When entering into a rental arrangement with a family member or friend, it might seem unnecessary to draft a formal written agreement. It might seem that an oral agreement is good enough. However, to protect the landlord’s interest, it is important to document the tenancy and to specify the terms under which the tenant may occupy the property. Without an agreement, the landlord’s equity interest in the property could be at risk.

Take, for example, the following situation: a mother enters into an oral rental agreement with her son and daughter-in-law. The son and daughter-in-law live in a house owned by the mother. For rent, the son and daughter-in-law agree to pay property taxes and utilities for the house during the time they live there. They also agree to pay for any house repairs and renovations necessary during the rental period.

Unfortunately, the son and his wife separate and the son moves out of the home. His mother then decides to sell her house. However, the daughter-in-law refuses to leave the residence. The daughter-in-law denies the tenancy arrangement and claims that the work she completed on the property gives her an “ownership interest” in the house. On this basis she says that she is entitled to at least a portion of the sale proceeds of the house.

Is the daughter-in-law right? Can this actually happen?

The answer is yes. Without a written agreement, a homeowner exposes herself to these types of “constructive trust” claims. Courts have imposed “constructive trusts” in cases where an individual without title to a property has made contributions to its upkeep: for example, building a shed, landscaping the backyard, or replacing old flooring. In certain cases, a court may find that these improvements give rise to an interest in the property, in favour of the non-owner of the property, that reflect the contributions he or she has made. By contrast, where a written rental agreement is in place, the court is more likely to recognize the tenancy relationship and is therefore less likely to find that any work completed by the tenant gives rise to a constructive trust.

The lesson is that all landlords – regardless of the familial or other relationship with their tenants – should properly document the specifics of rental arrangements. They should ensure that the parties enter into a written agreement that expressly spells out the intentions of both the landlord and tenant. 

(Julie Grajales is a Student-at-Law at Sotos LLP)