Rental deposits and when a Landlord may withhold it or deduct therefrom

It is a common clause in most lease agreements that a tenant is to pay a deposit. This deposit serves as security and covers potential damages and breaches of the agreement. Though circumstances when the deposit may be withheld may be outlined in the contract, disputes still arise as to when the amount may be withheld or when deductions may be made.

The Rental Housing Act determines how this deposit should be handled. This Act balances the rights of tenants while protecting the landlord’s financial interest.  

When can a deposit be withheld?  

1. Unpaid rent and utilities: If a tenant vacates the property without settling his rent or utility amounts, the landlord may deduct the amount from the deposit. The deposit may not be used to offset against arrear amounts during the lease.

2. Damage to property other than normal wear and tear: “normal wear and tear” refers to expected damage to the property due to regular use, such as faded paint and worn carpets. It does not refer to broken windows, large stains etc. The landlord may withhold the deposit to correct this, but will have to provide proof that the damage did not exist prior to the tenant moving in. This is why the entry inspection is so important. 

3. Cleaning: If more than standard cleaning is required when a tenant vacates the property, the landlord may deduct the cost of professional cleaning from the deposit. 

4. Breach of lease terms: An example of this will be where the tenant terminates the lease prematurely without proper notice. The deposit may then be used towards payment of any penalty amount or any other loss suffered by the landlord. 

In order to withhold or deduct from a deposit, a landlord must follow the procedure set out on the Rental Housing Act, such as conducting inspections and providing proper statements.

An entry inspection must be conducted when the tenant moves into the property where the landlord and tenant will jointly assess the property’s condition and where any existing damage will be noted. In due course, an exit inspection will be held to compare the condition of the property at termination of lease with the condition at the commencement.

In the case of a deduction, the landlord must provide an itemized list of damages or outstanding charges, the cost of each deduction and supporting documents. The remaining balance of the deposit (if any) must be stated with details as to how that will be paid to the tenant.

The Rental Housing Act also provides that a tenants deposit must be held in an interest-bearing account. The interest accrued must then be returned to the tenant at termination of the lease together with the principal amount, provided that no deductions apply. Tenants may request documentation showing the interest earned on the deposit.

The Rental Housing Act further determines that the landlord must return the deposit and accrued interest within 14 days from the date of termination of lease if there is no dispute. In the case of damage or dispute, the landlord has a further 14 days to return the balance of the deposit after repairs have been effected. In any event, the deposit (or balance) must be returned within 21 days from the date of termination of the lease.

Should a dispute arise regarding deductions, a tenant may refer the matter for arbitration and mediation by the Rental Housing Tribunal. Should mediation fail, the small claims court may be approached (provided that the claim does not exceed monetary jurisdiction) or any other court.

A landlord may not withhold a deposit without a valid reason and must always provide evidence to support any deduction.

There are certain steps that a tenant can follow to ensure that his deposit will not be withheld, such as ensuring that the property is returned in good condition by thoroughly cleaning the property and repairing any damage. It is also important to be present at- and participate in inspections to ensure that same is done in a fair manner. This also allows a tenant to address any concerns immediately.