Does a Tenant Lose Rights If a Rental Unit Is Used For Commercial Purposes?

A Rental Unit Predominantly Used For Residential Purposes May Qualify As Residential Despite Commercial Activity and Despite a Rental Agreement Contained Within a Commercial Lease Document.

A Guide to Determining If Use Is Residential or Commercial and Whether the Residential Tenancies Act, 2006  Applies

Lease Document The use of a rented unit may come into dispute whereas access to various rights provided within the Residential Tenancies Act, 2006, S.O. 2006, Chapter 17 depend on whether the use of the rental unit is deemed residential or commercial. Such a determination may result in a great swing of significance and consequences for either the landlord or tenant.

The concern for whether a rented unit is deemed residential use or commercial use arises out of the exclusion for commercial use premises from the rights and protections provided by the Residential Tenancies Act, 2006.  The exemption from access to the rights and the protections within the Residential Tenancies Act, 2006 is found in section 5, paragraph (j) which states:

5  This Act does not apply with respect to,

(j) premises occupied for business or agricultural purposes with living accommodation attached if the occupancy for both purposes is under a single lease and the same person occupies the premises and the living accommodation;

Despite the section 5(j) statement that appears at first glance to exclude, "premises occupied for business ... with living accommodation attached if the occupancy for both purposes is under a single lease ...", there is more required when performing an analysis and making a final determination.  To assist the interpretation of section 5(j), a review of the relevant case law is also necessary.

Requires Thorough Analysis

Despite that upon a first glance reading of section 5(j) it may seem that where a tenanted premise is occupied for mixed business and residential purposes that such a premises is thereby excluded from rights and protections afforded by the Residential Tenancies Act, 2006, a deeper analysis is still required.  Jurisprudence from both the courts and the Landlord Tenant Board show that the assessment and final determination is based upon various factors in what is referred to as the predominate purpose test.

Recently the predominate purpose test was used for a determination as to whether the Residential Tenancies Act, 2006 applied to a tenancy in the matter of OnTheGoShipping Inc., and Kwok-Wai Leung, aka Harry Leung v. G. Khan Medicine Professional Corporation, 2020 ONSC 2789 wherein it was said:

[19]  Section 3 of the Residential Tenancies Act, 2006, S.O. 2006, c.17 (the RTA) provides that the Act "applies with respect to rental units in residential complexes, despite any other Act and despite any agreement or waiver to the contrary."  Section 2(1) of the RTA defines “rental unit” as "any living accommodation used or intended for use as rented residential premises".  The Court of Appeal in Matthews v. Algoma Timberlakes Corporation2010 ONCA 468 at para.23 noted that the broad definition of "rental unit" in the RTA is intentional, reflecting the fact that the legislation is remedial, and is designed to protect tenants from unlawful rent increases and evictions.

[20]  Section 168(2) of the RTA provides that the Landlord and Tenant Board (the LTB) "has exclusive jurisdiction to determine all applications under this Act and with respect to all matters in which jurisdiction is conferred on it by this Act."  However, s. 5(j) of the RTA provides that the RTA does not apply with respect to:

premises occupied for business or agricultural purposes with living accommodation attached if the occupancy for both purposes is under a single lease and the same person occupies the premises and the living accommodation...

[21]  In interpreting and applying s.5(j) of the RTA, this court has considered the predominant purpose of the occupation or use of the premises.  As Justice Cory explained in Hahn v. Kramer (1979), 1979 CanLII 2111 (ON SC), 23 O.R. (2d) 689 (Div.Ct.) at para.9:

It is to be noted that the exemption clause specifies that the premises be occupied for business purposes with living accommodation attached. To me, the wording of the section seems to indicate that the business purposes should predominate. The Act appears to specifically and carefully proceed in a manner which emphasizes the business use to be made of the combined premises so as to take them outside the definition of residential premises.

For more recent examples of this court considering the predominant purpose test in interpreting and applying s.5(j) of the RTA, see Toronto Community Housing v. Bryant Didier, 2018 ONSC 5158 at para.29; Tauro v. Yu, 2018 ONSC 7319 at paras.32-37; and Firm Capital Management v. Heather Tessier, 2019 ONSC 55 (Div.Ct.).

[22]  Substance, not form, governs when considering the true nature of a tenancy.  Both the Court of Appeal and the Divisional Court have held that s. 202 of the RTA applies when determining whether or not a unit is residential:  Matthews, at para.24, quoted with approval in Firm Capital, at para.34Section 202(1) provides:

In making findings on an application, the Board shall ascertain the real substance of all transactions and activities relating to a residential complex or a rental unit and the good faith of the participants and in doing so,

(a)  may disregard the outward form of a transaction or the separate corporate existence of participants; and

(b)  may have regard to the pattern of activities relating to the residential complex or the rental unit.

