Holdback in contract of purchase and sale found to be a rental security deposit

The court found the documents considered together were clear that the holdback was a security deposit.

Administrative law – Decisions reviewed – Residential Tenancy office – Res judicata – Landlord and tenant – Residential tenancy agreements – Judicial review – Legislative compliance – Standard of review – Patent unreasonableness.

Liu v. Wang, [2024] B.C.J. No. 1031, British Columbia Supreme Court, June 7, 2024, K.D. Loo J.

This was an appeal from the Residential Tenancy Branch (the “RTB”).

There were two petitions before the court for judicial review. The petitioners, Feng Xia Liu and Lian Bin Feng sought to set aside two decisions made by arbitrators of the RTB. The petitioners in this matter were the tenants and the respondents were the landlords.

The petitioners were the original owners of the subject property. The respondents purchased the property from the petitioners on April 30, 2023, in a contract of purchase and sale (the “CPS”). Following this, the petitioners rented the property from the respondents. The tenancy was set for a fixed term, expiring September 30, 2023. Rent was $5,500 monthly.

The section in the contract regarding security deposits stated “The tenant is required to pay a security deposit of have $100,000 holdback in the buyer’s lawyer” [sic”]. The $100,000 holdback is also dealt with in the CPS and the parties agree that the CPS and the tenancy agreement ought to be read together. The CPS provided:

Both of parties agree to have $100,000 holdback until Sep 20, 2023. The seller will rent back from the buyer at the agreed rent $5,500 per month from completion date. The seller must vacate the house before or on September 30, 2023. The seller is not required to pay a security deposit but agree to keep the property in the same condition as when viewed on April 9, 2023. Seller will be responsible to pay the following utilities: Heat, BC Hydro, Water, Phone and Cable, tenant insurance. The buyer will be responsible to pay property tax and home insurance.

The sum of $100,000 was held back by the respondents form the purchase price. When the fixed term tenancy ended, the petitioners took the position that they were entitled to continue to live in the property on a month to month tenancy and that rent ought to be paid from the $100,000 holdback, from the end of September 2023 onward.

The petitioners applied to the RTB for dispute resolution arguing that the $100,000 holdback was a security deposit and sought an order for its return. The arbitrator at the RTB held that the $100,000 holdback was not a security deposit. Following this, the respondents delivered a ten day notice to end the tenancy for unpaid rent. The petitioners then filed a dispute notice but did not pay back the rent.

Issues:

The petitioners relied on section 19(2) of the Administrative Tribunals Act, SBC 2004 c 45 (the “Act”), which states that if a landlord accepts a security deposit that is greater than ½ of one month’s rent, the tenant may deduct the overpayment from rent. However, the arbitrator had determined that the $100,000 holdback was not a security deposit.

The primary issue before the court was whether the arbitrator’s decision was patently unreasonable as this was found to be the standard of review pursuant to the Act.

The court found that the arbitrator’s decision that the $100,000 holdback is not a security deposit because the sales contract “does not state the return of the $100,000 is related to, or dependent on, the condition of the rental unit” was defective. This is because there is no legal requirement that a security deposit be related to the condition of the unit. Second, it appeared clear form the CPS clause that the return of the $100,000 was related to the condition of the unit.

It was held that the $100,000 holdback was clearly a security deposit, and the holdback was intended, on the face of the documents to secure obligations of the tenant with respect to the property. The respondents were unable to demonstrate any other viable reason for the holdback.

The arbitrator’s decision was quashed, and the disputes were to be reconsidered by the Director of the RTB or a delegate.

This case was digested by Deanna C. Froese of Harper Grey LLP.  If you would like to discuss this case further, please feel free to contact her directly at [email protected].