Changing the Locks? What Commercial Landlords Can and Cannot Do in this Post-Pandemic Era

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Article2021 | 05 | 21

Changing the Locks? What Commercial Landlords Can and Cannot Do in this Post-Pandemic Era

What long term impact will this Great Pandemic have on commercial tenancies? Given the plethora of troubled retail businesses and the apparent ease with which we seem to have accepted e-commerce and remote work environments many foresee wholesale disruption. During the early days of the Pandemic the Manitoba government did go so far as to ban eviction of commercial tenants but that was a temporary order which has since expired.[1] Unless this Third Wave prompts further government intervention the reality is that landlords and tenants will have to navigate through their difficulties in the context of traditional landlord and tenant law.

In ordinary circumstances the commercial landlord-tenant relationship is fundamentally one-sided. In exchange for what is referred to as “quiet possession”, the tenant owes the landlord a host of monetary and non-monetary obligations and covenants usually detailed in a lengthy and complex commercial lease agreement, breach of which entitles the landlord to exercise various remedies on limited notice including termination, re-entry, and distress as well as providing the right to recover rent for the lease term. Subject to The Landlord and Tenant Act[2] (“LTA”) and a few remedial restrictions that developed in antiquity, the lease agreement governs the landlord-tenant relationship.

READ THE LEASE

The starting point is to review the actual lease agreement. In addition to the numerous and sundry covenants which govern the tenant’s use and occupation of the premises, commercial leases generally include the specific rights and remedies reserved to the landlord, what notice the landlord is obliged to provide and the cure periods before remedies can be pursued. That said, there is no standard form lease agreement. While the untrained eye may perceive only legalese or “boiler plate”, commercial leases and the language used therein vary significantly. As such, it is critical to read the precise wording in the applicable lease document carefully to ascertain the full nature and extent of the lease covenants as well as the remedies available.

The reason for so much of the so-called boiler-plate is not just to enable the landlord to collect rent. Commercial leases contain numerous tenant covenants that are designed to protect the landlord and its investment in the property. The ability of the landlord to enforce such covenants can at times be of greater concern than payment of rent. For example:

  1. Duty to repair and maintain the premises. Payment of rent is of minor consequence if the premises are allowed to fall into disrepair.
  2. Restrictions upon what business use can be made of the premises by the tenant. For example, if the landlord is operating a shopping mall of any size it may be necessary to specifically limit the type of business that can be conducted on the premises so as not to interfere or compete with other tenants in the complex. Where another tenant has an exclusive use provision, allowing a new tenant to compete may result in the landlord being in breach of its obligations.
  3. Similarly, in some larger centres, landlords may have granted covenants whereby if a major anchor-type tenant ceases to carry on business, other tenants may be entitled to vacate or pay a reduced rent.
  4. The standard covenant that the lease not be assignable by the tenant without the consent of the landlord. Clearly the landlords are concerned about the strength and reliability of the tenant they are contracting with and its ability to honour the lease terms.
  5. Prohibitions against conducting liquidation or bankruptcy sales. It is not unusual for landlords renting to retail businesses to want to maintain a high standard for their facilities.  Included in this category would be a typical covenant to operate in a manner befitting a first class retail shopping centre.
  6. Specific restrictions regarding removal of fixtures and other property including clean-up at the conclusion of the lease.  This can also include tenant covenants that they maintain a full and complete current inventory of goods within the premises when still operating.

Through enforcement of such covenants, typically by the threat of lease termination and eviction, a landlord is able to maintain the integrity of its overall business operations and protect its investment. That said, if the lease does not clearly define breaches of these covenants as giving the landlord the right to re-enter, much of the leverage the landlord thinks it has over the tenant may be missing.[3]

From an enforcement perspective the lease documentation should set out the specific events of default and what the notice requirements are. For example, most leases will specify how long after notice of default the tenant has to cure the default failing which the landlord can exercise its remedies. If the lease says seven days or five business days, that is the notice period; if not, it reverts to LTA s. 17(1) requirement of 15 days. As discussed further below it should also set out whether the landlord has the right to re-enter and still hold the tenant liable for the balance of the lease term.

