Cash For Keys

Cash For Keys

Bruce BrownInvesting

“Cash for keys” agreements between Ontario tenants and landlords have been receiving a lot of media attention lately. Here’s a link to a CBC article that includes video clips from a segment that ran on The National a few weeks ago, as an example: CBC on Cash for Keys.

CBC’s coverage includes everything you need to understand these agreements, why they are emerging as a “problem”, the underlying circumstances, aggravating factors and legal ramifications. When I saw the piece on TV and again when I read the article, however, I found that the flow of the piece works to mask the core underlying issues.My guess is anyone unfamiliar with residential tenancy regulations and “cash for keys” agreements would probably draw erroneous conclusions.

There is nothing special, sinister, improper or esoteric about “cash for keys” agreements. As in many industries, labelling simple every-day concepts with catch phrases or jargon can make them seem mysterious or complex. There is nothing spectacular about the right of two parties to mutually negotiate terms to end a contract. One party wants to end a contract early, offers something of benefit to the other party for this consideration, they negotiate and potentially reach agreement.

I don’t intend to cover the legal issues, mechanisms and considerations for landlords and tenants in negotiating agreements to terminate tenancies in this article; here are a couple of sources if you’d like to read about the mechanics and legalities:

Let’s isolate and address the core issues that have brought negative attention to cash for keys agreements. There are three fundamental problems:

  1. Extraordinary delays at the Landlord and Tenant Board (LTB).
  2. Lack of consequences for tenants who default on payment of rent.
  3. Casual, accidental, or purely opportunistic landlords.

LTB Delays

In normal circumstances it is a landlord who proposes a buyout (“cash for keys”) to end a tenancy early. This is the case when a landlord understands they cannot expect a tenant to agree to early termination without compensation. The tenant will either agree to terminate early in exchange for compensation, or the tenancy will continue.

To understand how delays at the Landlord and Tenant Board are leading to problems with cash for keys agreements, we need to categorize the circumstances that give rise to these agreements.

Landlord termination against RTA regulations. Landlords can only give notice to terminate a tenancy for one reason: they or an immediately family member require use of the property as their primary residence. (A current landlord may give notice for this reason on behalf of a purchaser of the property when it has been sold. Fundamentally, the reason is the same.)

The landlord must give any notice to terminate for this one valid reason at least 60 days in advance, the termination date must coincide with the end of a rental period, and cannot fall within the term of a lease. Given properly, this is the one notice to terminate that a landlord can give that does not require agreement with the tenant.

If a landlord wants to terminate a tenancy outside of these regulatory boundaries (i.e. either “early” or for a reason other than to use the property as their or a family member’s primary residence) they cannot do so unless the tenant agrees in writing. To secure such agreement, the landlord may offer the tenant compensation; ergo, “cash for keys”.

In these circumstances, there is no reason for Landlord and Tenant Board involvement. The landlord has no case if the tenant is not in agreement, and the tenant has no need to bring a case as they have every right to simply ignore the landlord.

In summary, delays at the Landlord and Tenant Board are not impacting cash for keys agreements where the landlord wants to terminate outside of the regulations and the tenant does not agree. Think about that again – the LTB has no impact in cases where the landlord is trying to remove the tenant unlawfully.

Landlord termination within RTA regulations. A landlord is permitted to give notice to terminate a tenancy when they require the property for use as the primary residence for themselves or an immediate family member. Notice must be given as specified above. The landlord must also compensate the tenant in the amount of one month’s rent.

Tenants are entitled to a hearing at the Landlord and Tenant Board to contest any termination notice. This protects tenants from being evicted improperly. However, when the landlord has given notice in compliance with the regulations, the tenant’s right to a hearing delays the termination until the hearing has completed, even if the landlord has acted lawfully.

The Landlord and Tenant Board was not hearing cases during the pandemic. Cases take many months to be heard because of the resulting backlog. Some tenants are therefore using the delays as leverage to demand compensation from the landlord who wants to terminate lawfully. The tables are turned and it is tenants, rather than landlords, proposing a cash for keys agreement.

In summary, Landlord and Tenant Board delays are the cause of exorbitant tenant demands in cash for keys agreements, precisely in cases where no cash for keys agreement should be required in the first place.

