LANDLORD AS CREDITOR:
What Remedies are Available?
By: Timothy R. Dunn and Glen O. Lewis
Minden Gross LLP
(As presented at the Ontario Bar
Association's Six Minute Debtor/Creditor
Lawyer held on March 31, 2005)
Introduction
In this brief paper, we have been asked to
provide an overview of the traditional rights
and remedies available to a commercial landlord
when faced with indebtedness owing by a tenant.
This topic is extremely broad and can cover a
wide variety of issues. However, the analysis
in this paper will be limited to a discussion
of:
·
the relevant considerations to be taken into
account by a landlord in weighing its options
upon a tenant’s default;
·
the types of default; and
·
the landlord’s traditional remedies;
Relevant
Considerations
At the risk of stating the obvious, the primary
sources of a landlord’s right to invoke
enforcement remedies and the rules and
regulations governing the process of enforcement
are set out in either of the Commercial
Tenancies Act (“Act”), the Short
Form Of Leases Act (“Short Forms”)
(the Act and Short Forms are sometimes
collectively referred to herein as “Legislation”),
and the lease agreement.
Most of the enforcement provisions and remedies
available to the landlord are set out in the
typical commercial lease agreement. By way of
an example, the “default and remedy” provisions
in the standard commercial lease attempt to
articulate a number of remedies to which the
landlord is entitled at law, and supplement
these remedies by reducing or eliminating notice
periods provided by statute, as well as
providing for further remedies. Indeed, under
subsection 18(1) of the Act, a landlord may not
terminate a lease for non payment of rent until
the rent is in arrears for fifteen (15) days or
more. Typically, landlords are not prepared to
wait for fifteen (15) days to terminate the
lease of a troublesome tenant and, therefore,
the time period is often abridged by contract.
In the main, the remedies stipulated in the
lease agreement will govern; however, there are
situations where the Legislation will trump the
provisions of the lease, so an advisor to a
commercial landlord must exercise caution and
always keep the Legislation in mind.
Prior to embarking on the course dictated by the
exercise of any given remedy or remedies, the
landlord and its advisor should consider the
potential risks and benefits from a practical
point of view. For example, if the defaulting
tenant occupies premises in a project with a
number of other vacancies, the landlord may
prefer not to exercise a legal right which will
lead to yet another vacancy, unless the landlord
has a tenant waiting in the wings to occupy the
premises.
Types of
Default
(a) Monetary Default
The most obvious type of default under a lease
is the failure of a tenant to pay rent when the
same falls due.
Beyond basic rent, in retail leases, tenants are
often required to pay a percentage rent based on
a percentage of the sales from the leased
premises. Additionally, commercial leases
generally provide for a number of other items
that a tenant is required to pay to a landlord
as “additional rent”, including, but not limited
to:
(a)
a
proportionate share of the landlord’s costs of
operating the project in which the leased
premises are located (for example, capital tax,
large corporations’ tax, management and
administration fees, etc.);
(b)
a share of realty taxes payable in respect of
the project; and
(c)
a share of utility charges incurred in respect
of the project.
The landlord’s remedies for default in the
payment of rent are better than remedies for
default in payment of other amounts. For
example:
(a)
distress
is a remedy available only for non-payment of
rent;
(b) termination of the lease can generally be more
easily achieved for non-payment of rent than
other monetary defaults; for one reason there
are invariably less onerous notice requirements
in leases and under statutes for non-payment of
rent than non-payment of other amounts (compare
for example subsections 18(1) and 19(2)
respectively of the Act); and
(c) on
bankruptcy of a tenant, a landlord has the right
to accelerate “rent” and has a preferred claim
for “accelerated rents”.
To optimize
the landlord’s remedies on default in payment of
amounts which would not otherwise be “rent”, it
is common practice for the lease to contain a
contractual provision to the effect that all
amounts payable by the tenant under the lease,
whether to the landlord or otherwise, are deemed
to be “rent”. Leases generally refer to such
amounts collectively as “additional rent”.
(b)
Non-Monetary Default
All other breaches of obligations that do not
directly require the payment of money represent
events of non-monetary default. Typical
examples of non-monetary defaults include the
breach by a tenant of its obligation to maintain
the premises in “first-class condition” or to
make certain specified repairs.
Given the focus of today’s programme, this paper
shall focus on monetary defaults and the
remedies available to a landlord upon the
occurrence of same.
