Is a Temporary Rent Discount Legal?
The Residential Tenancies Act, 2006 Prescribes Various Restrictions That Make a Temporary Rent Discount Illegal.
Understanding the Legal Problem of Temporary Rent Discounts
Despite comments within the regular media and extensively within the social media, there are surely many landlords who are compassioned toward the plight of tenants who are suffering due to lost, or reduced, employment and the economic downturn as a result of Covid-19. Among those compassioned landlords there are those who would be willing to offer rent relief in the form of a temporary discount, and in accordance to government encouragement; however, and ironically, these landlords are legally trapped within a technical difficulty that was actually created by the government via the Residential Tenancies Act, 2006, S.O. 2006, Chapter 17 as the primary law that governs most residential landlord and tenant relationships.
Problem With Rent Discount
The problem facing a landlord that wishes to provide a rent discount is that the landlord, presumably, wishes to provide a discount only on a temporary basis. The difficulty providing a temporary discount arises whereas, statutorily, per the Residential Tenancy Act, 2006, as government legislation, a landlord (in most cases) is limited in the amount that rent may be increased within a twelve month period and the Residential Tenancies Act, 2006, is without a section or clause that says something to the effect of ‘unless the landlord decreases the rent because of a pandemic and then wants to increase and reset to the previous amount later’. The abilitiy to increase the rent only once within a twelve month period is further encumbered by the restriction that a landlord only increase the rent by an amount equivalent to the Consumer Price Index for Ontario as established by Statistics Canada and published by the Ministry of Municipal Affairs and Housing. This restriction is prescribed within section 119 and section 120 of the Residential Tenancies Act, 2006 which specifically states:
119 (1) A landlord who is lawfully entitled to increase the rent charged to a tenant for a rental unit may do so only if at least 12 months have elapsed,
(a) since the day of the last rent increase for that tenant in that rental unit, if there has been a previous increase; or
(b) since the day the rental unit was first rented to that tenant, if clause (a) does not apply.
120 (1) No landlord may increase the rent charged to a tenant, or to an assignee under section 95, during the term of their tenancy by more than the guideline, except in accordance with section 126 or 127 or an agreement under section 121 or 123.
(2) The Minister shall determine the guideline in effect for each calendar year as follows:
1. Subject to the limitation set out in paragraph 2, the guideline for a calendar year is the percentage change from year to year in the Consumer Price Index for Ontario for prices of goods and services as reported monthly by Statistics Canada, averaged over the 12-month period that ends at the end of May of the previous calendar year, rounded to the first decimal point.
2. The guideline for a calendar year shall be not more than 2.5 per cent.
As per the Residential Tenancies Act, 2006, if a landlord decreases the rent, even for good reason and with compassioned intentions, the landlord is limited to the statutorily allowable increase later. For the year 2020, the statutorily allowable increase is two and two-tenths (2.2%) percent. Accordingly, if a landlord were to provide a discount of fifty (50%) percent by temporarily reducing rent from one thousand ($1,000.00) dollars per month down to five hundred ($500.00) dollars per month, the maximum increase allowable thereafter is eleven ($11.00) dollars.
Another difficulty for the landlord are the Residential Tenancies Act, 2006 requirements to provide proper notice via the mandatory form, being either the Form N1, Form N2, or Form N3, depending upon the circumstances, as well as the requirement to providing notice of an increase at least ninety (90) days in advance of the date that the rent rate increase will take effect. Failure to provide proper notice makes any increase unlawful, void, and unenforceable. These requirements were confirmed by the Landlord Tenant Board in the case of S.A. v. M.J.J.G. and A.S.J., TEL-99928-19 (Re), 2019 CanLII 126938 at paragraph 8 to paragraph 11 where it was said:
8. The issue before the Board in this situation is whether or not the NORI was served appropriately on the Tenants.
9. Divisional Court decision Price v. Turnbull's Grove Inc., 2007 ONCA 408 deals with this situation and is binding on me.
10. In Price v. Turnbull's Grove Inc. the Court considered provisions as they existed in the former legislation that are basically the equivalent of the current subsections 116(4), 136(1) and (2). Those subsections read as follows:
116. (4) An increase in rent is void if the landlord has not given the notice required by this section, and the landlord must give a new notice before the landlord can take the increase.
136. (1) Rent charged one or more years earlier shall be deemed to be lawful rent unless an application has been made within one year after the date that amount was first charged and the lawfulness of the rent charged is in issue in the application.
(2) An increase in rent shall be deemed to be lawful unless an application has been made within one year after the date the increase was first charged and the lawfulness of the rent increase is in issue in the application.
11. To meet the requirements of s. 116 a NORI must be in the prescribed form, it must set out the landlord’s intention to increase the rent and the amount of the new rent, and it must be served at least 90 days in advance of the effective date of the rent increase. Pursuant to s. 116(4) a NORI that does not meet these requirements is “void”.
