So, You Want to be a Landlord - A Cautionary Note
by Stanleigh E. Palka

Note to Reader: This article was authored while the Tenant Protection Act was in force in Ontario.  However, on January 31, 2007, the Government of Ontario replaced the Tenant Protection Act with the Residential Tenancies Act.  Therefore, some of the information contained in the article may no longer be accurate.

Introduction

You have a few thousand dollars saved up.  You are wondering what to do with that money.  You consider investing it in stocks and mutual funds, but the markets seem too unstable.  Placing it in a bank account will yield so little interest that it isn’t worth the trouble of getting out your calculator.  You have heard that some friends and relatives have fared well buying and selling real estate.  That sounds good to you.  Better still, you have heard about how people buy residential property then rent it out to tenants.  Mortgage payments get covered by rental income.  In a few years, the mortgage is paid off and the rent starts to pour straight into your wallet month after month.  As an extra bonus, your property continues to appreciate in value.  On the surface, you think that this is a fool-proof plan and you wonder why everyone isn’t doing this.  Think again.

Residential Landlord-Tenant Law in Ontario

To begin, it is important to note that we are dealing solely with residential rental properties, not their commercial counterparts.  Different laws and rules govern these two types of tenancies.

This article will focus on residential rental properties in Ontario.

The Tenant Protection Act and Forthcoming Residential Tenancies Act

One of the most important points concerns the law and regulations that govern landlord-tenant relations in Ontario.  The law that governs your relationship with a tenant is called the Tenant Protection Act.  Take careful note of the name of this law: it is very telling.  Indeed, tenants are well-protected under this act.  Conversely, landlords, while not without their own rights, must understand that this law was created on the premise that an inherent power imbalance exists between landlords and tenants.  On the one hand, landlords presumably have the financial resources to purchase and maintain rental property.  On the other hand, tenants (in many cases) are renting presumably because they cannot afford to carry a mortgage.  In light of these realities, the law is imbued with an inherent slant favouring tenants.

The Tenant Protection Act came into force on June 17, 1998, replacing Part IV of the Landlord Tenant Act, the Rent Control Act, the Rental Housing Protection Act, the Municipal Amendment Act, the Land Lease Statute Amendment Act, and the Residents' Rights Act.

It is important to note that, with the recent change of government in the province of Ontario in late 2003, the repeal of the Tenant Protection Act is expected forthcoming.  On June 22, 2006, the Residential Tenancies Act received Royal Assent.  Once proclaimed by the government, it will replace the Tenant Protection Act.  However, until such time as the Tenant Protection Act is replaced by another law, it remains the governing legislation for landlord-tenant relations in Ontario. 

Screening Tenants

Landlords have the right to screen prospective tenants.  They may do so by using accepted business practices, such as requiring income information, credit checks, credit references, rental history, guarantees, or other accepted business practices as prescribed in the regulations of the Ontario Human Rights Code. 

Practically speaking, the diligent landlord will not only collect proper information, but also verify it.  Before accepting a tenant, a landlord should verify that the information provided is accurate.  Landlords should take the time to double-check addresses in phone books or on the Internet and actually contact the tenant's references and speak to his or her employers, former landlords, and personal references.

Performing credit checks can be difficult and costly for the small-time landlord, especially if he or she is not a member of a credit bureau or agency.  Many businesses, notably real estate agencies and banks, are members of the credit bureau.  For a small fee, these businesses can help a landlord access the information on file at a credit bureau.

Although the footwork and expense of screening a tenant may seem burdensome, undertaking these steps helps to ensure that you choose a tenant who is able to consistently pay the agreed upon rent.

Residential Tenancy Agreements

The prospective landlord should consider the residential tenancy agreement or contract that binds the parties.  Ontario law imposes no obligation to have a written  residential tenancy agreement.  However, obtaining one is highly recommended.  Putting terms down on paper significantly reduces the possibility of future disputes over the parties’ respective rights and obligations.

In the absence of a written agreement, the landlord must give the tenant written notice of his/her/its (for a corporation) legal name and address for service within 21 days of the start of the tenancy.  With a written agreement, this information must be included.  The landlord must provide a copy of the agreement to the tenant within 21 days of the tenant signing and providing it to the landlord.  Failure to do so effectively allows the tenant to suspend rent payments until the landlord carries out this obligation.

One other relatively minor though often misunderstood point on tenancy agreements concerns pets.  A tenancy agreement cannot prohibit pets.  If the agreement contains such a clause, that clause is rendered void by the Tenant Protection Act.