Remedies
(a) Generally
As was originally articulated in the leading
case of Highway Properties v. Kelly Douglas,
[1971] S.C.R. 562, a landlord has four (4)
exclusive options upon a tenant’s default:
1.
do
nothing to alter or terminate the lease but
insist on performance of the lease and sue for
rent or damages on the basis that the lease
remains in force ;
2.
terminate
the lease and sue for rent or damages
outstanding or damages incurred to the date of
termination; and
3.
on proper
notice to the tenant, re-enter to re-let the
premises on the tenant’s account;
4.
on proper
notice to the tenant, terminate the lease and
claim damages for the breach of the lease,
including for future losses;
Any time a landlord makes the decision to
forfeit the lease and/or re-enter the leased
premises, it should ensure that any notice
required pursuant to the lease or the Act is
validly prepared and served and that the
relevant time period has passed. Particular
attention should be paid to subsections 18(1)
“Re-entry on Non-payment of Rent” and subsection
19(2) - Re-entry on account of Other Defaults.
A landlord must consider with care the question
of whether or not to terminate the lease and sue
for future damages or not to terminate the lease
and insist on the tenant’s performance of its
obligations. The landlord must also make it
clear by its conduct as to which one of its
remedies it is pursuing because there may be
different ramifications of each, such as the
duty to mitigate upon termination.
(b) Termination by Landlord
As mentioned earlier, the Highway Properties
case made it clear that a landlord who exercises
the right to terminate its lease can, on proper
notice, sue for damages for the loss of future
rent for the unexpired term of the lease (less
the actual rental value of the premises over the
term) as this claim amounts to a claim for
breach of contract. As such, the landlord also
takes on the corresponding duty to mitigate its
damages. It is important to reiterate that the
landlord is under no such duty if it decides to
preserve the lease and sue for rental arrears
only. In addition to present value of expected
future rent, damages may also be claimed for
other losses, including costs of re-renting the
premises, damages for unauthorized renovations,
and interest in accordance with the Courts of
Justice Act.
A landlord desirous of terminating the lease
must be careful that it does not engage in
conduct that may be construed as waiving its
right to terminate the lease based on the
tenant’s default. The case law is clear that if
a landlord accepts rent after the occurrence of
a breach by a tenant which would otherwise have
entitled the landlord to terminate the lease,
the landlord is taken to have waived its right
to terminate based on that particular default,
even if the landlord had no intention to waive
the breach. In order to avoid this result, a
prudent landlord’s counsel should ensure that a
“non-waiver” provision is included in the lease
that is drawn with the utmost care and
specificity because the Courts have demonstrated
a propensity to apply the waiver principle if
there is any ambiguity in the “non-waiver”
provision.
Further, relying on principles of equitable
estoppel can prevent landlords from strictly
enforcing lease provisions should they knowingly
“turn a blind eye” to a tenant’s breach of its
obligations or restrictions under a commercial
lease. Equitable estoppel, which is sometimes
also referred to as proprietary estoppel in real
estate cases, will prevent a person from
insisting on his or her strict legal rights,
whether arising under a contract or on title
deeds, or by statute, when it would not be
equitable for him or her to do so, having regard
to the dealings that have taken place between
the parties. Therefore, prudent landlords should
not tolerate any breach by a tenant, no matter
how minor or trivial it might appear at the
time, otherwise they may be estopped from
requiring strict compliance by a tenant with the
provisions of the lease. For example, in the
case of Aguacil v. 520301 Ontario Inc.,
[2003] O.J. No. 328 (S.C.J.), the lease
permitted the tenant to use the premises for a
vintage furniture reconditioning and graphic
design establishment for a term of three (3)
years. Toward the end of the term the tenant
indicated to the landlord that it wanted to
renovate the premises and use the space as a
film, television and photographic production
site. Following these discussions, the party
signed a letter of agreement that extended the
term of the lease, set out the rent payable
during the renewal term, and permitted certain
renovations by the tenant; however, the letter
did not mention any change in the use of the
premises. Several months later, after observing
a wedding reception at the premises, the
landlord served the tenant with a notice of
breach of the use covenant contained in the
original lease. The Court applied the doctrine
of proprietary estoppel to prevent the landlord
from enforcing the use clause in the lease
because it would have been inequitable for him
to do so having regard to the fact that the
landlord was aware of the changes to the
premises and had not attempted to stop the
tenant or otherwise strictly enforce his rights
under the lease.
In order to facilitate the landlord’s
forfeiture, most commercial leases contain a
provision that entitles a landlord to re-enter
the premises following a breach of the tenant’s
obligation to pay rent. Where such a provision
is absent, the landlord’s forfeiture rights for
non-payment of rent are set out in subsection
18(1) of the Act, and for non-monetary breaches
in subsection 19(2). It should be noted that
subsection 18(1) specifically allows the parties
to contract out of this subsection. Subsection
19(2) does not specifically allow the parties to
contract out of the subsection, and while there
is case law that suggests that it is possible
for parties to contract out of this section, the
better view, based on the numerous cases dealing
with relief from forfeiture, is that the parties
cannot contract out of subsection 19(2).