How could this problem be solved? Here are three possibilities:

  1. Improve LTB processing times, increasing staffing and resources and improving processes to clear the backlog.
  2. Implement the long overdue Tim Horton’s solution: two queues for LTB cases: one queue for black and white issues like assessing whether a notice to terminate is valid or not, and another queue for more complex matters. In the same way that Tim Horton’s has two queues: one for people ordering only coffee, and one for people ordering anything else. Oh wait! Tim’s doesn’t have two queues. Why on Earth not?
  3. Create an automated system to approve or at least pre-screen rental agreement termination notices. This would take some work, but there’s no reason lease terms, ID verification, and other criteria couldn’t be submitted for automated review and approval.

No rent, no problem.

The second factor bringing cash for keys agreements to the forefront is the lack of accountability for tenants who do not keep up with their rent payments. One principle underlying Ontario’s residential tenancy regulations is security of tenure for tenants, and compassion for tenants suffering hardship. The latter may not be spelled out in the Residential Tenancies Act, but interpretations of the Canadian Human Rights Code factor into decisions pertaining to non-payment of rent in dire circumstances.

Make no mistake, the one responsibility tenants have under the RTA is to pay the rent. However, precedence confirms leniency and compassion for tenants who get behind in the rent due to unforeseen circumstances, and long adjudication to remove tenants who do not pay the rent.

Conscientious landlords should understand that there are principles underlying housing regulations and decisions in Ontario and one should not become a landlord without buying into or at least accepting the associated responsibility.

Nevertheless, LTB decisions have proven overly lenient regarding late or non-payment of rent, compared to any other financial responsibility that consumers must accept in Ontario. Try not paying your cell phone or hydro bill or your income or property tax and you’ll soon suffer the consequences. Landlords can go without tens of thousands of dollars in rental income, and while the LTB will ultimately issue eviction notices for tenants who do not pay the rent, there is virtually no accountability for the loss to the landlord. It is extremely difficult or impossible to collect unpaid rent from tenants even with a court order.

Knowing that there is no need to pay the rent if you’re willing to move in six to nine months and can continue to live rent-free in the meantime, empowers some opportunistic tenants. They will use known lack of accountability as leverage, offer to terminate and vacate in return for extraordinary compensation that the landlord may decide is less costly than the loss they will suffer if the tenant stays in place while they battle non-payment of rent. The impact of this lack of accountability is exacerbated by LTB delays.

The principles underlying tenancy law in Ontario are benevolent and would not be a problem if there was greater accountability for non-payment of rent.

Real Estate Investing Is A People Business

Casual, accidental, or opportunistic landlords are also part of the problem. Media coverage of this topic, including the CBC article noted previously, cover landlord and tenant perspectives. Two common story lines sympathetic to the landlord are:

  1. The tenant is behind on rent, refuses to pay rent, and has the gall to demand a huge cash for keys settlement to vacate the property so the landlord can rent it to someone who will pay the rent.
  2. A home owner decided to rent out their house for a year or two while they went back to school (and therefore their income was reduced – rental income would pay the mortgage in the interim), took an overseas assignment, to accommodate other personal circumstances, or because market conditions weren’t favourable for selling. Whatever the reason, the home owner became a casual or accidental landlord and now wants to move into (or back into) the home.

While tenant advocacy groups and tenant-sympathetic stories in the media often focus on “greedy, wealthy” serial, professional, investment-minded landlords, when it comes to the topic at hand (cash for keys agreements as a problem) it is more often casual, unprofessional landlords involved in these cases.

Committed real estate investors are in the business of providing rental housing, taking on the risks and responsibilities associated with the benefits of increasing their wealth over time. When a dedicated investor has problems with a tenant who is not paying the rent, they move through the requisite legal process and understand it as a cost of being in the business. Would they like to see the process improve and be able to resolve issues with tenants who default, damage the property, or interrupt the peaceful enjoyment of other tenants more efficiently and more cost effectively? Of course. But they aren’t going to be held financially hostage by a tenant proposing an extraordinary cash for keys agreement. They will follow the process, perhaps offer a reasonable cash agreement, and see the problem through.

People who casually or opportunistically decide to rent out a property they own without understanding the Residential Tenancies Act (or considering it or in some cases even being aware of it), with no commitment to the principles of the provision of rental housing in Ontario, find themselves financially or practically in crisis when problems arise with a tenant or they create a problem by their need to exit the business for one reason or another.

We know that there is a multifaceted “housing crisis” in Canada. Rents are escalating, mortgage rates increased from 2022 through 2023 at the fastest pace ever, property values surged when mortgage rates were too low during a time of high demand, and some homeowners who bought while prices spiked are now under water from an equity standpoint.

One should think hard about casually renting out a property in an environment where legal requirements, public sentiment, and market dynamics support increasing responsibility and conscientious behaviour in the provision of housing.