If a tenant defaults on their obligations under a commercial lease, a landlord may wish to pursue a remedy. There are two types of tenant defaults – monetary or non-monetary. The type of default will determine the landlord’s available remedies. A monetary default occurs when the tenant fails to pay an amount due to the landlord under the terms of the lease. For example, a monetary default would occur if the tenant failed to pay rent, taxes, utilities, etc. (assuming the lease required these payments). A non-monetary default occurs when the tenant fails to perform an obligation under the lease that does not relate to the payment of money. For example, a non-monetary default would occur if the tenant failed to make a required repair under the lease. Some leases will allow a non-monetary default to be converted to a monetary default. This may be advantageous for a landlord because monetary default remedies tend to be broader.
If it is not required by the lease or some other statute, it is usually advisable for a landlord to give notice to the tenant of any default and allow a reasonable amount of time for the tenant to cure the default.
Terminating the Lease (Forfeiture of the Lease)
Assuming that the lease is silent on the issue, when a tenant fails to pay rent, the landlord may terminate the lease once rent has been outstanding for more than 15 days. There is no requirement for a landlord to give the tenant notice or allow the tenant time to pay rent after the 15 days.
When a tenant fails to perform a non-monetary obligation, the landlord may terminate the lease only after written notice has been given to the tenant and a reasonable amount of time has been given to correct the default.
If a landlord decides to proceed with terminating the lease, it should deliver written notice to the tenant and change the locks. A landlord may also choose to pursue Court proceedings to obtain a Writ of Possession. A Writ of Possession may be useful if physical re-entry is not possible or if there is a question as to whether the landlord is lawfully entitled to terminate the lease.
After terminating the lease, the landlord may sue the tenant for future rent, legal costs, costs of re-renting the premises such as brokerage commissions and the costs associated with removing the tenant’s property. It is important to note that the landlord must try to mitigate its damages by trying to find a replacement tenant.
A landlord wishing to terminate a lease must be careful not to inadvertently waive its right to terminate. For example, accepting rent (not rent for arrears, but current rent) after a breach of the lease will be considered a waiver of the landlord’s right to terminate.
Maintaining the Lease while seeking a Remedy
Distress is a remedy that permits the landlord to seize and sell the goods of the tenant (or other parties that are responsible for paying the rent) that are located on the leased premises in order to satisfy any existing rental arrears. Distress is not available if the lease has been terminated. It is important for a landlord to follow the strict procedures associated with this remedy. For example, distress may only be exercised between sunrise and sunset, never on a Sunday, and the landlord cannot use force to enter the premises. There is also the possibility that other parties may have claims against the goods, which may complicate things further. Furthermore, what qualifies as an eligible good that may be seized and sold is not always clear. For example, a landlord can only distrain against chattels of the tenant and not its fixtures such as leasehold improvements (For more information, see our real estate blog regarding the difference between a chattel and fixture).
Following a distress, the landlord must provide the tenant with proper notice. The landlord must then wait 5 clear days before selling the seized goods. This provides the tenant with an opportunity to pay the rental arrears and the landlord’s costs. Finally, the landlord must obtain 2 independent appraisals before selling the tenant’s goods.
A landlord may wish to sue the tenant for damages resulting from the tenant’s breach. This is accomplished by commencing a Court action or application. This approach is beneficial if the tenant is financially stable and the landlord wishes to keep the tenant in the premises.
Injunction or Specific Performance
An injunction remedy is an order of the Court requiring the tenant to stop carrying out a course of action. For example, the Court may provide an order for an injunction requiring a tenant to stop carrying on business contrary to the permitted use provided for in the lease. A landlord may wish to pursue a Court Order for specific performance in order to require the tenant to do something. For example, if the tenant has failed to repair something on the premises, the landlord may request an order for specific performance requiring the tenant to complete the repair.