A COMMERCIAL LANDLORD’S WEAPONS
December 12, 2008
Commercial landlords better start paying attention. Amidst the consumer spending slump and increased business bankruptcies (up 17.1% in British Columbia from October 2007 to October 2008¹), the wave of retail store and business closures in the United States may soon be making its way up to Canada. The current economic situation could mean changes to the landscape of malls, office complexes and city streets all of which may see increased vacancies. Whether it’s a large anchor store or a small local tenant, landlords in today’s economic climate need to be prepared to deal with an increased number of their tenants defaulting on their lease commitments.
Most landlords are grateful to learn that they have an arsenal of remedies in the face of such defaults. Which remedy the landlord chooses to employ will depend on several legal and business issues. Typically, a landlord will consider the likelihood of collection, the opportunities for re-letting and the impact of a tenant’s breach on other tenants.
Default presents one of the occasions where a landlord must haul out and read the lease in question. What are the notice requirements to be given to the tenant before a termination of the lease could take place? How will service of a notice be performed? Is there a guarantor or sub-tenant who must also be served? Careful attention must be given to the terms of the lease in order to preserve the landlord’s remedies.
Several remedies are usually available. The range of remedies were concisely set out in the Highways Properties judgment pronounced by the Supreme Court of Canada in 1971. The court discussed four mutually exclusive options:
do nothing except sue for rent or damages and leave the lease in place;
terminate the lease and keep the right to sue for rent and for damages up to the date of termination;
notify the tenant that the premises will be re-let on the tenant’s account and take possession on those grounds; or
terminate the lease while notifying the tenant that damages will be claimed for the loss of the present value of unpaid future rent for the unexpired term of the lease less the actual rental value for that period.
Aside from the remedies noted above, a landlord also has the right to seize a tenant’s goods by way of a distress. This type of seizure is dealt with, in part, by the Rent Distress Act. It is worth looking at all of the above remedies individually.
Before distraint, consider whether the value of the tenant’s goods on the premises is sufficient to warrant the cost of the distress process. Although it is possible to use self-help, most landlords will employ a commercial bailiff to conduct the seizure. These bailiffs know their business and will ensure that the proper notices are given.
Prior to the actual seizure, the landlord or bailiff will usually conduct a search of the personal property registry to confirm whether there is any security registered against the tenant’s goods by other creditors. A distraint will take priority over most, but not all, types of security. Talk to your lawyer first before proceeding with a distraint.
Once the bailiff has seized the tenant’s goods, he must wait five days after notice of the distress to permit the tenant an opportunity to pay the arrears. During that time, the bailiff will usually conduct an inventory and appraisal of the goods. The bailiff can remove the goods from the premises although, in many cases, it will be better to have the goods remain where they are based on an undertaking given by the tenant not to remove them. Leaving the goods on the premises helps reduce costs as the bailiff will otherwise have to incur transport and storage fees.
The bailiff can sell the seized goods if the tenant fails to pay the arrears and the bailiff’s costs within the five-day period. The sale proceeds are paid to the landlord after, naturally, deduction of the bailiff’s costs. It is rare that a surplus is realized from the sale of goods but should this occur, the monies will be refunded back to the tenant. A shortfall allows the landlord to take further steps against the tenant.
Keep in mind that the lease remains in force while the distraint is ongoing. It is not possible for a landlord to terminate a lease before distraining against a tenant’s goods. Generally speaking, the lease remains in full force and effect while the distraint is ongoing.
Insisting on Performance of the Lease
If a landlord chooses to keep the lease in place, it may sue monthly for rent as it becomes due. Otherwise, a landlord must wait until the end of the lease before commencing a court action for damages. It is hard to imagine circumstances where the latter would make sense unless the tenant is of means and the dispute does not really concern an ability to pay rent. It is not possible for a landlord to commence an action for prospective damages. This remedy is rather time-consuming and it usually involves a tenant which does not have a strong financial position.
