Last Month's Rent Interest versus "Top-up"
This is a great article written by fellow Landlord, Investor and Broker, Chris Seepe
It’s a breach of the RTA (section 106-6) if a residential landlord doesn’t pay annual interest to the tenant on their Last Month’s Rent (LMR) deposit. The interest rate is the same amount as the current year’s annual rent increase guideline.
Can you imagine in the cheque-writing days an owner of, say, 200 rental units having to write 200 cheques every year for perhaps $20 to $40 per tenant? Or alternately reconciling a one-month rent reduction every January for every tenant?
The RTA also states in section 106-3 that the landlord has the right to “top-up” the LMR deposit each year. For example, if you collected $1,000 from the tenant as the LMR deposit, and the annual rent increase for the current year is 1.8% then you have the right to ask the tenant to pay you 1.8% ($18.00 in this example) extra to keep the LMR amount current. That way, when the tenant eventually moves out, they’re paying their current rent rate, not the rent rate when they moved in years earlier.
Fortunately for once, some bright politician, if that’s where the credit is due, ensured that the interest rate for the LMR and the top-up are the same so they effectively cancel each other out.
The LMR is a deposit that should be recorded in your accounting books as a “contingent liability” (sometimes called "Pre-paid Rents"). That money isn't yours until you’ve earned it, which happens only upon the final month of a tenancy. You’re holding on to the tenant’s deposit in trust.
As another related stick-it-to-the-landlord law, you must collect the LMR, “… before entering into the tenancy agreement.” Once the tenant has possession of your rental unit you can no longer ask for, or try to collect, the LMR.
My tenancy agreement and my tenant introduction letter both state that we don’t ask our tenants for the annual LMR top-up and we don’t pay the annual interest normally paid on the LMR.
If you don’t properly document this arrangement then the LTB will ensure that the tenant receives the annual interest due as part of any settlement or court order.
Note also that upon closing on the purchase of a residential rental property, the buyer’s lawyer will make an entry into the statement of adjustments for all the interest that is due for each tenant’s LMR (to the buyer’s benefit and seller’s detriment) unless you have included the above “offset” policy as a clause in your tenancy agreement and can present a copy of every tenancy agreement to the buyer. For larger properties, this can amount of thousands of dollars taken off the purchase price.
Always collect the first and last months’ rents when you sign the tenancy agreement and never give the keys to a tenant before you’ve received the FMR and LMR.