Use caution when applying remedy of distress
By Paula Kulig, AdvocateDaily.com Contributor
Remedies are available for landlords pursuing rental arrears from commercial tenants, but they must be applied correctly or the consequences can be costly, Toronto litigator Jeffrey Silver tells AdvocateDaily.com.
In particular, the remedy of distress, which allows a landlord to seize a tenant’s property in order to obtain payment of arrears, “is considered what’s called an extraordinary remedy, and it gives significant power to a landlord,” says Silver, principal of Jeffrey C. Silver Barrister.
“Because of that, it’s also an extremely technical remedy, and therefore it must be exercised in compliance with many rules governing how to do it. If the landlord does it improperly — it can be either irregular, illegal, excessive or wrongful — the tenant would then have a potential claim against the landlord for damages.”
Distress is a “self-help remedy” and no formal court proceedings are needed for it to be used by landlords, Silver says, adding that while it arose in common law, it’s now captured in Ontario’s Commercial Tenancies Act, primarily under ss. 53-55.
Landlords also have a remedy when a tenant (or anyone assisting the tenant) fraudulently removes goods or chattels from the property in an attempt to avoid its seizure for unpaid rent, he says. Under s. 50, the tenant must pay the landlord double the value of the goods or chattels if ordered by a court.
“The idea is that the tenant is preventing the landlord from seizing those chattels for the arrears. So if they sneak them out in the middle of the night, that may be considered fraudulent. The landlord has to establish fraudulent intent. It has to be really secret and surreptitious,” Silver explains.
Landlords and their lawyers need to be aware of several points when using the remedy of distress in order to avoid complications down the road, he says.
While it may seem obvious, it’s important that the tenant is actually behind in the rent before any property is seized, and that the property is worth no more than rental arrears, he says, because otherwise, the tenant will have a right to damages.
Silver says it’s crucial that when distress is being applied, the tenant’s lease isn’t terminated at the same time.
“A fundamental principle is that the termination of a lease and distress are mutually exclusive remedies. So if the landlord intentionally or even unintentionally terminates the lease, or even if the manner of distress causes the lease to be terminated, they’re in trouble.
"The landlord can terminate the lease and sue the tenant for arrears of rent or can keep the lease, go in and take the chattels and sell them to recover the amount owing. But you can’t do both,” he says.
Changing the locks is a tricky area because while the act itself doesn’t constitute a termination of the lease, that can be the result if the tenant is prevented from carrying on business because it’s denied access to the premises, Silver says.
There are several other rules that landlords must abide by when using the remedy of distress, he says.
"They include providing the tenant with a notice of an inventory of the goods seized, as well as a notice of the reason for the distress, the amount of arrears outstanding, and the time and place of the intended sale of the goods, getting the goods appraised by two sworn appraisers, and selling them within a reasonable period of time," Silver says.
He points to a 2017 Ontario Superior Court of Justice case that offers valuable lessons on what not to do when seeking to recover rental arrears from a tenant. In the case, the landlord brought a claim for fraudulent removal of goods and chattels, while the restaurant tenant brought a wrongful distress and conversion counterclaim.
In its notice of distress, the landlord claimed arrears of rent owing in the amount of around $97,000.00, but subsequently indicated they were much less. Without deciding the issue, the court accepted for the purpose of its decision that the arrears were around $37,000.00, Silver says.
"The court made a number of findings against the landlord, including failing to provide the tenant with notice of the inventory seized, failing to provide the tenant with notice of the costs and expenses of the distress, making an unlawful forced entry onto the premises, posting the wrong amount for the rental arrears, failing to obtain sworn appraisals of the goods seized and engaging in unreasonable delay of nine months in completing the distress," he says.
Moreover, he adds, the landlord had seized goods and chattels worth over $1 million for only $37,000 of rental arrears.
"The court found the distress to be illegal, irregular, excessive and oppressive," Silver says. "It also found the landlord to be liable for conversion and determined the tenant was entitled to an award of both general damages and special damages as well as punitive damages.
"Significantly, the director of the landlord was found personally liable together with the corporate landlord. The landlord’s claim for fraudulent removal was dismissed, as for among other reasons, the court stated there cannot be a fraudulent removal within the meaning of s.50 of the Act with respect to goods that could not have been subject to the landlord’s right of distress at the time of their removal.”
“This case is interesting because the landlord did practically everything that you’re not supposed to do,” Silver says. “It breached every single one of the rules.”