THE PROBLEM OF MUTUALLY EXCLUSIVE REMEDIES

Although commercial leases are now regarded as contracts which entitle landlords to set out contractual remedies, they still remain a form of conveyance of real property with many of the archaic common law limitations that developed over previous millennia.

The starting point for Canadian Lawyers is Highway Properties Ltd. v. Kelly Douglas & Co.[4] where the SCC did its best to modernize landlord-tenant law by acknowledging the parties could set out and enforce most of their respective obligations as a matter of contract law. However, as Laskin, J. (as he then was) stated at pp. 568-569:

“I approach the legal issue involved in this appeal by acknowledging the continuity of common law principle that a lease of land for a term of years under which possession is taken creates an estate in the land, and also the relation of landlord and tenant, to which the common law attaches various incidents despite the silence of the document thereon….Although by covenants or by contractual terms, the parties may add to, or modify, or subtract from the common law incidents, and, indeed, may overwhelm them as well as the leasehold estate by commercial or business considerations which represent the dominant features of the transaction, the “estate” element has resisted displacement as the pivotal factor under the common law, at least as understood and administered in this country.”

Laskin, J. then went on to identify three mutually exclusive remedies the landlord may elect to proceed with once there has been a fundamental breach of the lease:

  1. The landlord may simply insist on performance of the terms and sue for rent or damages on the footing that the lease remains in force;
  2. The landlord may elect to terminate the lease, retaining of course the right to sue for rent accrued due, or for damages to the date of termination;
  3. The landlord may advise the tenant that he proposes to re-let the property on the tenant’s account and enter into possession on that basis.

Laskin, J. also went on to note that counsel suggested a fourth alternative whereby the landlord may elect to terminate the lease but with notice to the defaulting tenant that damages will be claimed on the footing of the present recovery of damages for losing the benefit of the lease over its unexpired term. In practice, these mutually exclusive options have created no end of confusion and difficulties for landlords, tenants and their respective counsel. Just to add some further confusion, Laskin, J. did not refer to one of the landlord’s most cherished remedies, that of the right to levy distress for recovery of lease arrears, which as I read it would form a sub-category of the first remedy.

For example, a landlord faced with a tenant defaulting on its rent is placed in a conundrum: does it re-enter and evict the tenant or does it distrain to recover the rent arrears? Under traditional real property law these are mutually exclusive remedies.[5] It cannot do both. The right to levy distress is predicated upon the existence of a lease between the parties. By locking out the tenant, the landlord terminates the lease and thereby loses the right to distrain and risks becoming liable to the tenant for a wrongful seizure.[6] In order to distrain the landlord cannot deprive the tenant of its right to occupy the premises. Similarly, having elected to distrain the landlord cannot then terminate the lease if the distress sale does not pay off all the arrears and costs. The decision to distrain results in a waiver of the landlord’s right to terminate, at least until there is a fresh or new default and the landlord satisfies the notice requirements all over again.[7]

 

 

WHAT CAN BE DONE TO OVERCOME MUTUAL EXCLUSIVITY

One of the practical concerns the landlord has with distress is that once a bailiff seizes the tenant’s goods it must still wait at least 5 days before conducting a sale.[8] What happens in the meantime? If the tenant continues to have unrestricted access to the premises there is a risk that the goods that the landlord hopes will realize sufficient funds to pay the rent will disappear. However, if the landlord changes the locks the right to distrain is gone. Landlords have tried different ways of working around this conundrum with varying results. For example, in Owiafe v. Zubriski[9] the tenant leased a parking lot. Following notice of default the landlord changed the locks to the office and barricaded the lot. The landlord took the position that these restrictions on access were necessary to protect its distress rights. Moreover the landlord offered to allow the tenant to “access” if he paid a portion of the rent. The Manitoba Court of Queen’s Bench ruled that locking the door terminated the lease and therefore the entire distress was unlawful. The bailiff had other options available to it to protect the distrained goods such as removing them to another location which would not have deprived the tenant’s access. Compare this to the landlord’s conduct in Queen Street Holdings v. Z. Teca Inc.[10] where the Ontario Court found that this landlord’s locking of the premises did not constitute termination:

  1. a) The Notice of Distress clearly set out the landlord’s intention to distrain the goods left at the premises;
  2. b) The notice also clearly informed the tenant that the locks were being changed but that it would be provided with access;
  3. c) The landlord acted quickly to retain a bailiff for the purposes of the distress and instructed the bailiff to provide the tenant access to the premises under its supervision;
  4. d) While the locks were changed the tenant asked for and was provided with further access.

