Tenancies and the Common Law (19:XIII)

Since a tenancy agreement has elements of both contract and interest in land, privity of contract and privity of estate exists between the parties to the agreement. Covenants relating to either the estate or the agreement are enforceable between such parties. Where either the reversionary (landlord) or the tenant assigns his or her interest, privity of estate only exists between the assignee and the remaining original party. Terms and covenants that run with (touch and concern) the land are enforceable between these parties. One of the more common situations involving a covenant running with the land is where a security deposit is paid to a landlord, and the property is then subsequently sold. After the building is sold to the second landlord, the security deposit obligations carry over to that second person. So a tenant who had lived in the building all along would be able to claim return of his or her security deposit from a new landlord, even though the tenant had originally paid the security deposit to a different person. See s 90 of the RTA regarding covenants that run with the land.

A sub-lessee has neither privity of estate nor contract with the head landlord, but is still bound by all the covenants in the original lease.

Covenants in leases are independent at common law, so that one party’s breach does not relieve the other party of performance obligations, unless the lease is forfeited. The innocent party in a tenancy breach situation is under no duty to mitigate damages under the common law of property. However, s 7(2) of the RTA invokes a clear-cut duty to do so in a residential tenancy (see also RTB Policy Guideline 5: Duty to Mitigate). For commercial tenancies (to which the RTA does not apply) the courts have begun to view them as contracts with all attendant rights and obligations, including the duty to mitigate where the plaintiff is seeking damages under contract (as opposed to property) law; see Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. (1971), 17 DLR (3d) 710 (SCC). However, there appears to be no duty to mitigate where the landlord does not accept the tenant’s repudiation of the lease, and simply sues for rent as it comes due under the principles of property law. Should this situation arise, clients are strongly advised to consult an experienced lawyer.

A. Common Law and Residential Tenancies

Subject to the RTA, the common law respecting landlord and tenant applies (RTA, s 91).

1. General Effects of Breach of the Agreement

The common law rules of contract respecting the effect of one party’s breach of a material term on the other party’s performance obligations apply to a residential tenancy agreement (RTA, s 91; see also Chapter 11: Consumer Protection). Thus, material terms are dependent, and the innocent party is entitled to withhold performance. However, withholding rent because a landlord has breached a material term is barred by the RTA. A tenant may withhold rent only as permitted by the RTA.

Under contract rules, a party may not be able to repudiate a contract due to another’s breach of a non-material term, but a right of “forfeit” can arise under tenancy common law. Under s 45(3) of the RTA, where the landlord breaches a material term, the tenant may elect to treat the agreement as ended (an Arbitrator may have to decide whether a term is “material”). The landlord may end the tenancy only in accordance with the RTA, because of abandonment, or due to an agreement. The RTA does not abolish the doctrines of privity of estate and contract, but it enables a person having a reversionary interest (i.e. a landlord) and a “person in possession” to enforce against each other all conditions and terms, whether material or not, contained in the tenancy agreement for the possessed rental unit (s 83(4)).

See also RTB Policy Guideline 8: Unconscionable and Material Terms.

2. Status of Other Statutes and Legal Doctrines

a) Interesse Termini: Tenant Rights before Possession

At common law, where an agreement for lease is entered into, or a tenancy agreement executed, and a tenant has not entered and taken possession, that tenant has only an interesse termini, i.e. contractual rights. The tenant may not exercise rights incidental to the possession of property by suing a person in possession of or upon the rental unit for trespass, assigning, or subletting the rental unit. However, s 16 of the RTA provides that property and contractual rights under a residential tenancy agreement take effect at law from the date specified in the tenancy agreement as the commencement of the term of the tenancy agreement. The tenant may obtain an order respecting his or her right to possess or occupy the rental unit. Problems will arise when another tenant has come into possession; the tenant with the earlier commencement date may prevail over the later tenant, but the tenant in possession will probably be allowed to remain in possession.

b) Implied Surrender: Abandonment

At common law, a lease may be ended by “surrender” due to conduct of the parties, consistent only with a “merging” of the tenancy interest back into the landlord’s (owner’s) estate. Surrender occurs, for example, where the tenant abandons and the landlord repossesses and re-rents. Generally, no further rent or compensation for the unexpired portion of the tenancy may be claimed on surrender. However, following Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. (above), claims for lost rentals are allowed, provided the landlord notifies the tenant that the surrender is accepted subject to rights to claim for lost future rent.

Abandonment is cause for ending a tenancy, but regardless of the wording of the tenant’s notice, or the wording of the acceptance of surrender, or the absence of a notice, abandonment gives rise to the landlord’s duty to mitigate.

c) Frustration

At common law, the doctrine of frustration of contracts does not apply to a conveyance of an estate (e.g. a lease). However, there are cases that have considered how the doctrine might apply to a lease or tenancy agreement where the thing transferred is completely destroyed (e.g. a suite is destroyed by fire or water).