In any event, it is important that the landlord
follow the notice requirements in the lease or
the Act, as applicable. Otherwise, the
forfeiture will be unlawful.
Written notice is not in and of itself adequate
to terminate the lease, as the landlord is also
required to exercise its right of forfeiture or
re-entry to the premises. In order to exercise
its right of re-entry, the landlord must:
(a)
physically re-take possession of the premises –
where landlord is entitled to use force to
effect a physical re-entry onto the premises;
however, in most cases the landlord utilizes the
services of an experienced bailiff in order to
assist with the re-entry;
(b) make an
application for summary proceedings under Part
III of the Act to terminate the lease;
(c)
commence
an action for a declaration that the lease has
been terminated and an order for possession of
the premises in favour of the landlord. This is
the remedy of choice where the landlord is
desirous of a speedy result or where the
landlord wishes to add other claims which are
not capable of being dealt with under Part III
of the Act, for example, a claim for damages for
rental arrears; and
(d)
enter
into a written agreement with the tenant that
terminates the lease.[1]
Generally speaking, forfeiture is not looked
upon favourably by the Courts except in cases of
repeated non-payment or dilatory payment of
rent, as it is often considered to be excessive
and unjustified and therefore tenants can often
avail themselves a relief under subsection 20(1)
of the Act wherever they can establish the
landlord failed to engage in the correct
procedure to effect the forfeiture of the lease
or where having regard to the conduct of the
parties, the Court thinks fit. In particular,
with respect to forfeiture on account of a
breach of a non-monetary covenant, there are
numerous cases in which purported forfeitures
have been invalidated by the Courts for what
might be considered to be minor breaches of the
strict provisions of subsection 19(2).
(c) Re-Entry Without Termination
In the standard commercial lease you will
invariably find a provision that enables a
landlord to re-enter the leased premises without
terminating the lease and to re-let the premises
on the tenant’s account. Prior to the Highway
Properties case, this procedure was required
to enable a landlord to obtain damages for the
loss of future rents; however, the Highway
Properties case confirmed that the landlord
has the right to both terminate the lease and
claim for the loss of future rents, provided
that it proceeds correctly and gives notice of
its intent to claim damages in advance.
If the landlord re-enters a premises without
terminating for the purpose of re-letting on the
tenant’s account, the landlord must be careful
to avoid a finding that it has entered into a
new arrangement with a new lessee that goes
beyond the rights that were previously accorded
to the defaulting tenant. The result would be
that, at the time of re-letting, the landlord
may be deemed to have terminated the lease, and
therefore may be disentitled to a claim for
future damages.
Examples of provisions that may be construed as
creating a “new arrangement” with a new lessee
include the granting to the new lessee of an
option to purchase, or of a term which extends
beyond the term of the defaulting tenant’s
lease. A further issue is that if the landlord
does not wish to terminate the lease, it must be
careful not to take any steps which might be
interpreted as termination, such as, re-entering
the premises for any purpose, without making it
clear by written notice to the tenant that it is
re-entering to re-let on the tenant’s account
without terminating. In order to effect the
right of possession-without termination, a
landlord must ensure that its position is clear
in notices given to the tenant both in advance
of and at the time of entering the premises,
because a landlord by its conduct may affect the
termination of a lease without any intention to
do so.
In some cases, the very act of seeking to
re-rent the premises, even without re-entering,
might be taken as termination or acceptance or
surrender and, accordingly, the landlord should
give written notice to the defaulting tenant as
to which option it is pursuing and reserving its
rights. If the nature of the tenant’s default is
non-monetary, then ordinarily a landlord can
rely upon a provision found in most standard
commercial leases which provides that if the
tenant commits a breach of a non-monetary
obligation, the landlord has the right, on
notice to the tenant, to remedy the breach at
the tenant’s cost payable to the landlord on
demand. The practical result of this remedy
would be to convert a non-monetary default into
a monetary default.
The primary benefit to a landlord of not
terminating a lease is that preservation allows
the landlord to sue the tenant for rental
arrears and avoid the duty to mitigate its
losses.
(d) Distress
Distress is a combination of a statutory (the
Act) and common law self-help remedy entitling
the landlord, prior to the termination of the
lease, to seize, take possession of, and sell
the goods and chattels (not fixtures) of the
tenant located at the premises to satisfy
arrears of rent.
