Tips of the Trade Series – Rent Distress vs. Termination of Lease

When commercial rent goes unpaid, landlords are left to make a big decision – to distrain for the unpaid rent by seizing the tenant’s assets or to terminate the lease altogether.  

Both options can be the best course of action for any given situation, but knowing which to choose can be difficult.  

We reached out to an experienced bailiff who has handled hundreds of rent distresses and terminations of leases to get a boots-on-the-ground perspective of the ins and outs of both processes in hopes of making this tough decision a little easier for landlords and property managers going forward.

What is the first step a landlord or property manager should take when rent is unpaid?

Issue a demand letter!  We frequently get calls from frantic landlords or property managers who need our urgent attendance to seize the assets or change the locks but our hands are tied when we find out that they have not complied with the notice requirements of their lease.  Almost all commercial leases require notice to be issued before these remedies can be executed, and even when it is not, it is usually a good idea to do so as some judges can deem that it would be reasonable to do so whether required or not.  

We typically recommend for our clients to not delay on issuing notice once the rent is officially in default because regardless of whether further action is needed or not, it is much better to be ready to go if needed instead of having to wait around for a notice period to expire before anything can be done.

Recourse allows you to create and send professional Demand for Payment of Commercial Rent documents in just a few minutes.

What happens if the tenant pays some but not all of the amount owed?

If the partial payment was made before a notice was issued the landlord should issue a demand letter as they normally would.  If the partial payment was made after a demand letter was already sent, it is wise to issue a follow-up notice acknowledging the payment and stating that the landlord still expects the remaining amount to be paid on or before the date demanded.  

This may sound redundant, however, there have been cases of judges siding with tenants who claim that they thought the landlord accepting the partial payment meant that they were okay with settling for the lesser amount.  Issuing a follow-up notice makes it clear where the landlord stands and takes this type of claim out of the picture.

Why does a landlord have to choose between seizing the assets under rent distress and terminating the lease?

Landlords have to choose because the two actions contradict one another.  The lease/tenancy has to be intact for the landlord to have the right to seize assets under rent distress, therefore, if the lease/tenancy is terminated the landlord has no right to the tenant’s property. 

Does one option stand out as better than the other based on your experience?

What is the process of seizing the assets under rent distress?

A lot of factors go into this so I will break them down into some key points:

1. Discuss gameplan with the client – After receiving a file for a rent distress, we typically reach out to the client to discuss some background information about the tenancy and to find out what the landlord is hoping to achieve.  Some landlords will say that they have a good relationship with the tenant and want us to work with them as much as possible, and others will say that they are fed up with the tenant and want a much more aggressive stance to be taken.  Value of the goods inside the premises also plays a factor, as the bailiff will lose a lot of leverage in the negotiations if the tenant knows that the resale value of their goods is minimal.  
   
   
2. Attend the premises during business hours – One key point that is not always known about seizure by rent distress is that it has to be daylight hours and the business has to be open for a bailiff to enter the premises to seize the assets.  Entering the premises without the tenant’s permission can be considered “re-entering”, which in turn terminates the lease, which as previously mentioned means that the landlord has no right to the assets.  Make sure to let the bailiff know if the tenant works odd hours or is not regularly at the premises.  
   
   
3. Place the assets under seizure – Once inside the premises we inform the tenant that the assets are effectively under seizure.  If the owner of the business is not around we do our best to be as discrete as possible to avoid startling employees or customers, which usually gets us in good favour with the tenant.   In most cases, the goods are seized in place by taking a detailed inventory of the goods and having the tenant sign a “Bailee’s Undertaking” which acknowledges that the goods are under seizure and essentially promises that they will not disappear overnight.  The tenant is made aware that breaching a bailee’s undertaking is considered theft and that criminal charges could apply.
   
   
4. Negotiate upon a reasonable repayment plan – We always do our best to collect the rent arrears and fees at the time of seizure, but in most cases, the tenant needs at least some time to get the funds together.  Usually, the tenant is given the amount of time we have to wait before actually selling the seized goods, which in most provinces is 5 days.  If the landlord wants us to work with the tenant as much as possible, more detailed and lengthy repayment plans can also be negotiated over weeks or sometimes months.   
   
   There are times when we run into a tenant who refuses to sign a bailee’s undertaking or when they cannot be trusted with one, that we arrange for the seized goods to be removed from the premises immediately. This is a method that we do our best to avoid, not only for the heavy-handedness of it but also because it incurs costs for moving and storing the goods that become difficult to recover from the sale of assets unless they are of significant value. 
   
   
5. Collect payment in full or proceed with the sale of the goods – Part of our job is staying in touch with the tenant throughout the repayment period to see if they are on track etc.  In almost all cases payment is made in full before the sale of the assets becomes necessary, though some cases need payment extensions which we always confirm are acceptable to the landlord before accepting them.  

What is the process to terminate a commercial lease?

Once again I will break the process down into some key points:

1. Discuss gameplan with the client – A termination of lease is done by re-entering and changing the locks of the premises on behalf of the landlord.  To avoid conflict and the possibility of the tenant refusing to leave, we usually do these early mornings before the business opens.  We will always contact the client beforehand to discuss the nature of the business and what hours they are usually there to try to make sure things go as smoothly as possible.
   
   
2. Re-enter the premises and change the locks – We attend the premises with a locksmith to key in.  The locksmith changes the locks while we take inventory and photos of the goods inside.  As mentioned, the landlord will have no right to the assets inside, so this is more so to document what it is inside to avoid the tenant claiming things have gone missing etc.  A notice of termination and a notice to quit is posted on the door before locking up and leaving.  
   
   
3. Arrange for the former tenant to remove their goods – It doesn’t take long before our office or the landlord is contacted by the now locked out tenant.  We contact them to arrange for their goods to be removed, in most cases under bailiff supervision to make sure no damage is done and no fixtures belonging to the landlord are removed.
     

Sometimes before the goods are removed the tenant comes forward trying to reinstate the lease by paying everything that is owed.  It is technically up to the landlord as to whether or not they want to accept this proposal, however, there has been case law that it can be seen as unreasonable by the landlord to reject the full payment if the tenant is trying to make it. 

It has become standard practice to give the tenant one chance to reinstate the lease if offered, so many landlords have the tenant sign a document called a “Relief From Forfeiture” after allowing them their one chance, which has them acknowledge that this was their one chance and that if it happens again they will not be permitted to reinstate the lease.  

Recourse allows you to create your own professional Notice of Termination and Notice to Quit documents in just a few minutes.

Can you change your mind after choosing one option?

After one action or the other has been executed, the landlord cannot change course.  A new demand notice will have to be issued and the notice period will have to be complied with before taking the other action.  For example, if goods are seized and sold under rent distress or if it is determined that there is no value to the goods the landlord cannot terminate the lease until a notice for any new or outstanding arrears has been issued.  

At times when the value of the goods may be questionable, we can attend the premises with the appropriate paperwork etc. but not actually levy the distress.  This allows the landlord to switch gears and terminate if they please since the rent distress was never actually executed.  

That ends our expert discussion on the differences between rent distress and termination of lease.  Stay tuned for more expert insights from Recourse.