The doctrine of frustration now applies to residential tenancy agreements (RTA, s 92) and commercial leases (Commercial Tenancy Act, s 30). If some unforeseen event occurs that prevents the agreement from being performed, it will be considered to have been frustrated and is thereby terminated at the time of the event. Frustration will rarely be found where the event appears to be largely self-induced (and the result of acts or omissions which might themselves constitute a breach of covenant, e.g. a municipal closure order made pursuant to a fire bylaw where the landlord failed to install sprinklers). If the event is totally self-induced, the perpetrator will not be able to establish frustration. Two factors to consider beyond the normal contract law concerns are: 1) the length of the unexpired term at the time of frustration, and 2) the possibility of an alternative use of the rental unit.

d) Mitigation of Damages: Duty to Re-rent

Residential landlords and tenants have a duty to mitigate their damages where either has a claim against the other for losses due to the other’s breach of the agreement (RTA, s 7(2)). Where a tenant ends the tenancy illegally, or vacates or abandons the rental unit other than in accordance with the RTA, the landlord has a duty to re-rent the rental unit at a reasonable price. Failure to do so may result in reduced compensation. See RTB Policy Guideline 5: Duty to Mitigate Loss.

e) The Right to Distrain the Tenant’s Personal Goods

Under the RTA, a landlord has no right to distrain (i.e. seize) a residential tenant’s personal goods for default in rental payment, nor may the landlord seize a tenant’s personal goods to satisfy another claim or demand, unless the seizure is made by a person authorized by a court order or an enactment (s 26(3) and (4)). If a landlord seizes goods contrary to s 26(3), the tenant may apply to the court for an order to return the property, or for a monetary claim for damages. Note that a landlord may distrain the tenant’s goods where the tenant has abandoned the rental unit.

B. Damages, Debts, Compensation, and Specific Performance

Where an enforceable term or condition has been breached, a number of remedies are available. The availability of remedies is restricted, however, by the type of breach (i.e. material term, or not) and conduct involved.

1. Termination (Ending the Tenancy)

A term’s breach may entitle the innocent party to put an end to the agreement, and either regain possession (landlord) or vacate the rental unit (tenant). Compensation or damages, in addition to termination, may also be available. However, it is risky to assume a breach is fundamental enough to put an end to an agreement, for if the party who makes that assumption is wrong, they may be held to be in breach and liable for damages. It is better to have such matters adjudicated.

2. Damages

A person suffering loss due to the breach of an express, implied, or statutory term may apply for damages through dispute resolution under s 58(1) of the RTA, or, if not precluded by the RTA, by civil action in Small Claims or Supreme Court. Damages may be available where the tenant harms or destroys property. See RTB Policy Guideline 16: Claims in Damages.

3. Debt

Under s 6 of the RTA, action for debt may be taken for rent arrears, e.g. where there is an early ending of the tenancy by the tenant and loss of rent.

4. Duty to Mitigate

Under s 7(2) of the RTA, any time a monetary claim arises between landlord and tenant, both have a duty to mitigate damages (i.e. minimize losses). For example, if a tenant breaks a lease that was for a fixed term of one year, the landlord could sue the tenant for the balance of the rent payments. Nonetheless, the landlord has a duty under s 7(2) to try to minimize his or her loss by re-renting the rental unit as soon as possible, rather than just suing the tenant for the whole year’s rent. See RTB Policy Guideline 5: Duty to Mitigate Loss.

5. Compensation

An Arbitrator may award “compensation” to an innocent party (a tenant or landlord) who has suffered direct loss due to a “contravention” of the RTA by the other party.

Persons merely in possession can enforce a covenant or condition of a residential tenancy agreement, take the above action, or be acted against.Specific performance may also be an applicable remedy. This does not apply to an illegal squatter.

Section 95 is a penalty section, which states that breaches of the listed sections (mostly landlord breaches) are punishable by fine. While it would appear that there has been little resort to this offence section, it may be prudent to advise landlords of this potential consequence of a breach (see Section X.A.1: Disputes Covered by dispute resolution).

C. Class Action

A class action is an action taken by one or more persons on behalf of a number of people who have a common interest in that action. Where the matter involves more than one person with a common interest, an order may be made affecting all persons who have the same common interest. Note that for hidden rent increases, the RTB may limit the application of its order to one or more of the affected rental units. If several tenants seek a joint hearing, under the RTA, an Arbitrator may hear the cases jointly without the consent of the landlord.