The Obligation to Return a Tenant's Deposit

The July 2011 decision of the Ontario Court of Appeal in the case of Musilla v. Avcan Management Inc., clarified the law regarding a landlord's obligation to return a tenant's deposit for last months rent (pursuant to section 107 of the Residential Tenancies Act, Ontario) and the circumstances when a landlord's is entitled to keep the deposit.

In Musilla, the tenant’s rental application for a one (1) year lease was accepted by the landlord and the deposit for one month’s rent was paid. However, six weeks before the commencement date, the tenant advised the landlord she would not take possession and requested return of the deposit. Two (2) weeks later, the landlord refused but said it was still prepared to give her possession which the tenant did not accept. The Landlord was unable to re-rent the premises until 2 months after the possession date. The Tenant applied to the Landlord and Tenant Board for return of the deposit and was denied on the application and on appeal to the Divisional Court. She appealed to the Court of Appeal who found in her favour and ordered the return of the deposit together with her legal costs.

Section 107 of the Act provides for the return of the deposit where possession "is not given" to the tenant i.e. the Landlord refuses or is unable to provide possession. The Court held that the wording of section 107 is a fair result where a landlord is unable or unwilling to provide possession.

However, the Court held that section 107 does not apply where a tenant has refused to accept possession from a willing landlord, in which event a landlord may retain the deposit provided the following are satisfied:

A.  the deposit was accepted solely as security for last months rent (as expressly stated in s.105(1) and 106(10) of the Act) and not as security for any other tenant obligation.

B. the landlord mitigates (minimizes) its damages by re-renting the premises but still suffers a loss of rent.

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