Our Court of Appeal in British Columbia has decided that there is no duty to mitigate on the part of a landlord who has chosen to preserve a lease and sue for rent. The Transco Mills Ltd. case determined that a landlord claiming rent and not damages, has no duty to mitigate and did not have to take rent from a sub-lessee which was occupying the leased premises without the landlord’s authority. Nothing precludes a landlord from trying to mitigate and a smart landlord will do so.
Re–Letting on the Account of the Tenant
If the lease provides for this remedy, a landlord can re-let on the tenant’s account. Notice is served upon the defaulting tenant that the landlord is re-entering the premises for this purpose. The landlord must strictly observe the lease’s provisions in this regard. Usually, this remedy is invoked when the tenant has skipped.
If a replacement tenant can be found, the rent collected must be credited towards the amount due from the original tenant. While the new tenant is in place, the landlord can continue to review the situation and may maintain an action to claim arrears from the former tenant. At some point, it may be better to terminate the lease and commence an action for the loss of the balance of the lease term, as noted below. It is very important not to re-let the premises beyond the term of the original lease. Such a step might be viewed as a termination of the original lease.
Unfortunately, any surplus obtained from re-letting the premises must be credited to the original tenant. In such circumstances, most landlords would simply terminate the lease and enter into a new lease with the replacement tenant at the agreed higher rental in order that all of that rent can then go to the landlord. Re-letting on the tenant’s account is somewhat cumbersome and it is not often used by landlords. It does have the benefit of preserving any guarantee or indemnity agreement which may be in place under the lease.
Terminating the Lease
This remedy is frequently used by landlords. In most cases, the remedy permits a court action for prospective damages when a termination has occurred. Once again, it is very important to carefully review the lease before taking any steps to terminate the contract.
Care must be given to make sure that the tenant is actually in default and that any notice provisions under the lease are satisfied. Further, it is essential that the lease have a clause which permits the landlord to terminate and re-enter the premises. If there is no re-entry clause, the landlord must first go to court to obtain an order for re-entry. Consideration should also be given to whether a termination of the lease could have the effect of cancelling the obligations of any guarantors or indemnifiers under the contract.
Usually, termination is effected by giving a notice of termination and changing the locks on the premises. In addition, although the case authorities are mixed on the point, a landlord that intends to pursue a claim for the loss of the balance of the term of the lease should give notice of its intention before or at the time of the termination.
Keep in mind that a landlord has a duty to try to mitigate its loss when terminating a lease. As a result, a landlord or its leasing agent should keep a record of all efforts to re-let the premises after termination. A record should also be kept of any money spent to advertise or repair the premises in order to attract a new tenant. Those monies may well be claimed as part of the damages against the former tenant.
Obtaining Possession of the Leased Premises under the Commercial Tenancy Act
As noted earlier, a landlord must apply to the court for an order to re-enter the leased premises if there is no automatic right of re-entry clause in the lease. The Commercial Tenancy Act details how to get such an order. Sections 18 to 28 of the Act set out the procedures which must be strictly followed to obtain the Order and retake possession of the premises. The Act provides two options in terms of how the landlord can proceed.
Keep in mind that a tenant may apply to the court for relief against forfeiture of the lease whether the landlord has proceeded to terminate the lease under a right of re-entry clause or used the procedures set out in the Commercial Tenancy Act. The courts will usually reinstate a lease if it is the first time that the tenant has applied for this kind of relief and the tenant’s default can be immediately cured. For example, if the tenant has simply failed to make a rent payment for the first time, the court will likely reinstate the lease based on an application for relief from forfeiture. In granting the relief, the court will insist that the tenant immediately pay the arrears. The court is less likely to grant relief from forfeiture if the tenant has previously sought such relief or if it is unable to immediately cure the breach in question.
Although the remedies available to a commercial landlord in the face of a defaulting tenant are numerous, the implementation of those remedies can be complicated and subject to rather technical procedural requirements. Experienced counsel can be of great assistance in enforcing the lease or choosing the appropriate remedy to deal with a defaulting tenant.
¹ Office of the Superintendent of Bankruptcy in Canada, “Insolvency Statistics in Canada – Online”, (December 8, 2008).