June 01, 2011

Jumping the Queue: The Commercial Landlord’s Right of Distraint

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Introduction

Distraint, also known as distress, is the commercial landlord’s most powerful remedy against delinquent tenants.  Governed in Newfoundland and Labrador by the Distress for Rent Act (1689), the remedy has been available for centuries.  When performed properly, it allows the landlord to seize the tenant’s goods, chattels, and inventory for outstanding rental arrears in priority to other creditors and without the need for court approval.  However, when performed incorrectly, it opens up the landlord to liability which may lead to more expense and headache than recovery.

To begin, it is important to set out the conditions precedent for the use of distraint as a collection tool.  Firstly, distraint is unique to commercial tenancies.  In Newfoundland and Labrador, section 29 of the Residential Tenancies Act, 2000 prohibits a landlord from seizing a tenant’s personal property for reason of or to compensate for a breach of an obligation by the tenant, including default in the payment of rent.

Secondly, the tenant must be in possession of the premises.  Practically this means the landlord cannot terminate the lease either by evicting the tenant, locking the premises, or barring possession in any way prior to the sale of the seized chattels.  However, a landlord may distrain on chattels and then evict if there are still arrears of rent owing after the sale. 

Thirdly, arrears of rent must be due and must be calculated with certainty.  If the foregoing conditions are met, the procedure to be followed by a landlord in exercising its right of distraint is as follows:

Preliminary Steps

Prior to exercising its right of distraint, the landlord should review the terms of the lease to ensure that the lease does not contain a specificwaiver on the right of distraint or require the delivery of a demand for rent to the tenant.  A demand is not required unless specifically required by the lease.  While a demand clearly informs the tenant of the landlord’s intention and frequently promotes payment, it can also be a detriment to the distraint process as it may alert the tenant of the upcoming distraint and provide the tenant with an opportunity to remove chattels and vacate the premises without the knowledge of the landlord. Other preliminary steps include calculating the rent outstanding and, if applicable, accelerated rent and conducting relevant due diligence searches in the name of the tenant. For example, a landlord may wish to search for judgments under the Judgment Enforcement Act (chattels seized by the High Sheriff pursuant to the Judgment Enforcement Act are exempt from seizure), search for secured interests under the Personal Property Security Act, search for lender securities under section 427 of the Bank Act (chattels subject to section 427 Bank Act security may not be seized because under the title in such chattels is vested in the bank) and search for assignments in bankruptcy under the Bankruptcy and Insolvency Act (if the tenant is bankrupt, then the landlord is precluded from exercising a distraint).

 

Appoint Bailiff

The landlord must appoint a bailiff to distrain upon the chattels and, if requested, may need to provide indemnity against claims against the bailiff relating to the distraint.

Entry

Subject to any specific requirements in the lease, a distraint may take place on the day following the day rent becomes due. It is important to note that the landlord cannot break locks or windows or the distraint will be illegal. Traditionally, the distraint must take place between sunrise and sunset.

Notice of Distress

There is no set form for the notice of distraint however, in general, it should set out the amount of the rental arrears, the time rent arose, and the payment required and it should state that the chattels distrained will be sold not sooner than 5 days therefrom.Appraisal & InventoryThe bailiff is required to inventory the chattels and have them appraised by two qualified appraisers, but only after the 5 day period referred to in the notice has expired.  It is important to note that certain items are exempt from seizure.  These include fixtures, money (except in a cash register), perishable articles, consignment goods, goods subject to an equipment lease, good seized by the sheriff, goods delivered to a repairman exercising a public trade and wild animals.

Sale

Sale of the chattels can take place after the 5 day period referred to in the notice has expired and can be by public or private sale (subject to a duty to take all reasonable steps to obtain the best price possible).  The sale proceeds, less expenses, are paid to the landlord to satisfy rental arrears. Any excess is paid by the landlord to the tenant.  However, the landlord should take care to avoid an “excessive distraint” of more chattels than the rental arrears and expenses.  In such cases, the distraint may be deemed illegal and the landlord may be liable for damages.

The largest advantage to a commercial landlord exercising its right of distraint is that the proceeds of the sale are paid to the landlord in priority to other creditors, but the landlord must be wary of some priority issues which may be relevant.  For example, should a tenant declare bankruptcy or make a proposal under the Bankruptcy and Insolvency Act in the three months following the distraint, a trustee may review the distraint as a fraudulent preference and demand a return of the sale proceeds.  Likewise, the law is uncertain as it pertains to the priority of certain amounts which may be owed by the tenant under a “deemed trust” in favour of the Canada Revenue Agency (refer to Attorney General of Canada v. Community Expansion, Inc., 2004 CanLII 50266 (ON SC).  While these items are outside the control of the landlord, by following the procedure as outlined above and obtaining legal advice, many of the risks associated with distraint can be overcome and made manageable.

Contact

Please direct any questions or suggestions to the author of this article, William Cahill at 570-5577 or coxandpalmer.com

The author was assisted by Matthew Clarke, a student-at-law with Cox & Palmer.


Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.