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Lease Option agreements and Small Claims Court

G

Goach

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Hello all,


I am about to embark on my first experience to Small Claims Court in Ontario. To sum up my situation, I have a Lease-Option agreement with a tenant who had decided to stop making payments and sit in the house long enough to have utilized their initial down payment. They have now moved out with the expectation that they are free and clear, which the agreement clearly states is not so ("Non-refundable deposit"!). Now that I have served them with SCC papers and received their defence (which they state the property as "inhospitable"), I am curious to see how others have faired in the great judicial process. Looking through the posts here, and other sites, I have found only one reference to a lease agreement and SCC, but without any follow-up outcomes.


I would love to hear about someone else's experiences in a similar situation, or any that deal with the SCC.


Thanks!
 
Hi,



Interesting. Does anyone have any Ontario decisions dealing with lease options ?



I do not understand the view that lease options in Ontario are exempt from the residential tenancies act..



The premise is that a lease option is not a residential tenancy based on the exemption contained in the definition of tenant:




`tenant` includes a person who pays rent in return for the right to occupy a rental unit and includes the tenant`s heirs, assigns and personal representatives, but `tenant` does not include a person who has the right to occupy a rental unit by virtue of being,


(a) a co-owner of the residential complex in which the rental unit is located, or


(b) a shareholder of a corporation that owns the residential complex; (`locataire`)



However I would suggest that a person with a lease option is not a co-owner but rather has an option to become an owner at a future date and subject to the happening of conditions. The conditions were not met so the tenant never became an owner.



If it is a not a residential tenancy and you can sue in the courts it follows that the tenant can also do the same.



If it is a residential tenancy and the tenant moved out you can proceed in the courts but but the tenant must go to Board up to 1 year after moving. That gets you over the immediate hump in your SCC case.



Even then there are decisions that go against and say if knew about the arrears when tenant there should have gone to Board. Depends on how the tenant moved and when you discovered the arrears amongst other things.



But being a residential tenancy has a lot more problems.
 
What are your damages, if any ?



What is the court supposed to make a decision on ?



Why not re-rent the house, sell it or do another lease option ?
 
Thomas- The OP didn't receive any monthly payments after the tenant/purchaser moved in, so are out thousands of $$$$
 
In this situation, the tenant was behind on their payments, claiming that they had a 'settlement' coming, which would cover off any monthly payments owed. Fast forward a few months and now they are moving out, claiming that the 'initial down payment' was rent and now they owe nothing. The question I have here is surrounding the agreements. The down payment and monthly credits are in the 'Option to Purchase' agreement, which is separate from the 'Occupancy Agreement'. My interest lies in how the SCC sees these contracts, separate or all in one? From the investors' perspective, you are providing two separate services, the option to purchase service as well as the property rental. This is what I am curious to hear from anyone who has had similar experiences.
 
Consider definition of security deposit in legislation




(2) In this section and in section 106,


`security deposit` means money, property or a right paid or 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 or to be returned to the tenant upon the happening of a condition. 2006, c. 17, s. 105 (2).

sec 106 goes on to say that deposit can only be 1 month, has to be applied to rent, etc..... just as the tenant says.



One good point is that the Board clearly has exclusive jurisdiction to deal with the claim for return of illegal deposit and the tenant only has one year to make it after moving out.



Even in SCC can argue that right gone if tenant does not make application within year.



Quite a technical argument however.
 
Yes, if it is seen as a "security deposit", then I would imagine it would follow those guidelines. However, it is not part of the lease agreement. It is in the "Option to Purchase" agreement, which states:





[list type=decimal]
[*]

Initial Option Deposit will be
applied/credited to the purchase price.
Initial Option Deposit is non-refundable. Should the Occupant not exercise his right to
Purchase the Property, the Occupant forfeits the Initial Option Deposit;


[/list type=decimal]


I have spoken with REIN members previously who's experience proved the LTB regarded these as separate agreements, but I have not found anyone yet who has gone to Small Claims to recover the fees.
 
Hi Goach,



As I say it is a technical argument. I wrote a letter of opinion for a rein member on the topic years ago and never heard anything more of it. I had hoped they had found a lawyer to disagree with me and that is why I asked if anyone had any decisions.



The section I quoted is not a guideline but a statute which defines what a security deposit is for the purposes of the Ontario legislation. If what you are doing fits the definition and you are doing it in Ontario then it is a security deposit.