[23]  Parties cannot contract out of the RTA.  The fact that a commercial lease is used is a relevant circumstance, but it is not determinative:  Fiset v. Di Geso, [1998] O.J. No.3466 (Ont.(Gen.Div.)). Nor is a "whole agreement" clause, or a clause forbidding a non-commercial purpose, determinative, or any other clause for that matter:  Firm Capital, at para.8.  As the Court of Appeal in Matthews explained after noting that s.202 of the RTA applies when determining the nature of a tenancy:

Accordingly, a term in the lease providing that a site is not residential nor a rental unit will not have the effect of avoiding the application of the [RTA], provided that the premises otherwise fit within the statutory definition of a "rental unit".

[24]  All the circumstances must be considered to determine the predominant purpose or use of the tenancy.  This Court in Fiset, provided examples of circumstances which may be relevant.  The circumstances could include:

• The historical use of the premises.

• The intention of the parties.

• Whether the landlord knew the tenant was living at the premises.

• The zoning for the premises.

• The form and wording of the lease.

• Whether the landlord charged GST in relation to the rent.

• Whether the premises are a single unit or whether they were divided into distinct residential and commercial areas, such that the residential area is "attached" to the commercial area.

• Whether or not amenities one would expect in a residential tenancy, such as a stove and a refrigerator, are in the premises.

• The relative share of the premises devoted to commercial use as opposed to residential use.

• How business was conducted at the premises.  Was there a "walk-in" trade?   Did employees or workers attend the premises in relation to the conduct of the business?

• Whether there are any signs indicating a commercial use.

• The terms of the lease, such as its length, and any provisions for rent increase.

[25]  The respondent accepts that the party claiming to come within a s.5 exception to the application of the RTA bears the burden of proving on a balance of probabilities that the exception applies:  Fiset, at para.21.

As stated in paragraph 24 of the OntheGo case, there are many factors applicable to the predominate purpose test.  It is also presumed that such a list of factors may be without limitation and thus in certain circumstances further factors may be considered.  In summary, the factors listed in OntheGo were:

  • The historical use of the premises;
  • The intention of the parties;
  • The awareness of the landlord that the tenant was living at the premises;
  • The zoning for the premises;
  • The form and wording of the lease;
  • The charging of tax upon the rent;
  • The details as to whether the premises are a single unit or divided into distinct residential and commercial areas;
  • The details as to whether there are amenities usual to a residential tenancy such as a stove and refrigerator, are in the premises;
  • The relative share of the premises devoted to commercial use as opposed to residential use;
  • The details as to how business was conducted at the premises and whether there was a "walk-in" trade and whether employees or workers attend the premises;
  • The details as to whether there are any signs indicating a commercial use; and
  • The terms of the lease, such as its length, and any provisions for rent increase. 

Also as indicated in the OntheGo case, a combined reading of section 5(j) and section 202 of the Residential Tenancies Act, 2006 is necessary when assessing the nature and use of premises.  This was clearly stated in the case of R.K. v. # O L and G D ITST-97776-18 (Re), 2020 CanLII 31408 at paragraph 15 and shown in the analysis at paragraphs 16 to 31 wherein it was said:

16.  The Landlords argue that the Board should consider the zoning of the property and that there is a commercial lease signed between the parties which represents the entire contractual agreement between the parties. The Tenant argues that the Board must consider the nature of the use and the intention of the parties at the time the lease was entered into, regardless of the use of a commercial lease form.

17.  Although the lease was not presented, it was undisputed that the lease was titled commercial. This is not in itself determinative of commercial use and does not entitle the Landlords to contract out of their rights and obligations if the nature of the tenancy is residential. Further, subsection 3(4) of the Act states that in the event of any conflict with another Act the Residential Tenancies Act, 2006 applies, with the exception of the Human Rights Code.

18.  The fact that a landlord and a tenant sign a commercial lease does not change the true nature of a tenancy. I find that the use of a commercial lease did not reflect the actual terms agreed upon by the parties at the commencement of the tenancy, specifically that the Tenants would reside in the unit.

19.  The Landlord did not dispute the Tenant’s evidence that the former building owners signed the lease with the Tenant and advised the Tenant that residential use was permitted in the building and further that when inspections were conducted, they would provide notice and assist in removing his belongings to ensure that the residential tenancy would not be at risk. GD did not dispute that this continued with Gino after the Landlords purchased the building, he only testified that he did not give Gino permission to do so.

20.  In addition, the Landlords did not challenge the Tenant’s oral evidence that the tenancy were advertised in NOW Magazine for residential occupation.

21.  The Tenant is not a not business entity and there was no contradiction of the Tenant’s evidence that he does not operate ae businesses out of the unit. There was no evidence that the rental unit is operated as a place of business nor dos the Tenant have any business signage on the residential complex that supports commercial use.

