – Your application is accepted.
  • March 23rd – Hi Rachelle. My living situation has changed drastically. I have just lost someone very close to me. I am no longer able to move to Toronto. Can you please advise return of the deposit?
  • March 23rd – I’m sorry but your application was accepted and your deposit is refundable only if the home is rerented. I will put the home back on the market asap. I don’t imagine it would be a problem but, I’ll keep you posted. (Here I say this knowing I have over a month to rent the house out)
  • March 23rd – Thank you very much
  • April 4th – Hi Rachelle. Just wondering if there is any word on having new tenants for May?
  • April 9th – Any word on renting the house?
  • April 9th – I had a large showing yesterday. Keeping my fingers crossed.
  • April 9th – Yay!  Thank you!
  • April 18th – It looks like the house rented, so I would like to return your deposit.
  • Wonderful thank you. How do you return the deposit?
  • I need your address and name you want on the check. The check will be mailed out as soon as the deal completes on May 1st.

I want to say I had just about given up hope that the house would be rented by May 1st, most of the showings I had were for June occupancy. Local people rent larger houses more than a month ahead of time. However, I ended up getting a super lovely couple from Vancouver relocating for work and bingo!

Deposits Retained Legally

If you’ve been reading my recent posts urging landlords not to lose their head and keep their business practices consistent with the fundamental principles of the housing business, you’ll be able to guess, that I don’t mess around with deposits. However; I’m definitely in favour of keeping deposits where there is cause. When I worked in buildings where there was a large number of applications and deposits, I did actually develop the practice of keeping application deposits when the tenants changed their minds, didn’t move in etc. Many of those tenants flaked out at the last minute and just expected the landlord to take the loss on the rent and wanted their money back.

I’ve had people come the day they were supposed to move in, expecting their deposit back, meanwhile we’ve kept that suite ready and empty for them for a month or even more. Like I said local people tend to rent over a month away especially for big pricey houses or apartments.

There is virtually 100% certainty that the landlord will lose their money if you cancel the day of move in and I don’t understand the idea that the landlord should give the tenant his or her money back when their erratic behaviour has caused the loss of one or several months rent. This would be rewarding bad behaviour and I absolutely will not, on principle, reward tenants’ bad behaviour. This has caused some serious life lessons for people and that’s ok because that’s how people learn. Don’t go around giving deposits unless you are 100% certain you want the place or car or couch.

Once your application is approved, that deposit is going towards last month’s rent. So let’s say, the tenant has problems because of a change of circumstance, such as losing a job or ability to pay the rent, then I would reverse my earlier decision and reject their application with their agreement and refund their money. (This has not yet happened because when I asked for proof, it was non existent) Usually tenants keep shopping and get another place they like more even when I am straightforward with them. When they come back to get their money, they make up a tear jerking excuse, but considering that everything in this world generates some paperwork, I want an independent verification.

In a way this way is easier, you get your money back if the residence is rerented for when you would have taken it.

Application Approval is Work

Processing applications is work, you have to call landlords, check employment, run searches, check credit, check occupancy etc. Time is money because property managers and staff do not work for free. When you have to pay an administrative fee, that’s what you are paying for.

Deposits Retained Illegally

It’s almost inevitable that eventually Landlord Rescue Inc would be sued for return of deposit. We’ve been in business for over 10 years, and growing every year. It’s going to happen eventually.

In this case the tenant rented a big house in August for October 1st move in, now anyone who has rented knows that the big house rentals for family occur between June to September. September 7th, the tenants ask for their money back. The house didn’t rent for months and them rented for $300 less per month after the winter months.

Then they sued us. Here’s the decision, in our favour. The landlord hired a paralegal who led the case and honestly even though she was a nice lady, she didn’t believe we could win and thought we should just give the money back. I got Jeff to go for our company. The case law we all relied on was Musilla v Avcan Management 2010 and the appeal of that decision in Musilla v Avcan Management 2011 This case was the last major ruling on the deposit situation and basically the court decided that deposit agreement that specifically forfeit the deposit to the landlord are not valid if the landlord is able to collect double rent. So if your tenant leaves you high and dry and you are able to fill the vacancy, you have suffered no loss and retaining the rent deposit from tenant A when you are receiving rent from Tenant B is unjust enrichment.

