Lease Option agreements and Small Claims Court

[Matt Crowley]

[quote user=ThomasBeyer]Yes it is a rental issue but the option deposit is relevant in the context .


I think that is probably a better solution. The option agreement will certainly be discussed by the tenant anyway.



What I think is most likely:



- No more option monies will be collected from the tenant. It's an "option" to pay option payments after all. If you don't think the house is worth it or have lost interest in paying them, you don't have to pay them. (There are lots of ways to write the option agreement but this is the way I've seen most of the contracts worded).



I'm just saying I wouldn't go in trying to enforce things on the option agreement. I would probably only seek for damages based on back rent.

 

[Thomas Beyer]

Since we do not know the specific wording of the option agreement if is fair to assume that a move-out or lack of payment triggers a clause that the option to purchases is void. Leaves the lack of rent paid, retroactively, as damages !



This is likely the result of sloppy tenant management ie eviction and too low a deposit and monthly option premium. I'd say a typical rookie mistake. RTO is a great strategy if executed well, ie a senior strategy that needs experience and careful execution.

 

[REQRentals]

[quote user=ThomasBeyer]Since we do not know the specific wording of the option agreement if is fair to assume that a move-out or lack of payment triggers a clause that the option to purchases is void. Leaves the lack of rent paid, retroactively, as damages !



This is likely the result of sloppy tenant management ie eviction and too low a deposit and monthly option premium. I'd say a typical rookie mistake. RTO is a great strategy if executed well, ie a senior strategy that needs experience and careful execution.


We do however know the wording of the statute that defines illegal deposits (above) and the decisions that say the monthly option premiums are distinct from rent (they also seem to meet the definition of deposit as to be returned/credited subject to happening of conditions).



I had thought Goach lucky that the tenant moved out after using the deposit as rent and understood your first post (questioning his losses) to make an important point:



Provided that the tenant moved after using the deposit he got more rent that he would have got if he had just rented the property, got it all in advance and got the property back for the next deal without any legal expense or lost rent. In addition he can now sue for the balance with minimal risk and no legal fees in small claims court. At worst it gets tossed and the tenant is out of time to apply to the Board.



So while the whole proposition beggars the imagination from the standpoint of regulatory compliance it actually makes sense and seems to have little exposure as long as you can avoid the regulatory issues.



One might point out that in taking the excessive deposit and applying it to the rent the landlord secures the very object sought to be prohibited by the statute however I would leave that for someone else to argue.



While I questioned it rhetorically his approach made sense: If you start trying to evict you are asking for this stuff vs the route he embarked on with zero loss and some residual upside.



I had thought that was the point you had made but that was what I learned from it anyhow.



Thanks to all concerned.

 

[Matt Crowley]

[quote user=ThomasBeyer]This is likely the result of sloppy tenant management ie eviction and too low a deposit and monthly option premium. I'd say a typical rookie mistake. RTO is a great strategy if executed well, ie a senior strategy that needs experience and careful execution.


Unfortunately, that may have been what happened here. For anyone researching how to do rent to own, Sherilynn from QD Home Buyers is a great resource and frequents these R2O posts quite often.



It is a complicated strategy with a lot of different contracts required. A large up-front option fee helps.



The strategy involves a lease contract + (separate) option contract. You should collect the option payments and lease payments separately. If the option fails, (which happens around 33%-50% of the time from what brokers have told me), you want a solid lease.



CILA: Certificate of Independent Legal Advice - is for the Tenant-Buyer to sign and bring to a lawyer. It informs the tenant that they are not a buyer and are not building equity. They only have the option to purchase if they make all option payments (on time).



There is a higher demand for due diligence with a Tenant-Buyer as compared to a rental tenant. On top of the regular criminal record and credit report information, the story for why they can't qualify needs to make crystal-clear sense. They need a plan and strong evidence that they are cleaning up their finances.

 

[Goach]

Well, I suppose a rookie has to start somewhere. The previous points about the two contracts being separate, including the payments contained in it, is how I have always understood it to be. Actually separating the payments of rent versus the option premium is an interesting idea.


