RECENT DEVELOPMENTS of IMPORTANCE IN PROPERTY LEASING
Distress Remedy – A Minefield
The right of distress allows a landlord, without any judicial process, to seize, take into possession, and sell the goods and chattels of its tenant to satisfy any unpaid rent. There are many technical rules when exercising the right to distrain and landlords need to be aware of their potential personal liability.
Generally speaking, a landlord will lose its right to distrain if any of the following occur: the tenant becomes insolvent and files a proposal under the Bankruptcy and Insolvency Act (or the tenant becomes bankrupt); the tenant surrenders possession of the premises and the landlord accepts; the landlord ends the lease; the landlord sues for unpaid rent and obtains judgment; the tenant pays the amount owing to the landlord or its agent; or a receiver is appointed by a court.
In Delane Industry Co. v. PCI Properties Corp., the Tenant withheld rent due to a dispute with the Landlord.1 The Landlord wrote to the Tenant demanding payment for $120,358 in unpaid rent. The Tenant did not pay, and the Landlord issued a distress warrant. The proceeds from the sale of chattels were $9,500 - a lot less than the rental arrears. The Landlord terminated the lease for non-payment of rent. The lower court found that the Landlord had to issue a fresh demand letter that specified the amount owed when distress did not produce sufficient proceeds to cover rental arrears. The Landlord appealed.
The British Columbia Court of Appeal agreed with the trial judge that a notice of default given by the Landlord during distress did not effectively end the Lease upon completion of the distress and held that the Lease would not be terminated under a "cumulative remedies clause". What was surprising was the Court's rejection that a landlord, who issues a new notice of default, can rely on rental arrears that accrued before the completion of distress as justification for terminating the lease.
The Court of Appeal disagreed that it was open to the Landlord to give the Tenant another notice of default, stating the unpaid rent based on breaches before or during distress as "such a course would amount to a nullification of [the Landlord's] election of distress – and hence its irrevocable waiver of the past breaches – up to the completion of distress."
The Court stated that it was a clear principle of contract law where Party A breached a term, which allowed Party B to end the agreement, but Party B chose to affirm the contract (e.g., by opting for the distress remedy instead of ending it). As such, Party B could not rely on the same breach (e.g., original unpaid rent) to end the contract. Although the Landlord lost its right to end the contract for the original unpaid rent, the Landlord could sue for the balance owing after distress was completed. The Landlord could give a new notice of default based on any new default, but it would have to comply with requirements in the Lease for defaults (and termination) and state clearly the amount of rent, post-distress, said to be due and owing.
Dual Limitation Regime – Finally Some Judicial Guidance
When the Limitations Act, 2002 came into force in Ontario on January 1, 2004, it replaced Parts II and III of the former Limitations Act. Part I of the old act (dealing with real property interests) was renamed the Real Property Limitations Act ("RPLA").
The new Limitations Act was designed to simplify the application of limitation periods by providing a basic limitation period of two years based on the principle of discoverability. Given the two limitation regimes, the obvious question is which statute applies – the new Limitations Act with a two-year limitation period? or the RPLA with a six-year limitation period? The RPLA does not specifically address leases, although "rent" is defined to include "all annuities and periodical sums of money charged upon or payable out of land" and the RPLA refers to "arrears of rent".
Opinion was divided on whether lease disputes would fall under the RPLA or the new Limitations Act. Over time, support grew for applying the six-year limitation period under the RPLA to landlord claims for unpaid rent and applying the two-year limitation period under the new Limitations Act to a tenant's claim for overpayment of rent. And since most tenant defaults can arguably be converted into a rental default by virtue of the Landlord's self-help remedies and indemnity clauses, the predominant view was that landlords can go back six years whereas tenants are limited to two years. However, a recent case appears to dramatically limit scenarios where a landlord can take advantage of the six-year limitation period under the RPLA.
In Pickering Square Inc. v. Trillium College Inc., the parties entered into a lease for a five-year term expiring on May 31, 2011. Under the lease, the Tenant was required to operate its business "continuously, diligently and actively" at all times. If it did not, the Landlord was entitled under the Lease to collect an extra charge from the Tenant for each day it failed to operate its business in the premises (the "Per Diem Charge"). The clause described the Per Diem Charge as a liquidated sum representing the minimum damages that the Landlord is deemed to have suffered because of the Tenant's failure to operate. The Court noted that the clause expressly stated that the Per Diem Charge was, "in addition to the Minimum Rent and Additional Rent", payable under the Lease.