Rent

With respect to rent, the Tenant Protection Act strictly regulates just about every aspect of how it can be collected and how much can be charged. 

Rent Controls and Vacancy De-Control

Of special concern to landlords (and tenants) is the amount that rent can be increased from time to time.  Landlords must comply with strict statutory guidelines when fixing rent for the following calendar year.  Subject to a few exceptions set out in the Tenant Protection Act, the amount of the annual increase cannot exceed statutory guidelines.  In other words, the guidelines indicate how much a landlord can legally raise rent. The guidelines are announced every August for the following calendar year.  The average figure is about two to three percent per year.  However, the figure can vary significantly so make certain to check with a lawyer or the Ontario Rental Housing Tribunal to ensure full compliance with the rent guidelines.

Notwithstanding these strict rent controls, a landlord is permitted to negotiate a market rent when there is a tenant turnover in a rental unit.  This is often called vacancy de-control.  However, once a new rent is established, rent controls take effect and regulate any future rent controls to protect the tenant.  Please note that, as mentioned above, the Tenant Protection Act may be replaced soon.  One of the proposed changes for the new law will make unreasonable rent increases illegal.

One of the rare provisions that tends to work in favour of landlords also concerns rent controls.  Generally speaking, tenants have a relatively limited period of time in which to dispute an illegal rent.  Where a tenant pays an illegal rent for one year or longer, the otherwise illegal rent is deemed legal.

Rent - Discounted Rent

Some Ontario landlords often inquire whether they can charge a discounted rent and still protect the lawful rent of the rental unit.  They should be aware that a marketing discount of up to one month's rent can be offered as an incentive to a new tenant or an existing tenant.  As long as the discount is properly described in the tenancy agreement and the discount is applied according to the rules set out in the Tenant Protection Act regulations, the lawful rent first charged can be used to determine future increases to the rent.  The "eligible discount" (as the Tenant Protection Act refers to it) can be applied in one of two ways: 1) provide the discount over the first eight months of a twelve month rental period and the tenant would pay the full monthly rent over the remaining four months, provided that the sum of the discounts applied over each of the first eight months do not exceed the rent for one month; or 2) apply the discount to the rent for one rental period during the year.

Rent - Collection and Enforcement

Before leaving the topic of rent it is worth addressing collection and enforcement measures.  Under the Tenant Protection Act, landlords have the right to receive full rent on time.  In the real world, this does not always happen.  It is not unusual for rental arrears to mount into the thousands of dollars for even the most diligent landlord.  For whatever reason, tenants sometimes do not pay rent on time or at all for months.

When considering how to collect rent, an Ontario landlord should consider that the amount of money that can be taken from a tenant upon establishing a tenancy is limited to collecting a rent deposit equal to one month’s rent.  Note that “key money” (that is, any type of payment above and beyond the value of one month’s rent) is, in almost all cases, illegal.  Additionally, landlords cannot require that the tenant provide post-dated cheques or other negotiable instruments for the payment of rent.

If a tenant has not paid rent for even one month, a landlord can apply to the Ontario Rental Housing Tribunal for an eviction order on grounds of non-payment of rent.  A hearing date will be scheduled.  At the hearing, the landlord must show the adjudicator proof of the rent owing (usually by putting forward a written tenancy agreement) and non-payment of that rent.  If satisfied that the tenant has not paid legal rent, an adjudicator may order an eviction.  Do not assume that your tenant will be evicted just because rent has not been paid − even for as long as half a year.  A tenant has the right to attend at the hearing and give evidence.  If the tenant tells the adjudicator that he or she has been trying to pay but cannot due, for instance, to a job layoff or to the fact that an ex-spouse has not been paying child and/or spousal support, an adjudicator may not order an eviction.  Instead of eviction, the landlord may obtain an order stating that the rental arrears are owing and, if not paid off, within a few months, then the tenancy will be terminated.  Furthermore, if the Ontario Rental Housing Tribunal orders an eviction for non-payment of rent, the tenant still has 10 days following the hearing to pay up the rent in full.  If the tenant does so, the eviction order is voided and the tenancy continues in full legal effect.

A question that often arises from landlords is whether they can turn off the heat or water in a rental unit when a tenant fails to pay rent.  The Tenant Protection Act prohibits a landlord, at any time during a tenant's occupancy of the rental unit, from withholding or deliberately interfering with the reasonable supply of any vital service, care service, or food that is the obligation of the landlord to provide.  Vital services include fuel, hydro, gas, and hot or cold water.