I do not understand the separate agreement argument either. Can you only enter the option agreement without the occupancy agreement ?
nt-family: 'MS Sans Serif';">


Can either exist independently or are they co-dependent to form the entire agreement ?



Were both executed at the same time in respect of the same property ?



I would suggest that you have two documents that together evidence a single agreement to occupy the property as a tenant with an option to purchase.



As I say would be delighted to read decisions or a legal opinion to the ccntrary.



: 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; background-color: #ffffff;">Other provisions of the legislation prohibit requiring collateral agreements as a condition of granting tenancy.




Think of it the other way if I am wrong. It holds incredible potential:



What if I own a run down house with municipal order against it and I do not want to be responsible to fix it. I would rather let a tenant fix it if they want to live there.



Also I do not like this whole business with the Board if the tenant does not pay and I don't need any regulatory hassles trying to collect the rent.



The house is worth 500K and I do not want to sell but if I give a renter the option to buy at say $1M then I should be safe. It does not matter that the tenant has no ability to come up with the $ 1M because under this theory the option itself makes them exempt and gets me out of my obligations whether or not it is ever executed.



And because the property is exempt I can collect a large deposit in case the tenant does not pay, throw them out without due process if they give me a hard time and make them responsible for any repairs.



Are all of my responsibilities as a landlord vacated just by having this separate option ?..



Or if one scenario is legal and the other is not what differentiates the 2 ?
 
All very good points. There are several media stories that exist, which depict investors taking advantage of tenants. I would hope that a court could decipher between an outrageous agreement clearly meant to benefit the investor, and one which is fair on both sides.


I am hopeful that someone will still be able to provide their experiences, as I'm sure they do exist. At the very least, I will provide mine when it is all said and done.
 
This should assist you although it does not deal with the statutory arguments raised above.



http://www.canlii.org/en/on/onsc/doc/2009/2009canlii9759/2009canlii9759.html?searchUrlHash=AAAAAQAYbGVhc2Ugb3B0aW9uIHJlc2lkZW50aWFsAAAAAAE



In this case the Court simply accepted the lease option as a distinct relationship without any discussion on the record.



Nevertheless it is a decison that supports your proposition.



Here is one from the Board however where the Board exercised jurisdiction over a lease option by agreement, again without any discussion of the issue



http://www.canlii.org/en/on/onltb/doc/2012/2012canlii27878/2012canlii27878.html?searchUrlHash=AAAAAQASb3B0aW9uIHRvIHB1cmNoYXNlAAAAAAE



This one is another Board decision that shows some of the problems but does not address the deposit as was not an issue. Still the amounts to be credited to the purchase deemed illegal and ordered repaid.



http://www.canlii.org/en/on/onltb/doc/2012/2012canlii98032/2012canlii98032.html?searchUrlHash=AAAAAQASb3B0aW9uIHRvIHB1cmNoYXNlAAAAAAE



As a general rule better to be before Court vs Board as Board deals with this legislation exclusively and Court does not deal with it at all.
 
[quote user=3canctheayr]didn't receive any monthly payments
Why was the tenant not evicted then immediately ?
 
Very interesting reads Mr. Trent. I would be quite curious to see the agreements that were used in these situations. Apparently the LL in the last one had problems with his documentation and should have known better. you are right though, clearly court is more beneficial to the investor than the Board.





ThomasBeyer - The tenants were in almost a year before things started to get off track. Sure, I should have started the process earlier, however the situation is different than the average rental. Looking at it again, I can see what I would do different....
 
The agreements are not that relevant as it is a jurisdictional issue....None of these agreements comply with RTA so if RTA applies there is a problem.



I am curious as to what procedure you would have used to evict the tenant sooner as the Court clearly has no jurisdiction to terminate a residential lease.



If you apply to the Court to terminate a residential lease the first thing you would have to do is prove an exemption because judges are aware of the fact that they no longer do that. The exemption is only for co-owners as I say in my first post.Of course that is a civil action with disputed facts so even to get the answer to whether you belong there is sure to take a great deal of time and thousands of dollars.



Alternatively you can go to the Board an an arrears of rent application, in which case you have to fill out a form regarding any deposits collected and other specifics. As appears from the last decision I included the Board has differing views on the rent and purchase credits. Other things such as making tenant responsible for repairs also clearly run afoul of legislation.



So where would you go to terminate one of these agreements without the risk of being caught up in what could be expensive and lengthy litigation.