Accordingly, if a landlord wants to provide a three (3) month discount, the landlord must immediately issue the proper notice form providing the ninety (90) day notice that the rent will increase three months, being the ninety days, later; and of course, as above, the landlord would be permitted to increase by only the statutorily allowable percentage and only if such would be the only increase within the past twelve months.
Furthermore, per the common law of contracts, an unlawful agreement is unenforceable; and accordingly, a landlord and tenant are unable to enter into an enforceable agreement wherein the landlord and tenant agree to vary the Residential Tenancies Act, 2006 restrictions. This common law principle is specifically codified within Residential Tenancies Act, 2006 at section 3(1) and section 4(1) which state:
3 (1) This Act, except Part V.1, applies with respect to rental units in residential complexes, despite any other Act and despite any agreement or waiver to the contrary.
Acordingly, if the landlord and the tenant want to agree to ignore the Residential Tenancies Act, 2006 provisions and and instead substitute terms that conflict with the Residential Tenancies Act, 2006, the substituted terms are deemed void and unenforceable.
Whereas, per the above, providing a discount is legally problematic, there is frequent discussion within social media suggesting creative solutions such as requiring that the tenant continue to pay full rent while the landlord then provides gift cards or another form of 'rebating' of the rent rather than an actual upfront discount so to avoid the troubles outlined above. While it is unknown how such a 'rebating' arrangement would actually be viewed by the Landlord Tenant Board and the Appeal Courts, a potential concern for this attempt to side step the 'discount' difficulties is found in section 202 of the Residential Tenancies Act, 2006 which states:
202 (1) In making findings on an application, the Board shall ascertain the real substance of all transactions and activities relating to a residential complex or a rental unit and the good faith of the participants and in doing so,
(a) may disregard the outward form of a transaction or the separate corporate existence of participants; and
(b) may have regard to the pattern of activities relating to the residential complex or the rental unit.
Accordingly, per section 202(1), it seems that a creative solution to skirt around the discount problem, by using a rebating method instead, is potentially flawed whereas the Landlord Tenant Board must, per the word "shall", based findings on the context of the actual arrangement despite the first glance appearance of an arrangement. Essentially, section 202 states that if it 'walks like a duck, talks like a duck, then it is a duck, even if the landlord and tenant agree to call it a goose'.
Within the Residential Tenancies Act, 2006 there are two allowable discounts. A landlord may agree to fully discount, or waive, the rent for up to three (3) months or, and is inapplicable to the point of this article, offer a two (2%) percent discount for early rent payment. These allowable discounts are prescribed within section 11(2) and section 11(2.1) of the Residential Tenancies Act, 2006 which say:
111 (1) No landlord shall charge rent for a rental unit in an amount that is greater than the lawful rent permitted under this Part.
(2) The lawful rent is not affected by a discount in rent at the beginning of, or during, a tenancy of up to 2 per cent of the rent that could otherwise be lawfully charged for a rental period if the discount is provided for paying rent on or before the date it is due and the discount meets the prescribed conditions.
(2.1) The lawful rent is not affected if one of the following discounts is provided:
1. A discount in rent at the beginning of, or during, a tenancy that consists of up to three months rent in any 12-month period if the discount is provided in the form of rent-free periods and meets the prescribed conditions.
2. A prescribed discount.
As indicated, a rent discount of up to two (2%) percent may be offered for early payment, which is irrelevant to the point of this article; and accordingly, it appears that the only allowable discount requires that the discount provide, "rent-free periods", as a one hundred (100%) percent discount which is thereby, essentially, a full waiver of payment. Where section 111(2.1) references, "prescribed conditions", the prescribed conditions are found within section 10(1) of O. Reg. 516/06 as the general regulation to the Residential Tenancies Act, 2006 and wherein it is stated:
1. The discount must be provided for in a written agreement.
2. If the rent is paid monthly and the discount is equal to the rent for one month or less, the entire discount must be taken during one rental period.
3. If the rent is paid monthly and the discount is equal to the rent for a period greater than one month but not more than two months, the discount equal to the rent for one month must be taken during one rental period and the balance within one other rental period.
4. If the rent is paid monthly and the discount is equal to the rent for a period greater than two months but not more than three months, the discount equal to the rent for two months must be taken for two rental periods and the balance within one other rental period.
5. If the rent is paid daily or weekly, the discount must be taken in periods that are at least one week in duration.
As per section 10(1) within the regulation, the "prescribed conditions" describe the manner in which the discount must be applied. Additionally, it is highly notable that the discount must be provided within a written agreement; and accordingly, a verbal agreement to provide a discount would be unenforceable.
Prescribed restrictions within the Residential Tenancies Act, 2006 impose strict limitations that result in an incapacity for landlords to temporary provide a discount on rent in favour of tenants.
It is strange, and quite ironic, that the Residential Tenancies Act, 2006, was enacted by the government for the purpose of providing rent protection tenants, as per section 1; however, in the current Covid-19 situation, the restrictions within the Residential Tenancies Act, 2006 are actually preventing landlords from temporarily reducing rent and thereby impairing landlords ability to provide temporary financial aid to tenants.