This Court was satisfied that the purpose behind changing the locks in that instance was to secure the goods subject to distress and prevent risk of loss while clearly showing the landlord’s intention not to terminate. The Court did go out of its way to distinguish this case from others where the landlords under the guise of distress, effectively terminated the leases and shut down business operations by denying access to the premises.

Similarly, there is a concern that if the landlord terminates the lease to gain control of the premises it will lose the right to recover the rent otherwise accruing for the balance of the lease term. Again, at common law changing the locks terminates the lease. If there is no longer a lease, the tenant no longer has obligation to pay for the balance of the term of the lease.[11] To some extent these consequences can be modified by contract provisions within the lease so as to enable the landlord to re-enter into the premises, evict the tenant and still recover by civil action the rent arrears and damages for the balance of the term of the lease. But extreme care must be exercised to maintain the tenant’s exposure for the balance of the lease terms while depriving it of possession.

Two contrasting examples may provide some clarity. In Langley Crossing v. North-West Produce[12] the landlord provided several default notices which, aside from giving notice that the rent had not been paid and the lease therefore in default, made amorphous references to what the remedy would be. These included “would enforce the rights under the lease” and “no alternative but to collect under the provisions of the lease”. The landlord ultimately sent a notice asserting that if the rent was not paid up the next day the bailiff would “proceed to distrain the goods and chattels”. The rent was not paid. The bailiff distrained. The goods were sold. The locks were changed. Then, because the lease agreement contained a covenant granting the landlord the right to terminate the lease and claim for damages for the balance of the term of the lease the landlord decided to send notice of its intention to claim for the balance of the lease term and that action was commenced. Although the landlord’s claim succeeded at trial, the British Columbia Court of Appeal took the position that having re-entered the premises without also providing clear notice of its intention to hold the tenant liable for the balance of the term of the lease the landlord’s claim was barred. However, in 491506 B.C. v. McElmoyle et al[13]  a landlord was allowed to re-enter, terminate the lease, and recover damages for the value of the balance of the term of the lease. In that case, after having given due notice of default and the cure period having expired, the landlord issued a Notice of Termination. However, this notice carefully tracked the wording of the remedies available under the lease disclosing the landlord’s intention to re-enter the premises but still hold the tenant liable for not only existing arrears and expenses but all prospective losses and damages arising under the unexpired portion of the lease. The point being that if the landlord wants to both enter into possession and still hold the tenant liable for the balance of the lease term extraordinary care must be exercised in the demands and legal notices provided.

My practice is to take a two stage approach to the notice requirements for lease enforcement. Firstly, formal demand must be made on the tenant which specifies exactly what the defaults are and the applicable cure period. If it is as simple as the rent is not paid then little needs to be added. However, if there are defaults of other covenants LTA s. 18(2) mandates that the notice served specify the “particular breach complained of”. This gives the tenant clear notice of what must be cured. If the tenant has allowed the property to waste or is carrying on business contrary to the restrictions within the lease, full particulars must be set out in the Notice of Default otherwise any attempt to exercise the right of re-entry or termination of the lease would be ineffective and the landlord exposed for any damages to the tenant. In this initial default notice it is not necessary to specify exactly what remedy a landlord has in mind if the default continues. However, once the notice period expires it is necessary for the landlord to make its election on which remedy it is proceeding with communicated to the tenant. So for example, if it was the landlord’s intention to distrain then the second notice would inform the tenant that that is what is occurring. Furthermore, that notice would need to unequivocally state that the intention is not to terminate the lease. Now if the intention is to proceed with distress the preference, wherever possible, is to leave the tenant in possession under a sub-bailment agreement where the tenant undertakes not to dispose of the seized items. However, if there is a real risk that the goods seized might disappear then consideration could then be made to notify the tenant that although the locks will be changed there is no intention to terminate the lease and pending the sale of the distressed goods the tenant will be afforded reasonable, although supervised, access to the premises.

