Landlord Options Upon Default Under A Commercial Lease.

The starting point for determining the rights and obligations of landlords and tenants under a commercial lease is the written lease agreement.  A poorly written lease can really limit a landlord’s options on default by a tenant.  In addition, the common law and provincial legislation, including the Commercial Tenancy Act, RSBC 1996, c. 57, also outline relevant considerations when deciding on enforcement strategies.

Generally, a landlord’s options include terminating the Lease, suing for arrears, reletting the property on the tenant’s account or commencing distraint proceedings.  Based on the legal principles established in a case known as “Highway Properties”, a landlord’s remedies are either:

  1. to refuse to accept the repudiation or default , then seek to uphold the lease and sue for unpaid rent as it comes due;
  2. on a variation of subparagraph (a) above, to advise the tenant that the landlord is seeking to uphold the lease and proposes to re-let the property on behalf of the tenant, suing for a shortfall where it occurs;
  3. to accept the default, terminate the lease, re-enter the premises and sue for rent arrears; or
  4. to elect to terminate the lease based on the default, with notice to the tenant that damages will be based on a present value of damages for losing the benefit of the lease for the remainder of the term (off-set against any rent that can be recovered from new tenants over that time). Under this option, the landlord can sue for rent arrears and future unpaid rent, less the actual rent recovered for the remainder of the lease term.

It is a further option to distrain for unpaid rent, but not if the lease has been terminated.  Distraint means seizing the tenant’s property with a bailiff and selling the property to recover unpaid rent.

Each of these remedies can be mutually exclusive at any one point in time.  In other words, should you elect to proceed with one of these remedies, you would not be in a position to pursue any other remedy until such time as your steps to pursue the initial remedy had been concluded.

For instance, in the case of Delane Industry Co. Ltd., v PCI Properties, 2014 BCCA 285, the Court held that, in electing to distain, the landlord had affirmed the lease by distraining and effectively waived its right to terminate the lease based on unpaid rent.  Following an appeal of that decision, the Court further held that, once the distraint was complete, if the tenant had further defaulted under the lease following the distraint process, the landlord could issue a fresh notice to cure that complied with the terms of the lease and, if the default was not cured, the landlord could then sue the tenant for the any outstanding rental arrears.

As such, although the remedies cannot be exercised concurrently, when one remedy is completed, it may be possible to effectively initiate another remedy.  One important factor in deciding on the most effective remedy will be the prospect for recovery or arrears and further potential damages from the tenant, including whether the landlord is aware of either any income or assets owned by the tenant (and whether other creditors already have priority claims to those assets).  The existence of a guarantee from a guarantor that may have assets or income to assist recovery will be another key consideration.  The likelihood of reletting the premises at a similar or better rate in current market conditions will also be a relevant factor.

The factors outlined above are not necessarily comprehensive and the most appropriate strategy will depend in the individual circumstances of each tenancy situation.  Selecting a strategy for enforcement requires careful and informed consideration of many legal and factual issues in order to facilitate a good business decision.  If you have a tenant that has defaulted on lease obligations, you should obtain legal advice specific to your situation.

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