Access

Landlords in Ontario have relatively limited access to occupied rental units.  Landlords may have a legal interest in their rental properties, but they must understand that their tenants obtain a possessory interest in the respective rental unit.  This possessory interest (or right to possess the unit) is zealously guarded by the Tenant Protection Act.

A landlord should extinguish any notion that he or she (or an agent acting on his or her behalf) may enter the rental unit at any time simply because they own the land on which the unit is situated.  Except in the case of emergency (such as when you see black smoke billowing out of the windows or hear desperate screams for help coming from within), a landlord is not permitted to enter without written notice given to the tenant at least 24 hours in advance of entry.  Even with written notice, a landlord may enter only between prescribed times (8:00am to 8:00pm), must have an approved reason for entry, and must state the reason in the written notice.  Failure to provide adequate written notice, especially if a pattern of such unauthorized intrusions emerges, may result in severe sanctions against the landlord, including rent abatements and fines meted out by the Ontario Rental Housing Tribunal.

Furthermore, a landlord cannot alter the locks on the rental unit, unless replacement keys are given to the tenant without delay.

Eviction

Evicting tenants can be difficult, time-consuming, and expensive.

A landlord cannot simply kick out a troublesome tenant.  That landlord must serve proper legal notice on the tenant using forms prescribed by the Ontario Rental Housing Tribunal.  In certain circumstances, the landlord must wait a time period specified by law to allow the tenant time to correct or rectify the offending behaviour.  If the behaviour is not corrected, the landlord must make an application to the Ontario Rental Housing Tribunal (and pay a filing fee of $150.00) then, in most cases, attend at a hearing.

Although not a court of law, the Ontario Rental Housing Tribunal is a quasi-judicial forum.  In other words, it is not as formal as a court of law, but the rules of evidence and natural justice apply.  Appearing before the Ontario Rental Housing Tribunal can be a stressful and daunting experience, especially for those who are unfamiliar with basic legal proceedings.  The tensions only rise where bad relations have developed between the landlord and tenant.  Both landlords and tenants have the right to be represented by a lawyer, paralegal, or other agent at a hearing.

Examining the various grounds for eviction goes beyond the scope of this article.  However, it is worth distinguishing between eviction for cause and non-cause.  The former term speaks to situations in which the tenant is doing or has done something illegal, whether it be under the Tenant Protection Act or some other law.  For instance, a tenant may be using the rental unit for commercial−as opposed to residential−purposes.  Or the tenant may be carrying out criminal activity within the unit.

Non-cause means that the tenant has done nothing wrong legally, but the landlord wants possession of the rental unit.  A common situation is where the landlord wants the rental unit for legitimate use by his or her child.  Terminating the tenancy is possible under such circumstances.  However, the landlord must make an application to the Ontario Rental Housing Tribunal to obtain an order to terminate the tenancy with the current tenant.

Conclusions

An ancient Chinese proverb reads: be careful what you wish for, you may just get it.  Keep this in mind when contemplating entry into the world of residential tenancies.  Proceed with caution.  Know your rights and obligations under the Tenant Protection Act.  Delving into residential rental properties can be a very profitable enterprise, but you must operate within a complex network of strict regulations, rules, and laws that do not always work in your favour.

Also remember that most tenants are good, honest people who want to establish and maintain a positive, mutually-beneficial relationship with their landlord.  Don’t let tales of a few rotten apples spoil it for the rest of the bunch.  But just be ready when one of those rotten apples ends up on your rental property.  Although most tenants work hard and obey laws, a few show no regard for the law or other peoples’ property.  Drug dealers and pimps need places to carry out their criminal trades and your property is probably as good as any in their eyes.  And it isn’t just the landlord who suffers.  Good tenants often suffer the most.  Too often, honest people trying to raise families or earn an education find out too late that they have moved into a rental unit right beside some of the worst criminal elements in society.  You owe it to yourself and your honest tenants to keep  your rental property clean and safe.

This article has canvassed some, though hardly all, of the legal issues that may confront a landlord in Ontario.  Legal issues arise the moment you begin dealing with a prospective tenant about a rental unit.  As discussed above, the law regulates the types of inquiries a landlord can make when screening prospective tenants.  Even after the tenancy ends, the law touches both the landlord and tenant.  For example, landlords are restricted in what they can do with personal property left behind by a former tenant.  Like every other issue in this surprisingly complex area of the law, know your rights and obligations and consult a lawyer if necessary.