Refunding Compensation to Landlord if N12 or N13 is refused

 What are the Rules for Compensation Refunds under the RTA?

Landlords who seek to terminate and evict tenants on the basis of an N12 become aware that it is a requirement of these termination notices that the tenant must be paid compensation equal to one month's rent (presuming a monthly tenancy) (Section 49.1 RTA).   The N12 form is used to terminate a tenancy for landlord's own use (or the other permitted users related to the landlord) or for a purchaser's own use (or the other permitted users related to the purchaser).  The compensation is payable before the termination date that is listed in the N12.  This date is required to be a minimum of 60 days after service of the N12 and must be for the end of term (rental period).  If the compensation is not paid then it is possible that the N12 will be void and any application brought by the Landlord to terminate and evict the tenant will be dismissed.  [Note that the law has evolved a bit and it should no longer be an automatic dismissal if the compensation is not paid by the termination date--see the blog article prior to this one for caselaw].

What ends up happening, that often angers (or perhaps even enrages) landlords is that they serve the N12 in accordance with the rules and then pay the compensation as required and then the tenant refuses to move out.  That leaves the landlord down the equivalent of a month's rent, likely frustrated at being unable to move into the unit or frustrated at being unable to close the real estate transaction to sell the unit for the purchaser to move in.   At this stage, all that a landlord can do is file an application to the Ontario Landlord and Tenant Board, in Form L2, and wait for a hearing at which they can argue that the tenancy should be terminated and the tenant evicted.

It might seem that getting an eviction Order is automatic if the proper form is served and the compensation is paid.  In reality, that is not necessarily the case.   A tenant is permitted to challenge the good faith of an N12, challenge the assertion that the landlord actually intends to move in or that the purchaser actually intends to move in.   There can be indicia of "bad faith" and certainly the Landlord and Tenant Board can refuse and deny the termination and eviction application.   There are circumstances where human rights considerations come into play and if the landlord's use seems less necessary compared to the tenant's need then a refusal is possible (though exceedingly rare).

There are then a whole slew of technical defences that may also result in a dismissal of the application.  Notices of Termination need to be "perfect" and what many often consider minor technicalities are actually fatal defects and the application is necessarily dismissed.   The Notice of Termination process, is an involuntary termination of a tenancy and we can't forget it is the removal of someone from their home.  It is a unilateral act.  Hence, the Court of Appeal (from so long ago you could say from time immemorial), has held that the termination provisions are mandatory requirements that can not be overlooked.

So, what happens to the already paid compensation if the Landlord serves the N12 (for landlord's own use or purchaser's own use), and for some reason the application is denied/refused/withdrawn?   

The Residential Tenancies Act contemplates this at section 73.1 RTA where it states as follows:

    73.1(1) If the landlord compensated the tenant under section 48.1, 49.1, 52, 54, 55, as the case may be, in connection with a notice of termination under section 48, 49, or 50 and the Board refuses to grant an application under section 69 for an order terminating the tenancy and evicting the tenant based on the notice, the Board may order that the tenant pay back the compensation to the landlord. [emphasis added]

Many people have interpreted this section in such as way as to imply that the compensation may only be kept by the tenant if the tenant is evicted by the N12 and the Application.   The suggestions is that the compensation is a payment for leaving or being removed from the property and that if the tenant gets to stay in the unit then the compensation needs to be returned to the Landlord.   This view, I think you will find is the dominant view in the reported caselaw (though the LTB has not been reporting/releasing its caselaw since October 2022) and most cases show an automatic order for the tenant to return compensation where eviction is refused.

In my opinion, this view of the compensation (as payment for moving out) is not the correct interpretation of the section.  The cases in which tenants have been ordered to return compensation have been decided in an analysis that seems rather binary.  If evicted, compensation kept by tenant.  If not evicted, compensation ordered returned.  Such an automatic and binary approach does not do justice to the word "may" as written in section 73.1 RTA.   The word may, in my opinion, implies a broader flexibility and discretion that needs to be exercised.  I say this because if the proper interpretation is that compensation must be returned if termination is not granted then the section would say that in a straight forward manner.   The section could be written as a simple yes or no directive based on whether termination was granted.   The fact that the section was not written in this way implies that the return of the compensation is a "possibility" but that there is a legal test, factors, and discretion that needs to be applied in determining whether the compensation should be returned to the landlord.

I was pleased to argue this position in Board File EAL-92824-20 (Order issued August 31, 2021).   The adjudicator did consider the word "may" as it appears in section 73.1 and had this to say:

    12.  Section 73.1 says the Board “may” order the compensation to be repaid to the landlord. By using permissive language, the legislature anticipated situations where it would be unfair for the tenant to    return the money. I see such a situation as where the landlord has done something wrong, as in this case where a mandatory requirement was not met. To order the money back to the landlord when the landlord has not followed the mandatory requirements of the legislation is not holding them accountable, therefore I find it fair and reasonable for the Tenants to retain the compensation.

As you can see from this decision, the adjudicator created a legal test around the work "may" and analyzed whether the compensation should be returned based on the conduct of the parties.  In this particular case, even though the landlord was unsuccessful in terminating the tenancy, the tenant was not required to return the compensation that was paid.

It will be interesting to see if the LTB adopts this reasoning in a broader way than the current caselaw reflects.  In my opinion, the adjudicator in this case (Ms. Wade), gave a proper interpretation to the word "may" as it is applied in this section of the Act.

Michael K. E. Thiele