For Commercial Landlords: How to Deal with Tenants in Arrears
Bailiffs are often approached by commercial landlords who have a tenant in arrears, with the request to “lock them out”.
Often, the landlord’s intent is to get hold of the goods located inside the leased premises either as ransom to get the rent arrears paid, or as assets that can be sold to recover the debt.
When landlords are considering a “lock-out” action, it is important that they are first made aware of the two key remedies that are available: distress and termination.
Aside from their very different meanings and applications, it is vital that they also understand that these two remedies are inconsistent in law, meaning they cannot be conducted simultaneously. It’s one or the other, and each come with benefits and drawbacks.
Distress (also known as Distraint) is the right of a landlord to seize and hold inventory, equipment, chattels, and goods, as security sufficient to recover unpaid rent arrears plus costs incurred. (Chattels is a very old term that refers to something that is owned, and which can be moved. A sofa might be a chattel, but a water heater that is bolted to the floor and attached to the plumbing system, is not.)
If, after a reasonable length of time has been allowed for the tenant to remedy the default – in other words, pay the back rent that is owed – and the tenant has not done so, the goods can be liquidated, and the proceeds applied to the delinquent account. However, a key component of distress is that the tenant’s occupancy and business must remain uninterrupted.
There are specific rules around how and when a landlord or a bailiff can enter a property to seize these goods, and it is vital that these rules be followed, because a landlord can easily become liable for costs and damages if the distress is carried out incorrectly and unlawfully. Locking a tenant out of the property to seize the goods is one example of unlawful distress.
In essence, termination does actually mean “lock the tenants out.” An act of termination gives the landlord the right to re-enter the property, change the locks, and retake control of the premises. However, even when this happens, the tenant must be permitted to remove their goods, within a reasonable period. The landlord may then pursue their arrears, costs, and other losses (due to early termination) through the courts.
Don’t Get Distress and Termination Mixed Up
Recent court precedent takes the position that when a landlord, while intending to distress, changes the locks (thus preventing the tenant access to the premises), the landlord is deemed to have terminated the lease. By doing this, in addition to forfeiting the goods, a landlord may also be liable to the tenant for costs, loss of business and punitive damages.
Do I Need a Court Order to Apply these Remedies?
In short, a court order is NOT required. These remedies, as applicable through Ontario’s Commercial Tenancies Act R.S.O. 1990 (CTA), do not require the landlord to obtain a court order or tribunal attendance, since both are considered a self-help remedy. On the surface, these remedies appear to be very powerful solutions to a landlord’s problem, but there are specific, and problematic rules of the CTA that present numerous pitfalls for those who lack experienced in this area. So while a court order is not required, it is highly recommended that a landlord seek counsel from a legal expert in Commercial Tenancy law, such as a lawyer or a qualified bailiff.
The Super Priority Rule
One significant area of concern in actions of distress and termination is the “super priority” rule that places various government and security liens ahead of the landlord’s interest. In essence, the Government is always the primary creditor, with the right to pursue and recover unpaid debts such as outstanding HST, before any other parties, including the landlord can take their share.
Contravening this one regulation could leave the landlord liable and responsible for paying some or all of the debtor/ tenant’s unpaid government liens. Other areas of concern include third party goods, bankrupt tenants, contents and timing of notices and valuation of goods to name a few.
Strategic and proper use of the landlord’s right to distress or termination is an efficient and cost-effective method of commercial rent recovery, as it means no more delay tactics. But the choice of which path to take, and the steps along that path must be clearly understood before any action is taken.
At Napier Bailiffs Ltd. we urge our clients to act promptly when a tenant first goes into arrears. Don’t let an arrears situation extend into months, as this effectively digs a hole of debt so large that the tenant cannot climb out. When circumstances allow, we utilize our professional mediation skills to help the parties come to an amicable resolution producing a win/win for the parties and keeping business relationships intact.
This information is provided as a brief overview of only a few excerpts of the Commercial Tenancies Act to assist commercial landlords in making the choice between these two remedies. We recommend that a landlord speak with a qualified lawyer or bailiff about their specific situation before proceeding.
Why Hire a Bailiff?
The benefits of hiring a bailiff are:
a) professional management of your file and clear guidance as to distress and termination options
b) avoidance of personal contact with the tenant
c) cost effective recovery: distress cases generally do not cost the landlord; the costs are paid directly by the tenant or recovered from proceeds
WHAT IS AN ONTARIO BAILIFF?
There are two types of bailiffs in Ontario
- Provincial Correctional Service Bailiffs who escort prisoners, and
- private sector bailiffs.
Napier Bailiffs Ltd. is a private corporate Civil Enforcement Agency appointed by the Ontario Government to act on behalf of business, individuals, or municipalities to seize or repossess property and Commercial Landlords to evict Tenants. Pursuant to regulations within the Personal Property Security Act, Repair Storage Lien Act, Commercial Tenancies Act and Municipal Tax Act.
DISCLAIMER: We are not a law firm, the information provided is not intended to substitute for legal advice. Always seek appropriate legal counsel for your unique circumstances.
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