Jul
2014

Commercial Tenancies Act (CTA)-Landlord barred from enacting Distress Remedy

A commercial landlord leases a property to a tenant in the fast food business. The tenant is also a franchisor who historically leases the property, establishes the business and then sells the established business to a franchisee. The franchisee and franchisor execute a franchise agreement wherein amongst other things, the franchisee (under tenant) pays the monthly rent to the franchisor (head tenant/sub landlord) and, all of the goods and chattels located at the property are purchased by the franchisee.

The landlord has full knowledge of the franchisor franchisee relationship and feels very comfortable knowing that the financial strength of the head tenant/franchisor is behind the lease.

During the term of the lease, default in paying rent occurs and the landlord engages a Bailiff to levy distress at the property. The franchisee advises the Bailiff that all monthly rent has been paid to the franchisor (sub landlord) in accordance with the franchise agreement and further, the goods and chattels at this property do not belong to the franchisor (head tenant).

The problem is that although the franchisee (under tenant) has been paying rent to the franchisor (sub landlord), the franchisor has not paid the superior landlord thereby creating the default. The question is, under this circumstance, does the superior landlord retain the right of distress against the franchisee (under tenant) who is operating the business.

Section 32(2) of the CTA addresses this issue. In fact, the superior landlord has no right of distress against the under tenant as distress can only be exercised if the following three (3) conditions are met.

1. There must be a landlord and tenant relationship in place
2. The tenant must be in possession of the premises
3. There must be arrears of rent due and payable by the tenant to the landlord

To support the Franchisee’s (under tenant’s) position that no arrears of rent exist, and that the head tenant (franchisor) has no interest in the goods and chattels and the subject goods and chattels are the lawful property of the under tenant, the under tenant (franchisee) must prepare a Statutory Declaration addressing these issues and attach a correct and accurate list of the goods and chattels mentioned in the declaration.

Upon receipt of the declaration and inventory of goods and chattels, the party levying distress must withdraw as such levy represents an illegal distress which gives rise to a claim for damages.

To avoid the potential of this landlord and tenant situation in a commercial lease involving a tenant who franchises, include appropriate provisions calling for a lease amending agreement to be executed upon the franchisee taking occupancy. Such amending agreement should include the franchisee as the new head tenant and the franchisor as the indemnifier thereby maintaining the landlord’s right of distress and ability to litigate against the franchisor in cases of rent default.