I have argued a number of reported jurisdictional cases concerning residential tenancies in Ontario. I still do not know the answer as to where I would advise a client to go if they needed to evict. Either one has great risks attached.



In reality I suspect most persons who have sought professional advice have come to a similar conclusion.



Perhaps you came to a similar conclusion with or without advice.



But where would you have gone and why did you not go there to enforce your rights ?
 
Hi Goach,



I can't give you advice for Ontario because we are based in Alberta (we have done 2 rent to owns here) but I have known a few investors here who have been to court over a lease to own for non-payment of option monies.



I think REQRentals is concerned about the word "deposit"...Barry McGuire suggests to always word it as "monies" eg. "initial option money" and "additional option monies".



Did you by chance have the Tenant-Buyer sign a CILA (Certificate of Independent Legal Advice) that states something to the effect "I recognize I am not a buyer and I do not have an equity stake in the property. I will never own this property unless I pay all option monies and am able to qualify for a mortgage within the stated time frame...ect."? Something like that would really help your case.



The investors I have known basically argued there are two separate agreements. One is the option. One is the lease. They are completely separate agreements. If the option fails, the lease stands. It says so "here" (show clause). The option has failed because payment was not made.



Good luck!
 
Hi Goach,



I was not trying to be rude and do have a solution how to stick-handle the claim.



Basically let the time for the tenant to apply to the LTB run out and then try and press on in the Court for your rent claim while barring the tenants claim. If you would like it contact me directly I would be happy to explain in more detail.



That being said I am surprised that someone who invests in these deals regularly did not shut me down immediately with a textbook of cases.



As I understand it these deals are founded on renting to persons who have less that stellar credit. Sufficiently bad that they cannot get a private mortgage.



How could you even consider that type of deal without having a proven and efficient means of enforcing default should the tenant not pay ?



Does everyone know this is a problem going in ?



Would you do another one in Ontario anyway ?
 
Indeed having good contracts and the ability to enforce them is critical, for example through the small claim court system. As such a sufficiently high initial option deposit is a good insurance policy.
 
[quote user=ThomasBeyer]Indeed having good contracts and the ability to enforce them is critical, for example through the small claim court system. As such a sufficiently high initial option deposit is a good insurance policy.


A good point to be sure when trying to collect after the fact.



But how do you get them out of the property ?
 
Hi Sweetzone - No, I haven't heard of using a CILA before, but here are the basic terms of the agreement:



TERMS


[*]

Purchase Price of $123,456.78;


[*]

Property is purchased as
is. All appliances and chattels on the
Property are included (if any);


[*]

Option to Purchase is only
valid upon prior receipt of Initial Option Deposit (outlined below);




Option to Purchase is null and
void should the Occupant be in Default (as outlined in the Occupancy
Agreement);




Initial Option Deposit will be
applied/credited to the purchase price.
Initial Option Deposit is non-refundable. Should the Occupant not exercise his right to
Purchase the Property, the Occupant forfeits the Initial Option Deposit;



Monthly Option Payment Credits will be credited toward the purchase
price. Monthly Option Payment Credit is
only credited for months in which payments are made on time. Monthly Option Payment Credit will be
forfeited for the month in which the monthly occupancy payment is not received
on time. Should the Occupant not
exercise his right to Purchase the Property, the Occupant forfeits all Monthly
Option Payment Credits.



REQRentals - I welcome everyone's opinion here, this is good forum material.





I don't have issues evicting the tenants, as they had stopped paying for a length of time that they felt equal to their initial option deposit, then moved out. I have served them with papers for Small Claims Court.





I have and have had several other Lease-Option agreements. This is my first that has run into this situation. Would I do it again? Most likely, but I'll let you know in a year, or whenever my current situation is resolved. ; )
 
[quote user=Goach]I don't have issues evicting the tenants, as they had stopped paying for a length of time that they felt equal to their initial option deposit, then moved out. I have served them with papers for Small Claims Court.


Hey Goach,



I think I'm getting the picture now. It sounds as if you have submitted both lease and option as evidence in small claims court. I would initiate proceedings only on the basis of the lease in default with defaulted lease payments.



This is a lease issue. The option is irrelevant. They didn't pay their option monies so that contract died.



The problem here is unpaid rental money - which they are obviously obligated to pay.



I would try and keep the issue as straight-forward simple as possible. This is an unpaid rental issue.
 
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