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Tenant Default . . .What Can a Commercial Landlord Do? PDF Print E-mail

By: Jayson Schwarz and Aaron Grinhaus

argaiv1288

           You have signed a 5 year lease with a new tenant. His credit checked out, he did improvements and all is good. Suddenly, two years go by, and then cheques start to bounce. You try to speak to the tenant, communication breaks down, and you are owed money. Your mortgage company wants its payment what can you do?  The real question is a decision between distress and forfeiture. Ok what does this mean? A distress is when you enter the premises take control change the locks and seize all of the Tenant’s goods on the premises. A forfeiture occurs when you change the locks and terminate the lease.

            Remember the lease is your blueprint on how to proceed and if you have a loose lease you may have limited options. Whatever the lease does not cover the Commercial Tenancies Act, R.S.O. 1990, c. L.7 will regulate.

             Distress:  Before a landlord can distress the property, a few conditions will need to be satisfied. You must give the tenant notice in writing of the breach. The governing law states that if notice is required, unless the lease says otherwise (remember what I said about loose leases), such notice must be given fifteen days before changing the locks; Provided you have the authority by lease or statute the way to go about this is to attend at the premises with a locksmith and your carefully prepared “Notice of Distress” and change the locks. Remember you must give the tenant access to the premises during normal working hours to attend on the premises. Your lawyer can give you detailed advice on how to wend your way through this technical area so you do not mess up.

             Why distress? Subject to PST and soon HST you have the right if the tenant does not pay you current (quite often plus accelerated rent) within 5 days of the distress to have the tenant’s goods sold to pay your rent and costs. You need to do appraisals etc. Again consult your lawyer because you cannot afford to mess up doing this. As a comment a Landlord’s distress comes just about ahead of everyone including secured bank debt except monies still owing on a conditional sales contract and a bankruptcy trustee if the tenant goes bankrupt before you have completed a sale. If you get all of your money the lease is back in good standing and the tenant’s obligations continue.

              In a forfeiture you re-enter the property for the express purpose of terminating the lease, throwing the tenant out and moving forward to release immediately. This is a judgement call based on the value of the tenant’s assets and your own business reasons for how to proceed. Again notice is critical and often your  lawyer can help you find a Bailiff to assist in properly terminating the lease and locking-out the tenant. Landlords must ensure that they are protecting themselves before terminating a lease. Once the landlord re-enters properly and in accordance with the law and the lease, the property is secured for the benefit of the landlord alone and the tenant is denied access. The landlord and tenant relationship is ended. The tenant may remove its property and the landlord must try to stem his or her damages by re-renting to someone else. This is old law for the case of Highway Properties Ltd. v. Kelly, Douglas & Co., [1971] S.C.R. 562 stated that once a landlord terminates a lease it has a duty to mitigate damages by finding a new tenant so that it can offset the losses owed by the old tenant. You still have the right to sue the tenant for your losses however, but generally good luck unless you have personal guarantees.