 

ADDITIONAL COMMENTS ON REMEDIES

The primary weapon in the landlord’s arsenal for maintaining compliance of tenant obligations under the lease is the threat of re-entry. Whether this is based upon termination or simply a contractual right of re-entry, the ability on the part of the landlord on relatively short notice to deprive the tenant of the benefit of the lease and re-let the property to a new, hopefully more reliable, tenant provides tremendous leverage to the landlord. It is important to realize this is a self-help remedy exercised by the landlord and is not dependent upon obtaining a Court Order. That said, should the tenant refuse to vacate the landlord can make application to Court for a Writ of Possession.[14]

Where the landlord’s more pressing concern is recovery of rent arrears, the remedy of distress is a particularly useful tool wherein the landlord can send in a bailiff to seize the tenant’s assets on the premises and, following the five day notice to the tenant and any other interested parties, dispose of those goods and apply the proceeds against the unpaid rent. The conditions precedent to enabling the landlord to levy distress are as follows:

  1. a) There is a landlord and tenant relationship (in other words the lease has not been terminated or surrendered);
  2. b) The tenant is in possession of the rented premises; and
  3. c) There are rent arrears due and owing to the landlord – breaches of the tenant’s covenants other than the covenant to pay rent do not give rise to the remedy of distress. “Rent” will generally be defined by reference to the terms of the lease itself and may include such things as tax, insurance and even percentage rent.[15]

If the tenant disputes the landlord’s right to distress or the manner it is being exercised it can make application on a summary basis to the Court of Queen’s Bench.[16]

One of the strengths of the distress remedy is that the landlord has a first priority over secured creditors to the proceeds of the goods it distrained.[17] That priority does not extend to perfected purchase money security interests or statutory super priority claims such as CRA’s claim to unremitted withholdings taxes and GST.[18]

The right of distress is limited to recovery of no more than the preceding three months’ arrears of rent unless the rent is payable less frequently than quarterly whereupon the landlord may distrain for no more than the preceding year’s rent.[19] The distress must also be reasonable.[20] Typically the landlord may only distrain against those goods or chattels of the tenant which are actually on the leased premises at the time of the distress.[21] There are a number of anachronistic exemptions for certain articles of personal property.[22] Also, if the assets are removed before the landlord can send the bailiff in to distrain, that right is lost. However, if it can be proven that the tenant fraudulently removed the goods within 30 days of the removal, the landlord may be able to follow the goods that had been fraudulently removed.[23]

The landlord always has the right to enforce covenants by civil action and in particular obtain judgment for rent arrears and, where provided for under the lease and the tenant properly notified of the landlord’s election, damages for the balance of the lease term.

An interesting practical question is often posed about whether the landlord should rush to distrain before a tenant is placed into bankruptcy. Without getting into the merits of such an approach it must be recognized that until such time as the distress is fully completed – i.e. the distrained goods sold and the landlord in actual receipt of the proceeds, a bankruptcy occurring at any time prior thereto will result in the proceeds becoming the property of the Trustee.[24] Even where the distress has been completed and the landlord paid, there remains a risk that a Trustee in Bankruptcy might challenge the distress as a preference under the BIA regime.[25]

It cannot be forgotten that the tenant is not entirely powerless in this process. For example, in the event the landlord is proceeding with a wrongful distress, the tenant can apply to Court on a summary basis to have the dispute addressed.[26] More practically, the tenant may always bring application to Court on a summary basis for relief from forfeiture.[27] In that respect the Court retains its jurisdiction to do equity between the parties such that even where the landlord has properly complied with its legal obligations to exercise whatever remedy it has, including where the landlord may have already properly terminated the lease, the Court may reinstate the lease on such terms as it deems fit including addressing issues of quantum of rent, costs, expenses, damages, compensation, penalties or otherwise.[28] Certainly landlords must be cautious in how strictly they endeavour to enforce their rights under the lease. The Court’s jurisdiction to grant relief from forfeiture has certainly undermined the best intentions of landlords and their counsel. For example, recently in the Second Cup Ltd. v. 2410077 Ontario Ltd.[29] (yes, during the pandemic and when this Second Cup franchise could not legally be fully open to the public) a landlord sent a Notice of Termination where there was a shortfall in the amount of rent paid for April – only 75 percent of the rent leaving $4,527.55 in arrears. Second Cup offered to make immediate payment of the overdue amount. The offer was rejected. The landlord then took the opportunity to accept a new Offer for Lease from a cannabis company. The Court granted Second Cup relief from forfeiture upon payment of the unpaid rent and utilities and fully reinstated the tenant’s rights under the lease.