I think one of the issues here is that I've been utilizing the agreements that were provided to me by Mark Loeffler in 2009. Clearly things have changed since then and the CILA does sound like a really good idea, although in my situation, no one is questioning any equity or stakes in the property. As far as the option fee goes, I think this amount should definitely be subject to the location. In my area, $5k seems to be a decent number for still attracting clients and eliminating the potentials who are most likely not suited for the arrangement in the first place.


I now have my "Settlement Conference" scheduled in two weeks time. This is going to be quite the learning experience.

 

[REQRentals]

Hi Goach,



Here is another case discussing the jurisdictional issues.



http://www.canlii.org/en/on/onscsm/doc/2012/2012canlii98396/2012canlii98396.html?searchUrlHash=AAAAAQASbydzaGFudGVyIHYgc2VwYXJpAAAAAAE



Reading it it brings back some memories:

In O`ShanterDevelopment Corp. v. Separi, [1996] O.J. No. 1589 (Div. Ct.), it was held that a landlord`s application for arrears of rent was only available where the tenant remained in possession.

Separi was an appeal that I successfully argued against the Director of the University of Toronto Law School Clinic in the 1990's. Basically the idea was that you could sue in Small Claims Court to collect the arrears if the tenant had left the property. On appeal the tenant argued that the claim should have gone to Landlord and Tenant Court (as it then was). The Court held that remedy was only available if the tenant was still there and accordingly the Small Claims action was proper. The main issue was whether the Court could grant relief against retroactive rent increases ordered by the (then) Ministry of housing (it could not). The full text is on Quicklaw.



The above decision also cites Gill vs Residential Management which was another jurisdictional conflict case I argued that appeared in the Ontario Law Reports. While the decision does not deal with the issue directly Hon Jurianz J. (as he hen was) summarized and adopted my basic argument as follows:



[20y: 'Times New Roman'; font-size: medium; font-variant: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: auto; word-spacing: 0px; -webkit-text-stroke-width: 0px; float: none; display: inline !important; background-color: #ffffff;>] Mr. Trent pointed out that if Mr. Hutchens' argument were accepted, a tenant would be able to proceed against a landlord for damaged personal property, but a party who had the same personal property damaged in his or her apartment by a contractor or mover would have to proceed by action. Mr. Trent argued that disputes between a residential landlord and tenant that did not fall under the Tenant Protection Act were simply disputes within the general jurisdiction of the court and must proceed in the usual way.



Taking that argument in its simplest form the LTB has no jurisdiction to deal with the option and other payments nor the rent after the tenant had vacated. If the Board has no jurisdiction it follows then the landlord is a liberty to proceed in the Courts.



Separi was decided before we had an LTB when the cases were still deal with by Superior Courts. Gill was a transitional case from when jurisdiction was being transferred and was less clearly defined on each side.



Later decisions seem to (correctly in my view) point out that these older cases were decided under previous legislative schemes and suggest that the jurisdiction of the Court has been largely foreclosed by more recent statutory amendments.



This one seems a well reasoned approach from last year



http://www.canlii.org/en/on/onscsm/doc/2013/2013canlii95665/2013canlii95665.html?searchUrlHash=AAAAAQAVcmVzaWRlbnRpYWwgdGVuYW5jaWVzAAAAAAE



Best of luck.



Needless to say I am interested to see how it goes.

 

[Goach]

Hello everyone,


I just wanted to give an update on my situation. I went to the Settlement Conference (pre-small claims hearing) and I ended up coming to an agreement with the tenants. In meeting with the judge, it was apparent that the agreements were going to be regarded as two separate contracts. He was quite certain that the initial option deposit was a non-issue and that the issue would revolve around the unpaid rent (plaintiff claim) versus the condition of the property (defendant claim). It was also apparent that the actual court proceeding would be an expensive two-day trial because of the nature of the claims and all the evidence to go through.


I ended up settling for basically half of my claim, which I have no qualms about. Just knowing that what I've always believed to be true is actually enforceable within the law is the real pay-off here.


I really thought that I would be going to trial here, which would have been good information for anyone else in my situation, but it appears that someone else will have to share their experiences at SCC.


Thanks to everyone for your input and support!

 

[Matt Crowley]

Nice work! Sometimes it is worth it to consider the value of your time. Thanks for the update