If a commercial tenant is behind on its rent, should the landlord terminate its lease and evict the tenant? Maybe not — commercial landlords have other, often better, options. This article outlines two of those options: distress and re-leasing on behalf of the delinquent tenant.
This article deals only with tenancies for premises located in Saskatchewan that are commercial and not residential or agricultural in nature. Different rules apply to residential tenancies and farm leases. It also does not address the special considerations applicable to insolvent tenants.
Why not Terminate?
Terminating the lease of an unprosperous tenant may seem the best option because it provides a simple, clean break. However, if a commercial landlord terminates the lease, its sole remedy to collect the arrears and future rent due under the lease is to sue the tenant. Lawsuits can drag on for years, and judgments can be difficult to enforce, particularly after the passage of time. Before terminating a lease, commercial landlords should consider the remedies of distress and (if available in their lease) re-leasing on behalf of the delinquent tenant.
The Remedy of Distress
Commercial landlords have a potentially powerful tool for collecting overdue rent known as the remedy of distress (also known as distraint). It allows the landlord to seize and sell the tenant's property to pay the arrears. This remedy comes from The Landlord and Tenant Act, so any commercial landlord can use it unless their lease says otherwise.
To use the remedy of distress, a landlord hires a third party known as a bailiff who is licensed to perform tasks like these. The bailiff goes to the rented premises, seizes the tenant's property (except property subject to a purchase-money security interest in favour of someone else), and gives the tenant a "notice of distress" listing the rental arrears and the property seized.
After the property is seized, the tenant has, pursuant to section 35 of The Landlord and Tenant Act, five days to pay the arrears. If the tenant pays the arrears, the tenant gets its property back. If the tenant does not pay the arrears, the tenant's property may be sold and the proceeds applied to the arrears.
Landlords can claim some or all of the costs of the distraint from the tenant or out of the proceeds of the goods. The type and amount of the costs that may be claimed are determined by The Distress Act and the terms of the lease.
It is important for landlords to know that the remedy of distress is available only if the lease has not been terminated. The landlord must not terminate the lease before distraining and should not do anything that could be interpreted as terminating the lease, such as denying the tenant access to the rented premises.
Landlords often want to terminate the lease after the distraint is complete if they do not receive enough from the distraint to pay the arrears. It is therefore also important for landlords to know that courts have in some cases interpreted landlords' use of the remedy of distress as meaning that the landlord will not terminate the lease for failure to pay rent. Accordingly, if a landlord wishes to terminate the lease after the distraint is complete, the landlord should obtain legal assistance in managing both the distraint and the termination.
Re-Leasing the Premises on Behalf of the Tenant
Some leases provide that landlords may take possession of the rented premises and re-lease them to a third party on behalf of the tenant without terminating the lease. These clauses usually state that the landlord will receive rent directly from the third party.
Re-leasing on behalf of a tenant may seem to achieve a result similar to terminating the lease. However, the key advantage to re-leasing is that if the landlord uses a re-leasing clause, it does not necessarily have to sue the tenant to recover the arrears and any future rent the tenant may owe. Instead, re-leasing clauses typically allow the landlord to collect the delinquent tenant's arrears and the landlord's costs of re-letting from the new tenant's rent, then to credit the new tenant's rent against the future rent that would have been owing by the delinquent tenant. The delinquent tenant remains on the hook if there is any shortfall between what the delinquent tenant would have paid under the lease and what the new tenant paid. Accordingly, if the new tenant pays a higher rent than the delinquent tenant, the landlord could end up paid in full for the delinquent tenant's arrears, re-leasing costs, and future rent by the end of the delinquent tenant's lease. In contrast, if the landlord terminates, the landlord must sue the delinquent tenant in order to collect the arrears and any future rent the delinquent tenant may owe.
Terminating the lease is often not the best option for collecting rental arrears. Instead, if the delinquent tenant has goods on the leased premises that could be seized and sold in an economical manner, a commercial landlord should consider distraint. Commercial landlords should also review their leases to see whether they are permitted to re-lease the premises on their delinquent tenant's behalf without terminating the lease, as such clauses may permit landlords to recover the arrears without a lawsuit.
Commercial landlord and tenant law can be complicated and technical. It is easy for a landlord to compromise its rights or act unlawfully without intending to do so. Commercial landlords should seek legal advice before taking any action to collect arrears.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.