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On Money SE there was a recent question "Rent cheque was stolen from landlord - am I obligated to pay again?". The situation: Tenant pays rent by handing a cheque to the landlord, the landlord is robbed before the cheque is deposited. Consensus on money.stackexchange.com is that the tenant should tell their bank to cancel the cheque, and hand over another cheque.

However, what happens if the thief manages to cash in the checque before it is stopped? The money is gone. Clearly someone is going to lose out, either landlord or tenant. But whose money is it? Does the tenant have to pay the rent again, paying twice, or does the landlord lose his rental income for the month?

The question was asked in Canada, but other jurisdictions would be welcome as well.

  • In the case where the check hasn't been presented for payment, what's the consensus at Personal Finance & Money on liability for the check cancellation charges? If I were the tenant I would deduct them from the replacement check. – phoog May 27 '18 at 15:19
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    I would think that a bank paying out cash on a cheque written out to a specific (and different) person is not doing its job and have to carry the loss. My bank refuses to pay cash to me, even if I present ID. It is deposited in my account and they can spend up to three weeks "clearing" the check. During this "clearing" period, the bank reserves the right to charge me back if the issuer cancels the check. – Free Radical May 27 '18 at 16:06
  • @phoog I don't think there was expressed consensus. Presumably the cancellation charges are not that much money that people worried too much, compared to one months rent. – gnasher729 May 27 '18 at 17:28
  • @FreeRadical indeed. As I understand it, banks typically swallow such losses because the cost of validating signatures on processed checks is higher than the losses on bad checks. – phoog May 27 '18 at 17:45
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In Canada, the bank loses the money. They are the party that is ultimately responsible for paying only the person the cheque ordered to be paid. Canadian law is actually very strict on this, the bank would would be liable even if the landlord fraudulently gave the cheque to his brother to cash.

The Supreme Court of Canada has made multiple decisions confirming the banks liability in cases like this, most recently in Teva Canada Ltd. v. TD Canada Trust:

... The question at the heart of this case is which innocent party — T or the collecting banks — should bear the loss resulting from fraud? The Bills of Exchange Act should be interpreted in such a way that drawers and banks are exposed to the risks created by the fraudulent use of the system, but the banks are the more significant beneficiaries of the bills of exchange system. It is therefore appropriate, in certain circumstances, for them to bear risks and losses associated with that system. To allocate losses to the drawer for having failed to identify and detect the fraud is inconsistent with the strict liability tort of conversion, which makes any negligence on the part of the drawer or the banks in preventing the fraud irrelevant. The Court has, in multiple decisions, provided a two‑step framework which outlines what a bank must prove to demonstrate that a payee is fictitious or non‑existing. ...

Note that tenant would still owe the landlord rent. If the bank paid someone other than landlord then cheque wasn't properly honoured and so no longer satisfies the debt. So in the end the landlord would get paid, the tenant would only pay for the rent once, and the only bank would lose. That is, assuming the bank couldn't recover the money from the person who fraudulently cashed the cheque.

(Note that banks in Canada make it very difficult for their customers to obtain compensation when the bank screws up, so what I've written above is only what should happen according to the law in theory. In practice the tenant will have to spend months going through the bank's arduous dispute resolution process, and only after that fails be able to go court to recover the money. Most tenants will give up before this and so will end up having to pay the rent twice.)

  • What about bearer cheques? – SJuan76 May 27 '18 at 21:52

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