What to Know About Rent Arrears and Debt Recovery in Ontario

Rent arrears and the need to recover debts are growing problems in Ontario's rental market. With rents going up and incomes staying the same, landlords and property managers are struggling with two main issues: keeping cash flow steady and dealing with unpaid rent from tenants.

Ontario has become a province with one of the highest rates of unpaid rent in Canada. This article offers a detailed overview of what rent arrears are, the legal steps for recovering debt, and effective ways to handle these issues.

Understanding Rent Arrears in Ontario

What Are Rent Arrears?

Rent arrears happen when tenants do not pay their rent on time. Many reasons can cause this, such as losing a job, earning less money, or facing unexpected costs. In Ontario’s busy rental market, even a small gap in payments can cause big problems for landlords. Many landlords depend on regular income to pay their bills and mortgages.

Key Statistics and Data

Recent data from the Canadian Mortgage and Housing Corporation (CMHC) shows that Ontario has one of the highest arrears rates in Canada. As of October 2020, the arrears rate for apartment units in Ontario was about 10.2%. This means that around 0.81% of the expected rent was unpaid. These numbers represent a lot of financial stress for landlords.

Other studies show even more striking numbers in certain cities. In Windsor, over 22% of rental units had unpaid rent. In Toronto, the rate was just under 11%.

While the total amount of overdue rent might look small compared to overall rental income, for individual landlords—especially those with only a few properties—these overdue payments can cause serious cash flow issues.

Impact on Stakeholders

For tenants, falling behind on rent can cause stress and possible legal issues, which could even lead to eviction in the worst cases. For landlords, ongoing unpaid rent can create financial problems and higher costs related to collecting debts. Additionally, the problem of unpaid rent brings up larger discussions about housing costs and tenant protections in the area.

The Debt Recovery Process in Ontario

Overview of Debt Recovery

When tenants fall behind on rent, landlords may need to take steps to recover the money owed. In Ontario, debt recovery can be done in two ways: informal solutions like negotiating a payment plan, and formal legal actions. It is important for landlords to know the steps and legal rules involved. This knowledge helps protect their rights and leads to a fair resolution.

Step 1: Sending a Demand Letter

The first step to collect unpaid rent is to send a formal demand letter to the tenant. This letter should state how much is owed, when the payment is due, and that legal action may happen if the debt is not paid. A clear demand letter can encourage tenants to pay without needing to take further steps. Many landlords use standard templates that follow Ontario's Collection and Debt Settlement Services Act.

Step 2: Filing a Statement of Claim

If the demand letter does not bring in payment, the next step is to file a Statement of Claim. In Ontario, if the amount owed is more than $35,000, you usually file in the Ontario Superior Court of Justice. For debts under that amount, you can go to Small Claims Court. The Statement of Claim needs to include the amount owed, the reason for the claim, and any proof that supports the landlord's case. Filing the claim officially begins the legal process and starts the timelines set by the Limitation Act.

Step 3: Pre-Trial Resolution and Mediation

Before going to trial, both sides can try to settle the case through pre-trial negotiations or mediation. These methods, known as alternative dispute resolution (ADR), can help both parties find a solution that works for them. This process can save time and money on legal costs. Often, resolving the issue before trial leads to a payment plan or a lower settlement amount, which may be better than the risks involved with a trial.

Step 4: The Trial Process

If the negotiations do not succeed, the case will go to trial. In court, both sides will show their evidence and give testimonies. The judge will decide if the debt is valid and how much is owed. If the judge rules in favor of the landlord, this decision allows for further steps to enforce the judgment.

Step 5: Enforcing the Judgment

A judgment does not ensure immediate payment. Landlords might have to take more steps to enforce the judgment. Some common methods to do this include:

• Garnishment of Wages: A portion of the debtor’s earnings is directly deducted by the employer and remitted to the landlord.
• Seizure of Assets: The court may authorize the seizure and sale of the debtor’s assets.
• Liens on Property: A lien can be placed on the debtor’s property, ensuring that when the property is sold, the arrears are paid. It is crucial to note that all legal actions must be initiated within Ontario’s limitation period—typically two years from the time the tenant defaults on payment.

The Importance of Acting Promptly

In Ontario, landlords have two years to bring a debt recovery claim. If they wait too long, tenants can use this delay as a defense against the claim. Additionally, even if the debt is considered too old to collect, it can still show up on the tenant's credit report for about 6 to 7 years. This can hurt the tenant's credit score, even if the landlord cannot legally recover the debt anymore.

Legal Framework and Tenant Protections

Collection Agencies and Their Limitations

Debt collection practices in Ontario are controlled by the Collection and Debt Settlement Services Act and other related laws.