After the Tenant vacated the premises in December 2007, the Landlord brought an action for payment of the Per Diem Charge. Later, the parties entered into a settlement agreement that required the Tenant to resume occupation of the premises by October 1, 2008. The Tenant did not re-occupy the premises. In February 2012, the Landlord began a second action against the Tenant for payment of the Per Diem Charge. The Tenant brought a summary judgment motion claiming that the limitation period began to run on October 1, 2008; therefore, the Landlord's action was barred by the two-year limitation period under the Limitations Act.
The Landlord argued that the appropriate limitation period was six years because the Per Diem Charge fell within the definition of "rent" under the Lease, which included "any and all sums of money or charges required to be paid by the Tenant."
The Court had to determine whether the Landlord's claim was for "damages", where the Limitations Act would apply, or if it was for "rent", where the RPLA would apply. The Court stated that with the new Limitations Act, "the legislature created a single, comprehensive general limitations law that is to apply to all claims for injury, loss, or damage except, in relevant part, when the RPLA specifically applies." As such, the Court was of the opinion that the new Limitations Act should be interpreted broadly and the RPLA should not. The Court noted that the definition of "rent" in the RPLA refers to "all annuities and periodical sums of money charged upon or payable upon the land." It concluded that "rent" in the RPLA applies to "rent service or rent reserved, and means the payment due under a lease between a tenant and landlord as compensation for the use of land or premises."
The Court did not agree that the Per Diem Charge was "rent" under the RPLA just because it was defined as "rent" in the Lease. The Court opined that "'rent' in the RPLA is not an empty vessel that the parties may fill at their discretion. It must be interpreted in light of the context, scheme, and object of that statute and the law of limitations in Ontario." As such, the Court found that the Landlord's claim was for damages; therefore, the new Limitations Act would apply.
The Court agreed that the two-year limitation period began on October 1, 2008 (when the Tenant failed to resume occupation), but the Court found that the Tenant's breach was continuous and that the Landlord suffered damages for each day that the Tenant failed to conduct its business in the premises. Accordingly, the Landlord's Per Diem Charge claim was time-barred for the period before February 2010 (two years before the Landlord began its action), but not for the period between February 2010 and the last day of the Term - May 31, 2011.
In Simone v. Investor's Group Trust Co. Ltd., the Court considered when a limitation period begins. The Tenant ran a tanning business in a shopping centre that was nine separate, but close, buildings. A fitness facility ("Snap Fitness") started a lease with the Landlord in the same shopping centre. Snap Fitness operated one tanning bed for exclusive use of its members. The Tenant demanded enforcement of its exclusive use clause. The Landlord maintained that the exclusive use clause applied only to the building where the Tenant's unit was located and not to the entire shopping centre. In June 2010, the Tenant sent an e-mail to the Landlord complaining its sales were down by 10% due to the fitness facility. When the Tenant brought an action against the Landlord in April 2013, the Landlord applied for summary dismissal of the claim based on expiry of the limitation period.
Was the Landlord entitled to immunity from liability because the Tenant did not file its claim within the two-year limitation period in Alberta's Limitations Act? The Court rejected the Tenant's argument that there was a fresh injury each month the Tenant's business lost sales after Snap Fitness opened. To view it as such would mean the limitation clock would start again with each monthly loss in sales. This would undermine the purpose of limitation legislation and would fail to protect the Landlord from what other courts described as "ancient obligations". The Court cited Peixeiro v. Haberman, which set out that "neither the extent of damage nor the type of damage need be known. To hold otherwise would inject too much uncertainty into cases where the full scope of the damages may not be ascertained for an extended time beyond the general limitation period."
The Court stated that if the Landlord violated the Tenant's exclusive use, it would constitute a single event of default (as opposed to a continuing default). Since the Tenant's claim came after the two-year limitation period expired, the Landlord was "entitled to immunity from liability in respect of the Tenant's claim" and the Court summarily dismissed the matter.
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