At first blush, distress sounds like an ideal
remedy. However, there are a number of
restrictions on this remedy set forth in both
the Act and at common law, which a landlord must
carefully follow, including:
(a)
while
there is no requirement to give prior notice of
the distress under the Legislation, proper
notice must be given to the tenant at the time
the distress is taken (sections 34(i) and 36 of
the Act);
(b) after
giving notice of distress and taking possession
of the chattels, but prior to marketing the
chattels for sale, the landlord must wait five
(5) days and then must have the distrained goods
appraised by two (2) independent appraisers;
(c)
when
selling the distrained goods, the landlord must
obtain “the best price available in the
marketplace for them”; there is no specific
requirement with respect to the process that
must be following for the sale of the goods;
however, the landlord can be exposed to
liability for making an “improvident” sale;
(d)
the
landlord must be careful not to seize and sell
an amount of the tenant’s property that greatly
exceeds the quantum of the tenant’s arrears then
in question. This is an onerous and ambiguous
restriction because it is clear that in order
for the landlord to recover the full amount of
rent in arrears and the cost of exercising its
right of distress and marketing and selling the
tenant’s chattels, the distress will almost
certainly have to provide a cushion and this
should not subject the landlord to damages;
however, if the distress is “excessive” (ie. the
value of the distrained goods is unreasonably in
excess of the amount in arrears) the landlord is
exposed to the risk of liability damages. The
question then becomes what is excessive in the
circumstances;
(e)
distress
must be levied during daylight hours, that is,
after dawn and before sunset; and
(f)
chattels
exempt from execution under the provisions of
the Execution Act (Ontario) may not be
distrained.
The right of distress is a unique right
available to a landlord. In order for the
landlord to lawfully exercise the right of
distress, it is necessary that the
landlord-tenant relationship remain intact until
the completion of the distress. Accordingly, the
tenant must be in possession of the premises and
there must be arrears of rent due and payable to
the landlord prior to the sale of the chattels
and the application of the sale proceeds on
account of the arrears of rent.
Although landlords and bailiffs have now become
more sensitive to this point, it formerly was
common practice for a landlord to purport to
distrain by changing the locks on the premises.
Case law has made it clear that the changing of
the locks by the landlord is, in effect, a
re-entry into the premises and termination of
the lease, even if such action is purportedly
for the purpose of securing the chattels on the
premises. Once the lease is terminated the
landlord loses its rights to distress and the
tenant has the right to remove the chattels.
The other issue for a landlord exercising its
right of distress is to determine who owns the
chattels located on the premises. Under
subsection 31(2) of the Act, the landlord may
not distrain on the chattels of any person
except the tenant or other “person who is liable
for the rent”. The landlord is not entitled to
chattels on the premises that were provided to
the tenant on consignment or under a true lease.
Generally
Speaking:
(i)
except for chattels on the premises which are
subject to a true lease (a lease which is not in
the nature of a financing arrangement), the race
is to the swiftest; in other words, priority
goes to the party who first seizes the chattels;
however, it must be noted that the Ontario Court
of Appeal has held that a landlord’s distress
completed within three (3) months of a tenant’s
bankruptcy, amounts to a “fraudulent
preference”, and that the proceeds of the
distress belong to the trustee in bankruptcy,
leaving the landlord with merely a preferred
claim under the Bankruptcy and Insolvency Act
(Canada). This finding can potentially
require a landlord that otherwise successfully
completed a distress to repay the proceeds
therefrom to the trustee of the bankrupt, which
severely limits the efficacy of this remedy. If
a tenant becomes bankrupt before the landlord
completes its distraint or within three (3)
months of the landlord’s completion of the
distraint, the landlord’s claim for distress
will be defeated in the chattels or proceeds
from the sales of the chattels, which chattels
vest in the trustee. This results in wasted
time, effort and expense on the landlord’s part.
(ii)
with respect to chattels leased pursuant to a
true lease, title to the chattels is in the
lessor and the landlord cannot gain priority by
seizing the chattels.
Often in attempting to exercise its right of
distress the landlord or its bailiff will
encounter a difficult tenant that fervently
objects to the act of distress. Such an
uncooperative tenant may present the possibility
for a physical confrontation and/or attempt to
remove the goods from the premises (as right of
distraint can only be exercised on the premises
subject to the lease save right to trace
chattels of tenant for 30 days under section 48
of the Act).