These laws aim to protect people in debt from harassment and mistreatment. For example, collection agencies can only call a limited number of times in a week. They cannot contact debtors during unreasonable hours or use threatening language.

Rights of Both Parties

• For Landlords and Creditors: The law enables landlords to seek judicial remedies if tenants do not pay rent. However, they must follow the prescribed legal process, beginning with a demand letter and proceeding through the courts if necessary.
• For Tenants: Tenants have the right to dispute a debt. If a tenant believes that the arrears amount is incorrect, they may request a detailed breakdown of the charges. The legislation requires collection agencies to provide this information and to use fair practices when contacting debtors.

Acknowledgement and Resetting of Limitation Periods

If a tenant admits to the debt in writing or makes a partial payment, it can reset the time limit for the landlord to take legal action. This is important for both the landlord and tenant to know. Any mistake in how they communicate could restart the time limit on collecting the debt.

Economic Impact and Recent Data

Rent Arrears in Ontario: A Data Snapshot

The 2020 Rental Market Report by CMHC shows big differences across regions. In Ontario, almost 10% of apartment units had unpaid rent. In Toronto, this rate was nearly 11%, while in Windsor, it was much higher at 22%.

Studies estimate that rent arrears in Ontario total about $87 million. This amount is a small part of the total rental income, usually less than 1%. However, for small landlords with just a few rental units, this financial loss can be very serious.

Broader Economic Considerations

As rents rise and living costs increase, unpaid rent is becoming a bigger issue. Some suggestions, like rent forgiveness programs, have come up. Some experts think that the total amount of unpaid rent might be a small part of what people earn each year. However, there is still a debate about whether these programs could weaken protections for landlords or just hide larger problems with affordability for tenants.

Implications for Landlords and Tenants

Landlords face two main challenges. They need to get back their lost income and handle the costs of legal and administrative processes to recover that money. On the other hand, tenants who fall behind on payments risk eviction and long-term harm to their credit. This situation can make it harder for them to find housing later on.

Best Practices for Landlords and Property Managers

Preventative Measures

1. Robust Tenant Screening: Conduct comprehensive background and credit checks. Platforms that share arrears data—though sometimes limited by privacy concerns—can help screen out risky tenants.
2. Clear Lease Agreements: Draft leases that clearly outline payment deadlines, late fees, and the consequences of arrears.
3. Regular Communication: Maintain open lines of communication with tenants. Early intervention when a payment is missed may prevent arrears from accumulating.

Steps When Arrears Occur

1. Documentation: Keep detailed records of all rent payments and communications with tenants.
2. Demand Letter: As soon as a payment is missed, issue a formal demand letter that adheres to legal requirements.
3. Negotiation: Consider setting up a repayment plan if the tenant shows willingness to settle the arrears.
4. Engaging Legal Counsel: If arrears persist, consult a lawyer or a reputable debt recovery firm. Many law firms offer contingency-fee arrangements where fees are deducted from recovered sums, reducing the upfront burden on landlords.

Working with Debt Recovery Professionals

Some landlords decide to hire debt recovery agencies or law firms that specialize in collecting debts. These experts have tools to locate debtors and understand the law well, which can help recover more money. Often, they work on a "no win, no fee" basis, meaning if they don’t recover any money, the landlord doesn’t owe them legal fees.

Final Thoughts

Rent arrears and the need to recover debts are big challenges in Ontario's rental market. In cities like Windsor and Toronto, the rate of arrears is among the highest in Canada. Because of this, landlords need to actively manage their rental properties.

The debt recovery process in Ontario involves several steps. It starts with sending a demand letter and can end with enforcing a judgment. To do this correctly, you need to understand the legal rules in Ontario. It is also important to act within the two-year time limit. Following the proper practices is necessary to ensure that both landlords and tenants are treated fairly.

As we move ahead, ongoing economic challenges and changes in rental laws (like discussions about rent forgiveness and sharing tenant debt information) show that both landlords and tenants should stay informed. Landlords should focus on thorough tenant screening and keep detailed records. If tenants fall behind on rent, seeking legal advice and using professional debt recovery services can help protect cash flow and reduce losses.

Finding a balance between tenant protections and landlords' rights is essential for a healthy rental market. As policymakers look at new ideas to handle unpaid rent, like sharing tenant debt information with credit agencies, it is important for everyone involved to talk and share their views. Landlords should stay informed about legal changes and seek advice from legal experts to make sure their practices follow the law and protect their financial interests.

If you’re struggling with unpaid rent or need advice on how to protect your cash flow, contact Royal York Property Management today. Let us help you safeguard your investment and maintain a steady rental income stream.