LANDLORD’S RIGHT TO FORFEITURE OF TENANT’S DEPOSIT LIMITED IN RESIDENTIAL CASES
Richard Macklin —
In landlord and tenant law, if the tenant gives a deposit and then walks from the deal, the landlord gets to keep the deposit as forfeited, right? Wrong!
As confirmed in the recent Court of Appeal for Ontario case of Musilla v. Avcan Management Inc. (2011) 106 O.R. (3d) 490 (C.A.), this is not the case. In Musilla, the tenant gave a deposit equal to one month’s rent upon signing an agreement to rent. Six weeks before the tenancy date, the tenant walked from the deal and asked for her deposit back. The landlord stated that it was prepared to rent the unit to the tenant but would not return the deposit. The landlord was able to rent the space to another tenant but not until two months after the date the first tenant was to take possession. The first tenant applied to the Landlord Tenant Board for a return of the deposit and lost. An appeal to the Divisional Court was dismissed. The Court of Appeal allowed the appeal from the Divisional Court’s judgment.
The setting aside of the Divisional Court’s judgment was based on a reading of ss. 105(1), 106(10) and 107(1) of the Residential Tenancies Act. Taken together, these sections mandate that a landlord may only take a deposit as security against the payment of last month’s rent. In Musilla, since the tenant did not ever rent the premises, the deposit could not have been in respect of last month’s rent and, the Court made clear that a landlord “may not take a deposit to secure any other obligation” (p. 492). The Court also stated, “[i]n effect, the [landlord] treated the deposit as a forfeiture penalty. That use is not permitted under the Act”.