To maintain a healthy relationship, the tenant and landlord will often work together to resolve issues such as a monetary default. After all, it is in the interest of the landlord for the tenant’s business to thrive, as it reduces the time, energy and cost associated with exercising contractual or statutory rights and finding a new tenant. However, if the relationship is beyond the point of recovery and all attempts at reaching a resolution have been exhausted, the landlord will have to make some difficult decisions. In this first of two articles on Commercial Lease Rights and Remedies we will discuss some options available to a landlord in the event of a tenant’s monetary default, along with some potential risks.
Terminating the Lease
Upon failure of a tenant to pay rent, the landlord has the option to terminate the lease if the rent remains overdue by more than 15 days (unless otherwise specified by the agreement). A termination becomes effective with a landlord delivering written notice of termination to the tenant and changing the locks to the subject property (normally done after business hours to avoid confrontation). Both must be executed in order for the termination to be considered sufficient and valid.
The termination can also be done with an application to the Superior Court of Justice under Part III of the Commercial Tenancies Act for a ‘Writ of Possession’. While there are costs associated with a court proceeding, there is an added element of validity to the termination and it eliminates the requirement for a physical re-entry which is typically done with the use of a bailiff.
When terminating a lease a landlord must not act in a way that may risk a waiving of their right to termination. For example, the landlord should not accept any rent after the provided ‘cure period’. Also, the landlord should not accept a surrender of the lease from a tenant and should make clear that they are terminating the lease rather than accepting a surrender. If a surrender of the lease is accepted, a claim to damages made by the landlord may be diminished.
Damages to the landlord may include rent for the remainder of the lease term, future rents, and any losses relating to the tenant’s default such as costs associated with re-entry (ie: demolishing and removing tenant’s fixtures). If seeking damages, the landlord must be able to show that they have been proactive in mitigating their damages by actively seeking a replacement tenant.
In the alternative, if the landlord does not wish to terminate the lease they may consider seizing and selling the tenant’s goods to satisfy rental arrears. This is known as the ‘distress remedy’ and is only available if there is a monetary default and the lease remains in good standing. With this remedy, the landlord is not required to give advance notice of seizing the tenant’s property unless otherwise specified in the lease. However, landlords are required to inform the tenant of the distress and the amount of funds required to cure the default before proceeding with the sale of seized property. There is also a requirement to hold the tenant’s property for five days prior to sale to allow time for the tenant to cure the rental arrears. If no payment is made by the tenant, following two independent appraisals of the seized property, the landlord may proceed with the sale but only to satisfy the arrears. Any excess funds made by the sale must be returned to the tenant.
A landlord must exercise caution if proceeding with the distress option as it may lead to selling of seized property that may be subject to security claims. Such security claims which typically outrank the landlord’s right to distress may fall under the Personal Property Security Act (PPSA) or those of the Canada Revenue Agency. The property may also be leased or under consignment (eg: jewelry shops). Further, what qualifies as eligible property for sale may not always be clear. A landlord may only sell chattels belonging to the tenant and not any fixtures as part of a leasehold improvement.
Editor’s Note: This article is a contribution to BIA Buzz by Petrovic Law. It is for informational purposes only and is not intended as legal advice. To better understand the options available to you as a landlord after a tenant defaults, please contact a legal professional. For more information please visit: www.petroviclaw.ca or call, 647-678-8844.