Although it is beyond the scope of this paper, it must not be forgotten that Canada’s insolvency regime provides tenants in financial difficulty with protection from most landlord remedies. In particular, tenants who obtain relief under the Bankruptcy and Insolvency Act[30] or the Companies Creditors Arrangement Act[31] not only benefit from the stay of proceedings but also may be able to disclaim unwanted leases.

[1] Commercial Tenancies (Covid-19)(Order in Council No. 183/2020) under The Emergencies Measures Act CCSM c.E80

[2] CCSM c.L70.

[3] For example under s. 17 of the LTA every lease is deemed to give the landlord the right to re-enter where rent is unpaid for 15 days. The LTA does not deem other covenant breaches to give the landlord a right of re-entry – save and except the keeping of a common bawdy house.

[4] Highway Properties Ltd. v. Kelly Douglas & Co., 1971 CanLII 123 (SCC), [1971] SCR 562

[5] Delane v. PCI Properties Corp., 2014 BCCA 285 (CanLII)

[6] Hutchinson v. Wiebe’s J-Mart Ltd., 1998 CanLII 28160, para. 8 (MBQB); Owiafe v. Zubriski, 2006 MBQB 209 (CanLII)

[7] Delane v. PCI Properties, Supra, para. 45

[8] LTA s. 45

[9] Supra

[10] 2017 ONSC 5890 (CanLII)

[11] Langley Crossing v. North-West Produce Ltd. et al., 2000 BCCA 107 (CanLII)

[12] Supra

[13] 2004 BCSC 1075 (CanLII)

[14] LTA ss. 67-72

[15] Brain-Hulst (1986) 59 CBR (NS) 209 (ONSC)

[16] LTA s. 60(1)

[17] LTA s. 37 and in particular s. 37(b).

[18] Canada (Attorney General) v. Community Expansion Inc., 2004 CanLII 50266 (ONSC); affirmed 2005 CanLII 1402 (ONCA)

[19] LTA s. 29(1).

[20] LTA s. 29(2).

[21] LTA s. 35.

[22] LTA s. 36(1).

[23] LTA ss. 40-42.

[24] BIA s. 73(4); Frank Bennett “The Landlord’s Right of Distress and the Trustee in Bankruptcy” 15 CBR (NS) 209 at para. 48.

[25] CIBC v. Canotek Development Corp., 1997 CanLII 1343 (ONCA)

[26] LTA s. 60(1)

[27] LTA s. 19(1); Queen’s Bench Act CCSM c.C280 s. 35

[28] Owners, Strata Plan VIS2030 v. Ocean Park Towers Ltd., 2015 BCSC 146 (CanLII)

[29] 2020 ONSC 3684 (CanLII)

[30] RSC 1985 c.B-3 as amended

[31] RSC 1985 c.C-36 as amended


DISCLAIMER: This article is presented for informational purposes only. The views expressed are solely the author(s)’ and should not be attributed to any other party, including Taylor McCaffrey LLP. While care is taken to ensure accuracy, before relying upon the information in this article you should seek and be guided by legal advice based on your specific circumstances. The information in this article does not constitute legal advice or solicitation and does not create a solicitor-client relationship. Any unsolicited information sent to the author(s) cannot be considered to be solicitor-client privileged.

If you would like legal advice, kindly contact the author(s) directly or the firm's Managing Partner Norm Snyder at nksnyder@tmlawyers.com, or 204.988.0302.



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About the Author
David Jackson
David R.M. Jackson
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