The Law Of Distraint Under A Commercial Lease In Ontario

• Published date: 21 January 2022
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Law Firm: Robins Appleby LLP
• Author: Mr Darrell M. Gold

Where a landlord and tenant have entered into a commercial lease under which the tenant has committed a monetary default (the failure to pay rent or additional rent), a landlord may exercise the remedy of distraint (also referred to as distress).

Distraint is a self-help remedy granted to landlords (often exercised through an agent such as a bailiff) without a court order, which allows them to seize (and then dispose of) the personal property, including chattels, fixtures, equipment and inventory, of the tenant on the leased premises to an amount equivalent to satisfy the rent arrears subject to the qualifications discussed below. If the tenant's monetary default remains uncured following seizure of the goods, the landlord may have the goods appraised and sell the goods, then apply the proceeds to the rent arrears.

The distraint remedy is only available to commercial landlords, as the remedy has been abolished in residential tenancy contexts (see section 40 of the Residential Tenancies Act, 2006, S.O. 2006, c. 17).

Distraint is an effective landlord remedy for a tenant's monetary default provided the tenant has sufficient assets and other creditors do not have priority to the landlord's interest.

What Is the Remedy of Distraint?

The 4th edition of Black's Law Dictionary, Definitions of the Terms and Phrases of American and English Jurisprudence, Ancient and Modern, distraint/distress is defined as follows:

"DISTRAINT. Seizure; the act of distraining or making a distress.

DISTRESS. The taking a personal chattel out of the possession of a wrong-doer into the custody of the party injured, to procure a satisfaction for a wrong committed; as for non-payment of rent..."

At common law in Ontario, the remedy of distraint is "the seizure of someone's property in order to obtain payment of rent or other money owed" (Walsh v Lonsdale (1882), 21 Ch. D. 9 (Eng. C.A.). In a situation where a commercial tenant has defaulted on its rent, the remedy of distraint allows the landlord to seize, take possession of, and sell the tenant's goods, chattels, and inventory to reimburse a landlord for rental arrears (see Practice Note, Tenant in Default: Landlord's Rights and Remedies (Commercial Real Property)). The common law remedy of distraint has since been restricted and regulated by provincial statute, including the Commercial Tenancies Act, R.S.O. 1990, c. L.7 (CTA), in Ontario.

Who Can Exercise the Remedy?

The remedy of distraint is available for exercise by a commercial landlord for a tenant's rent default. A landlord includes a lessor, owner, the person giving or permitting the occupation of the premises in question, and these persons' heirs and assigns and legal representatives, along with the person entitled to possession of the premises which can include a duly appointed property manager of the landlord. Often, the remedy is exercised by a bailiff as an agent of the landlord.

Pre-Conditions for Exercise of the Remedy

For the distress remedy to be exercisable:

• There must be a landlord-tenant relationship (a lease or agreement to lease at a fixed rent).

• The tenant must be in possession of the premises.

• There must be rental arrears due and payable.
• (Harvey M. Haber and Robert Malen, Distress: A Commercial Landlords Remedy, 2nd ed. (Toronto: Thomson Reuters, 2021) (Haber & Malen).)

Landlord-Tenant Relationship

The landlord must in fact be a landlord as described above in Who Can Exercise the Remedy?. A tenant is described as a "lessee, occupant, sub-tenant, under-tenant, and the person's assigns and legal representatives" (section 1 "tenant", CTA).

Where there is a rent default by a commercial tenant, distraint is but one remedy available to the landlord to cure the default. However, since there must be a landlord-tenant relationship, that means the lease must not have been terminated. So, where there has been a rent default, a landlord has the option to seek either distraint or termination of the lease (but not both), along with other remedies such as re-entry for reletting. If the landlord has sought termination, it cannot also pursue a distraint remedy. A condition of exercising such remedy is that the lease is not at an end.

There is one exception where distraint can be exercised by the landlord notwithstanding that the lease has ended (see Mundell v. 796586 Ontario Ltd., 1996 CarswellOnt 2620 (Ont. Gen. Div.) (Mundell)). If the tenant is in arrears after the term of the lease has ended, the landlord may seize the tenant's goods for up to six months thereafter, provided that the:

• Landlord still owns the premises.

• Tenant is still in possession of same.

This exception is codified in the CTA, which states that a landlord of a lease ended or determined upon which arrears are due may "distrain for such arrears...in the same manner as the person might have done if the lease had not been ended or determined, if the distress is made within six months after the determination of the lease, and during the continuance of the landlord's title or interest, and during the possession of the tenant from whom the arrears became due" (section 41, CTA).

Tenant in Possession

The tenant need not be in physical occupation of the premises but must exercise care and control over the premises. Care and control may include the presence of sub-tenants pursuant to the terms of the lease.

Rental Arrears Due and Payable

There must be rent arrears in order for the distraint remedy to be exercisable (Baragar & Russell Ltd. v. 1553464 Ontario Ltd., 2004 CarswellOnt 1701 (Ont. S.C.J.) and Cassandro v. Glass, 2018 CarswellOnt 9798 (Ont. S.C.J.) (Cassandro)). However, note that a default initially unrelated to rent, such as a failure to repair, can turn into a rent default where the lease gives the landlord the right to cure the tenant's default and deems the costs incurred in doing so to be rent.

"Rent" is not defined in the CTA, as such, the meaning of "rent" is determined by the lease between the landlord and tenant. If "rent" is defined under the lease as basic rent or fixed minimum rent, the landlord will only be able to distrain this amount. If rent is designated more broadly as all monetary obligations of the tenant pursuant to the lease (for example, taxes, insurance, all other operating costs) then the landlord's distraint is more potent, as it will cover all amounts owing under the lease, not just basic rent (subject to the maximum set by the BIA as discussed under Maximum Rent Arrears Subject to Distraint). Further, rent must be fixed and certain (for example a set amount). If rent is determined by mediation or arbitration, it is not so fixed and not subject to distraint rights by the landlord.

From the landlord's perspective, its lease form should be reviewed to determine if "rent" is defined to include all monetary obligations of the tenant, while the tenant will wish for a more limited definition of "rent" (Haber & Malen).

Maximum Rent Arrears Subject to Distraint

The maximum rent arrears for recovery through the distraint process is three months of rent arrears and, so long as the lease provides for it, accelerated rent of three months pursuant to section 136(1)(f) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA). The accelerated rent provision of the BIA is intended to increase the amount the landlord can claim as a "preferred" creditor in the event of the bankruptcy of a tenant if the lease provides for accelerated rent. However, many landlord lease forms provide for three months accelerated rent to apply on any defaults and not just in the case of a bankruptcy. If you are acting for a tenant, the accelerated rent provision should be limited to where it applies under the BIA.

Subtenants' Goods, Chattels, Etc.

Special rules apply when dealing with subtenants (third parties subleasing all or part of the tenant's space for less than the entire term). Where a landlord seeks distress of goods against a subtenant for the head tenant's rent default, the subtenant's goods, chattels, etc. may be exempt from the seizure if it complies with section 32(2) of the CTA. Under section 32(2) of the CTA, the subtenant must do the following:

• Make a statutory declaration that states:

• that the head tenant has no interest in...