The deposit on a promise to lease in residential and commercial real estate
Although leasing is no longer an act reserved for real estate brokers, the fact remains that any licence holder carrying out real estate leasing brokerage transactions is subject to all the obligations arising from the Real Estate Brokerage Act. Therefore, by dealing with a broker for this type of transaction, the lessee or the lessor benefit from protection mechanisms provided by the Act.
It is common practice, when drafting a promise to lease, for a sum to be paid as a deposit on rent by the prospective lessee.
It is important to comply with the deposit clause included on the mandatory Promise to lease – Residential form. This clause is similar to the one found on the mandatory Promise to purchase form.
Therefore, under clause 4.3 of the Promise to lease – Residential, the lessee remits to the broker “as an instalment on the first month of the lease or, if such term exceeds one month, on the first month of the lease, the sum of ____________________ dollars ($_____), by cheque payable to the order of: ‘name of agency or broker trustee’ in trust.” The terms of this clause state that: “Following acceptance of this promise to lease, the cheque may be certified and shall be given to the TRUSTEE, who shall immediately deposit it into a trust account until the signing of the lease or until the LESSEE begins occupancy of the PREMISES, whichever occurs first, whereupon that sum shall be applied against the lease price. As soon as he has deposited this sum into his trust account, the TRUSTEE shall give the depositor a receipt.” It is therefore important that this sum be deposited in the agency’s or broker’s trust account in order to ensure compliance with this clause.
Following is a reminder of the steps to follow:
- Deposit the client’s deposit cheque in the trust account and file a copy of the cheque in your transaction record;
- Issue a receipt to the depositor and file a copy of the receipt in your transaction record;
- Have the lease signed and keep a written proof of either the signing of the lease, the taking of possession of the leased premises, or the lease itself. This written proof shall be signed by the lessee and filed in your transaction record.
Insofar as the agreement between the parties allows it, the agency or the broker acting on his own account may offset its or his remuneration. However, compensation can take place only when the lease is signed or when the lessee takes possession of the premises, whichever occurs first, and not upon acceptance of the promise to lease.
In addition, before receiving compensation, the agency or the broker shall obviously prepare the invoice and send it to the client (lessor).
Remember that, according to section 1904 of the Civil Code of Québec, where the lease of a dwelling is concerned, the lessor may only exact the first month’s rent. In this regard, read the article entitled Payment of rent: the first payment and terms of payment.
In commercial real estate, clauses regarding deposits in trust often require the payment of the first and last months’ rent as well as a security or guarantee deposit in the case of a mid- or long-term lease. The Inspection Department has noticed that some agencies or brokers remit the last month’s rent and the security deposit to the leasing owner (lessor), whereas the promise to lease or the brokerage contract to lease makes no mention of this. If the agency or the broker trustee, for any reason, wants to remit the last month’s rent or the security deposit to the lessor before the end of the lease, he must make sure he has a written authorization to do so from the lessee or indicate it in the lease. Otherwise, the agency or the broker shall keep the deposit in the trust account for as long as it’s stipulated in the promise to lease (can be 3 to 5 years).
Following is a reminder of the steps to follow:
- Deposit the client’s deposit cheque in the trust account;
- Issue a receipt for each deposit, in the depositor’s name, and identify what the deposit is for (e.g. 1st month’s rent, security deposit, etc.);
- File a copy of the signed lease or a written proof of either the signing of the lease or the taking of possession of the leased premises in the record. This written proof must be signed by the lessee.
Insofar as the agreement between the parties allows it, the agency or the broker acting on his own account may offset its or his remuneration. However, compensation will take place when the lease is signed or when the lessee takes possession of the premises, whichever occurs first, and not upon acceptance of the promise to lease.
Remember that the agency’s or the broker’s compensation may be paid only from the sum to which the lessor is entitled at that time from the trust account. In addition, before receiving compensation, the agency or the broker shall obviously prepare the invoice and send it to the client (lessor).
All real estate brokerage contracts, in whichever form, must clearly specify the way in which the agency or the broker acting on his own account will dispose of the sums entrusted to it or him in the course of the transaction, and related timelines. The agency or the broker trustee must place in its or his transaction record a written proof confirming that the withdrawal of money from the trust account, for the purpose of compensation or remittance to the lessor, was done in accordance with the promise to lease. Managing a deposit in the context of a lease requires as much vigilance as for a sale. By following these steps thoroughly, you will make sure that the mechanisms of managing deposits paid in connection with promises to lease are properly applied.