Commercial landlords often ask whether they are allowed to sell their tenants’ assets in order to recover some of the monies owed to them by the tenant. This question relates to a commercial landlord’s right to “distrain” against the tenant’s assets and the answer is never straightforward, as is usually the case in legal disputes.
The landlord’s right to distrain, or in plain terms, to keep a tenant’s assets as partial payment of rental arrears, is a legal right that carries with it ramifications and penalties if exercised improperly.
The landlord’s right to distrain against the tenant’s assets arises under the terms of the lease and the Commercial Tenancies Act1. Quite often, commercial landlords attempt to exercise this right without following the proper steps. Doing so may give rise to the ability of the tenant to seek damages against the landlord for wrongful conversion of the tenant’s assets. For this reason, it is helpful to briefly outline the basic steps involved in exercising this right.
1 – Notice
To properly distrain the landlord must first provide notice. Notice may be sent to the tenant’s last known address and/or posted in a conspicuous location at the premises. A minimum of 5 days notice of the landlord’s intention to exercise its right to distrain must be provided. Failure of the tenant to rectify the breach of the lease gives rise to the landlord’s right to sell the assets.
It is imperative that the notice does not indicate that the lease has been terminated. This is because where a lease has been terminated, the tenant may argue that the landlord has no right of distress under the terminated lease.
Section 55 of the Commercial Tenancies Act, also cautions that:
55. (1) A distrainor who takes an excessive distress, or takes a distress wrongfully, is liable in damages to the owner of the goods or chattels distrained.
(2) Where a distress and sale are made for rent pretended to be in arrear and due when, in truth, no rent is in arrear or due to the person distraining, or to the person in whose name or right such distress is taken, the owner of the goods or chattels distrained and sold, the owner’s executors or administrators are entitled, by action to be brought against the person so distraining, to recover full satisfaction for the damage sustained by the distress and sale.
This means a landlord is not entitled to distrain against assets when no rental amounts are owed, nor is a landlord entitled to retain assets whose value far exceeds the value of the rental amounts owing. However, often the terms of the lease may modify the landlord’s right to distrain by providing that the landlord could rely on the lease agreement for its right to distrain in order to collect any rental arrears owed.
Depending on the circumstance, clauses such as these may add strength to a landlord’s claim that it has a right to distrain against the tenant’s assets regardless of their value.
2 – Lien Searches
The landlord is only entitled to retain those assets that are owned by the tenant. Further, if there is a lien registered against the assets, the landlord must ensure that the lien holder is notified of the impending sale of the asset. The lienholder is entitled to be paid out of the proceeds of sale or the lien holder may agree to assign their lien to the new owner of the asset.
To ensure that the assets are owned by the tenant and that there are no liens registered against the assets, the landlord must conduct all necessary searches including those searches under the Personal Property Security Act and the Bulk Sales Act.
3 – Appraisal
At the expiration of the 5 day period, the landlord must have the tenant’s assets appraised by a minimum of two appraisers. The appraisers must promise to appraise the items fairly according to their best understanding of the assets’ value. The promise must be in the form of a sworn declaration. Again, before selling any equipment left at the premises, it will be necessary to ensure that any liens registered against the equipment are paid out.
4 – Sale
Once these steps have been followed, the landlord may lawfully sell the tenants assets. The sale must be designed with a view toward obtaining the best price possible. Any surplus remaining following the sale must be held in trust for the benefit of the tenant and paid to the tenant upon its demand2.
These four steps are the basic ones involved in seizing and selling a tenant’s assets. However, the process is riddled with complications along the way. If you are a commercial landlord and your rent has not been paid for some time, before locking your tenant out and attempting to navigate these steps on your own, it is best to consult your lawyer.
1. R.S.O. 1990, c. L.7 [hereinafter the “CTA”]. 2. Section 53 of the CTA.