22.  I considered the Landlords’ evidence that the building is zoned commercial. However, municipal by-laws and zoning cannot be used to determine the contractual relationship between a landlord and a tenant. The fact that the building is zoned commercial and that residential occupation may be a violation of the building code is irrelevant as to the application of the Act.

23.  I have also considered the evidence that the lease agreement is on a commercial lease form. However, section 202 of the Act requires the Board to ascertain the real substance of a transaction. I find the real substance of the tenancy is for residential occupation and not commercial use as the lease agreement purports to set out. The intentions of the parties when the tenancy started was for all intended purposes for residential occupation.

24.  The predominant purpose test as established in the case of Hahn v. Kramer 1979 CanLII 2111 (ON SC) (‘Hahn’) applies to this case. In Hahn the Court held as follows:

The exemption clause specifies that the premises be occupied for business purposes with living accommodation attached. To me, the wording of the section seems to indicate that the business purposes should predominate. The Act appears to specifically and carefully proceed in a manner which emphasizes the business use to be made of the combined premises so as to take them outside the definition of residential purposes.

25.  The test in Hahn makes it clear that for the tenancy to fall outside of the parameters of the Act, the business purpose of the premise must be the primary or predominant use of the space. Therefore, in weighing the two uses of the space, the commercial use of the space would outweigh the residential use.

26.  The undisputed evidence before the Board is that the rental unit is used solely for residential occupation. The photos of the unit show no business or commercial space open to the public. The Landlords did not provide evidence that the Tenant is operating a business out of the rental unit.

27.  The Divisional Court dealt with very similar tenancies in the Sterling Studio Lofts Incorporated v. Clayton Stel, 2019 ONSC 91 (CanLII) case (Sterling). In Sterling the landlords argued: the Board was required to apply principles of contract interpretation in assessing the lease agreement; that at the time of signing the lease, the parties had turned their minds to a commercial tenancy and that it was unreasonable and incorrect for the Member to have found that the intention of the parties was to enter into a residential tenancy agreement despite the written commercial lease agreement; that it was an error of law to allow the surrounding circumstances of the tenancy to overwhelm the written contract; and the tenants could not unilaterally change the nature of the lease that they voluntarily signed. Finally, the landlords also argued that it was an error to apply the predominant purpose test from section 5(j) of the Act.

28.  In Sterling the Divisional Court disagreed with the landlord and held that:

“In accordance with s. 202, the terms of the agreement signed by the parties are not determinative with respect to the application of the RTA and, in our view, the LTB was entitled to find upon consideration of all the evidence that the true nature of the agreement was for use as a rented residential premise.  To hold otherwise would result in a triumph of form over substance.”

29.  Further, in Sterling the Divisional Court relied on the Court of Appeal case of Matthews v. Algoma Timberlakes Corporation, 2010 ONCA 468 (CanLII), “the Court of Appeal stated that s. 202 is to be applied when determining whether a unit is intended for use as a residential premises.  At paragraph 24 the Court states:

Definition of a “Rental Unit” in s. 2(1) contained two components.  First, the unit must be “living accommodation”. Second, it must be used or intended for use as “rented residential premises”.  As I have indicated, s. 3(1) provides that the Act applies despite any term in the Lease to the contrary and s. 4 provides that “a provision in a tenancy agreement that is inconsistent with this Act or the regulations is void”. Section 202 requires the Board to “ascertain the real substance of the activity” relating to the rental unit and to do so disregarding “the outward form of [the] transaction”. Accordingly, a term in the Lease providing that a site is not residential nor a rental unit will not have the effect of avoiding the application of the Act, provided that the premises otherwise fit within the statutory definition of a “rental unit”.

30.  In consideration of the findings of the Divisional Court and the Court of Appeal, as noted above, I find that the form of the lease cannot override the true substance of the agreement of the parties and resulting use of the premises in the matter before me; the agreement was for use as a rented residential premises.

31.  On the basis of the evidence before the Board, on the balance of probabilities, I find that subsection 5(j) of the Act does not apply in this case, the tenancy is not exempt from the Act. The pre-dominate use is residential.

Accordingly, per the OntheGo and R.K. decisions, there is much more to determining whether a tenancy was commercial or residential than just a review of whether the "premises [are] occupied for business or agricultural purposes with living accommodation attached if the occupancy for both purposes is under a single lease and the same person occupies the premises and the living accommodation" whereas the predominant purpose test factors require review and analysis.

Summary Comment

Determining whether a tenancy is a commercial or residential arrangement requires a very careful and thorough review.  Various factors beyond simply whether the lease agreement was titled "commercial", among other factors, must be considered within what is referred to in law as the 'predominant purpose test'.


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