As landlords we are still able to collect and even keep rent deposits if we have a loss in rent, but not if we don’t, which makes sense. In any case, read the decisions above and come to your own conclusions. All I know is that I changed all my rental applications to reflect the new rules when these rulings came out and combined with my property manager Dina’s brilliant paperwork and completely correct responses, similar to mine above, we were able to retain the tenant’s deposit.

Don’t mind my terrible redacting skills, but here is the decision in our case which you can download here.

Order About Deposit Retained Illegally

Now I’ve said before, you might as well be sued for trying to do something right than doing something wrong and here at Landlord Rescue I’ve thought long and hard about our rental process and how to do it to be fair for everyone, including ourselves.

  1. Show the place
  2. Give Application which 99% of the time requires outside information
  3. Get Application + information + deposit. (usually scanned and emailed)
  4. We mostly get e-transfers to secure the application
  5. We only take one application at a time and stop showing the place once the deposit is received.
  6. We do not process applications without deposits – We are in the business of renting and we only need one tenant for each place.
  7. Approve application within 24 hours (sometimes we have to ask for more info)
  8. Accept e-transfer
  9. Send email back to applicant that they are approved.
  10. If rejected, tell them, and start the process of renting again.

Our process is a serious one, we only need one tenant for each place, and we process applications quickly and respect the process of turning down applications so that tenants can move on and find other places. Because we process applications in the order they are received, it would be really difficult to sue us on discrimination grounds. Our process is first come first processed. Occasionally we will receive two applications at basically the same time, but usually one will be superior to the other and we will go on to check  it first.

For the most part we will get only one application at a time, and evaluate that application and move on. No more showings are done, we are not accepting multiple deposits, we are very straightforward people and I can honestly say, I respect most tenants and I appreciate the time and effort it takes to follow our process regardless of if their application is accepted or not.

I urge other landlords to behave in a similar manner, to be professional and candid and deal with tenants in good faith. Just because some tenants are bad doesn’t mean that all tenants are bad, you are entering a new tenant relationship – leave your baggage behind.

In a case like the one we fought at the Landlord & Tenant Board, we were well within our rights to retain the deposit, the house was off the market for the best rental month of the year, and they totally reneged for their own reasons and the landlord suffered a serious loss. It is annoying for a tenant to back out of what we think is a done deal, but do your best to rent it out and hopeful get lucky.

Do not freak out and just accept the first tenant with cash and first & last, you must still be selective and sane and reject applications that need rejecting, and it is quite likely you’ll get some bad applications if you’re not renting at the optimum time. Despite the tenant wanting their money back, that doesn’t mean that you must accept crappy application so keep your criteria for acceptance in order, and do your best.

Happy Renting!

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3 Comments so far ↓

  • Rob

    How much did it cost you to defend the suit? Both in terms of money and time

    Tha ks

    • Rachelle

      I’m not your average bear, so it cost me a lot less that it ordinarily would. By sheer coincidence Jeff was at the same Landlord & Tenant Board dealing with another matter that day and I refused to use the owner’s paralegal so he paid her. Because I had already done the research on the law years prior, I just printed out the case law in triplicate. My lovely property manager had all the paperwork in order, as she always does. The rest is history. If I hadn’t been sure I would win, I wouldn’t have taken this case to the LTB, in fear of making another precedent. The tenant had also emailed me about why they weren’t taking the house and they weren’t a party like a single mother with kids that would have caused the adjudicator feel sorry for them. They were a highly educated professional so there was no inequity between the parties.

      A lot of people might have made a different decision but just because of my past business experiences, I’m not at all afraid of litigation anymore. It’s tool just like any other. If I had been in the wrong I would have given the deposit back long before.

      Sometimes you have to do what’s right, not what’s cheap and what’s easy. I’m stubborn about that. I’m in this business for the long term and it’s in my best interests to contribute to the well being of landlording.

      However

      • Rob

        Thanks and this is the reason why I recommend your blog. Don’t know if your on FB but there is a great community there. Ontario Landlord Watch.