When Tenants Default: Considering the Options for Commercial Landlords
“Hope for the best, prepare for the worst” – Lawyer, 100 years BC
No, really. Cicero, a lawyer and politician shared this advice 100 years BC, and it continues to be excellent advice today. And while we’d like to think all landlords heed this advice when prepping leasing agreements, we know that’s not always the case. The good news is, if you are a commercial landlord facing a dispute, there are ways to reach a solution after the lease is signed.
“That’s me – I have a tenant not paying rent.” – Commercial Landlord, 2019 Ottawa
If you find yourself with a tenant in default, not paying rent, for example, you have two courses of action: terminate the lease and sue for the losses or maintain the lease and recover unpaid rent by seizing and selling your tenant’s property (a process called Distraint).
“Easy. I’ll seize their property.”
While distraint may turn out to be the best possibility in your situation, it is important to carefully consider the requirements, advantages (and risks) of each option. Let’s look at the two main options for problem commercial tenants:
Termination: The Less Risky Approach.
Of the two options, termination is the less risky solution, with a relatively straightforward process.
As a landlord, you can terminate a lease agreement once you’ve confirmed that the tenant is in default. To be in default, the tenant has to have acted against the conditions laid out in the leasing agreement – whether for monetary reasons (such as not paying rent) or through other conduct (such as using the rented space in some way that is prohibited in the lease).
Once the tenant is in default and you have decided to take action, you must, if the default is for a non-monetary issue, give notice of the termination and a reasonable amount of time for the default to be corrected. Landlords do not have to give formal Notice of termination if the default is in paying rent, but a delay period of 15 days, or whatever other time is set out in the lease, must be respected before termination is carried out. In any event, a Notice letter is a good practice even for monetary default. It is also good practice to engage a bailiff to act as an agent of the landlord when enforcing a termination notice. The bailiff will advise what information is required for the Notice of Termination to be posted at the premises, what amount of time is reasonable and best practices. The Ontario Ministry of Government and Consumer Services website is a good resource for finding bailiff services.
If the tenant has not corrected the default, then your bailiff would proceed to secure the location. While a landlord can use reasonable force to re-enter a premises the preferred practice is to have a bailiff attend at night, with a locksmith, to secure the premises by changing the locks. If there is resistance from the tenant, or the tenant breaks in to the premises after locks have been changed, the police should be contacted.
Once the location is secured, you must provide the tenant an opportunity to recover their property. If the tenant abandons their property, or refuses to recover it, the bailiff can take and store the property, and further you can pursue a legal process to recover the costs for storage.
Distraint: Use with Caution
Your other option – applying distraint remedies, such as seizing goods – requires great care. Using improper procedures, for example seizing exempted items like tools or instruments that are in use, can negate your “landlord right of distraint,” give your tenant a right to claim for damages, or even be deemed illegal.
However, there are times when using Distraint is a good way forward. Because Distraint allows a landlord to seize applicable goods without a court order, and prior to other creditors, it may be the only option to recover what is owed.
If you have determined that seizing your tenant’s property is the best approach in your situation, we again recommend engaging a bailiff, as there are many rules around how and when goods may be removed and further, how and when seized goods may be sold.
“What should I include in a leasing agreement to prepare for the worst?”
Getting back to how to prepare in advance, here are four areas where having the right boilerplate clauses before a conflict can smooth the rights and remedies process after:
Include additional costs such as maintenance cost, heat, hydro, insurance and realty taxes, in the definition of “Rent.” Generally, property seizure, or “distraint,” remedies can only be applied to unpaid rent. By including other monetary obligations, you’ll have the option to apply distraint remedies against all of your tenant’s cost obligations.
Include an Acceleration clause that specifies defaults as “cause” so you’re able to ask for accelerated rental payments if your tenant defaults on any part of their monetary obligation.
3. Fixtures & Chattels
Add a detailed listing of the ownership and repair responsibilities for all fixtures (owned by the landlord) and chattels (owned by the tenant).
4. Restoration Obligation
Specify the state to which the property must be “restored” to avoid disputes around damage or items that may have been in place when your tenant first took possession.
Some further takeaways for commercial landlords to keep in mind:
- Keep Your Hands Clean – No matter how frustrating the situation, it is important for both landlords (and tenants) to follow all tenancy rules and regulations, as well as their leasing agreement. If a landlord does not follow the rules required of it, even though the tenant is in default, it may become more difficult to obtain a favourable Court Order at a later date.
- Hire a Reputable Bailiff – Remember that a bailiff is the landlord’s agent and acting on their behalf.
- Be Careful with Distraint Remedies – While distraint can be a possible solution, there are many rules and regulations that must be followed to avoid invalidating the process and your rights.
Regardless of whether you are leasing out a retail, industrial or traditional office space it is important to understand your rights and procedures you can use to avoid and resolve common landlord/tenant disputes. If you have questions about your rights and how to protect yourself in advance of disputes, please reach out to our Commercial Leasing group.