Needless to say, in such circumstances, the
landlord must avoid physical confrontation in
order to avoid exposure to liability for
trespass and assault. The landlord also has to
be aware of its right to hold the tenant and any
other person who assists the tenant in
fraudulently removing goods from the premises to
avoid distress personally liable under section
50 of the Act.
Notwithstanding the foregoing, if the tenant and
its principals are experiencing financial
difficulty it may well be able to successfully
remove goods from the premises to avoid the
distress without consequence.
Practically speaking, the “race to the swiftest”
and corresponding incentive for the landlord on
the one hand and the secured creditor’s on the
other hand to seize the tenant’s assets as soon
as possible can have a counter-productive affect
on each of the landlord, the tenant and the
secured creditor, because it may result in the
failure of the tenant’s business that otherwise
may have been in a position to work its way out
of its financial difficulties through a proposal
under the Bankruptcy and Insolvency Act
(Canada), plan of arrangement under the
Companies’ Creditors Arrangement Act, or
some other “turnaround” measure.
It should be noted that the landlord cannot sue
for rent until the distress has been completed
(i.e. the goods have been appraised and sold).
It should also be noted that if a deficiency
remains after the goods subject to the distress
have been sold, the landlord may sue for the
deficiency, or terminate the lease for arrears
of rent as a result of the fact that a
deficiency remains.
(e) Other Remedies
(i) Legal Action for Collection of Rental
Arrears
Upon default, the landlord is entitled to sue
for rent in arrears or damages on the basis that
the lease remains in force. This scenario is
often utilized where the landlord has a mortgage
in which it has covenanted not to terminate the lease(s) without the mortgagee’s consent. Under
the Rules of Civil Procedure (Ontario)
the claim may be for arrears of rent at the date
of issuing the Statement of Claim, and for rent
accruing due in the future, up to the date of
trial. The clear advantage to pursuing a suit in
this manner is that the landlord is able to both
preserve the lease of the premises while
avoiding the duty to mitigate its losses (which
it is required to do if it terminates the
lease).
(ii) Injunctive Relief
Perhaps the most effective remedy in a case
where a landlord is desirous of preventing the
committing of or continuance of a breach of a
non-monetary obligation under the lease. For
example, a breach by a tenant of a restrictive
covenant, an attempt by a tenant to vacate the
premises or remove the chattels from the
premises contrary to the provisions of the
lease.
Generally speaking, an interlocutory injunction
will be granted where it appears to be just or
convenient for the Court to make such an Order
in the circumstances. This is a highly
discretionary remedy and hence very
unpredictable. The test for the granting of an
injunction is set out in the 1994 Supreme Court
of Canada decision in
RJR MacDonald v. Canada (Attorney General)
[1994] 1 S.C.R. 311
as follows:
(a)
the plaintiff or moving party must be able to
establish that there is a serious issue to be
tried in the case;
(b)
the plaintiff or moving party must establish
that a refusal of the interlocutory injunction
will result in irreparable harm to the Plaintiff
which cannot be adequately compensated in
damages; and
(c)
the plaintiff or moving party must be able to
prove that the balance of convenience as between
the plaintiff and defendant in the case lies
with the plaintiff, such that inconvenience and
harm to the plaintiff should the court refuse to
grant the interlocutory relief sought would
outweigh the benefit to the defendant.
It is very difficult to convince a Court to
grant interlocutory injunctive relief for the
enforcement of conditions in a lease that
require action on the part of the tenant. This
is due to the fact that the Courts are loath to
grant interlocutory injunctions where it is
conceivable that the performance of the mandated
action will require further supervision of the
Courts.
A second type of injunction is a permanent
injunction which is granted after the rights of
the parties have been finally determined by the
Court. Courts are more inclined to grant
permanent injunctions where the plaintiff is
able to establish that its rights have been
infringed in the past and it is quite likely
that its rights will be infringed in the future.
Some Final Thoughts
In this brief paper, we have only been able to
address in a very embryonic fashion the rights
and remedies available to commercial landlords
who must deal with a defaulting tenant.
It should be noted that there are various, and
oftentimes effective, proactive protective
measures a landlord can undertake at the
inception of a lease arrangement which will
serve to minimize loss and aggravation in the
event of a default. Such measures include the
taking of security and the obtaining of third
party assurances (i.e.: letters of credit,
guarantees, indemnities, etc.). Unfortunately,
time and space constraints do not permit a
discussion of these measures here.
For your ease of reference, we attach as
Schedule “A”
(PDF) to this paper, a rather simple but
effective decision tree which summarizes the
rights and remedies available to a landlord on
the occurrence of an event of default by a
tenant. If you are a landlord, may you
never have cause to refer to it!
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