The Property Management Exposition & Conference “What Do I Do When My Tenant Defaults?” A Practical Guide for Non-Lawyers Presented by: Gasper Galati Kenneth Pimentel

The Property Management Exposition & Conference “What Do I Do When My Tenant Defaults?” A Practical Guide for Non-Lawyers You can download this presentation to your mobile device at:

PART A: AGENDA  Takeaway Highlights  Non-payment of Rent  The Late Payer – Rent Default  The Surrendering Tenant  Waiver  Rent paid by someone other than Tenant  Non-monetary defaults  Midnight Move  Abandonment  If the Tenant is in Default – Where does that leave their Subtenant and/or Occupant?

Takeaway Highlights  Watch for warning signs of impending trouble with the tenant, such as late or short payment of rent, changes or reduction of staff, reduced inventory, requests for rent relief and requests to reduce the size of the premises. These warning signs can be significant in helping to minimize loss and achieve business objectives  Report on relevant information, including to Leasing, so timely decisions and action can be made and taken and so there is consistency in approach to the defaulting tenant. Do not let arrears build or a breach continue without consultation/action plan. Inaction can compromise rights you may want to exercise at a later date

Takeaway Highlights cont’d  On the bright side – defaults can present a golden opportunity to strategically evaluate:  If it is time for a divorce – is there a better tenant out there?  Whether there is any opportunity to negotiate to improve rights that were not in the original deal – for example, obtain an EFT, security deposit or indemnifier  Whether certain rights can be avoided on the basis of the default, such as rights of exclusive use, options to extend, and the like  All this requires good papering of the file – keeping good notes of relevant events, complete files or correspondence, documents and pictures where helpful

Takeaway Highlights cont’d  The lease and other governing documents are the starting point for all discussions on rights and remedies. Review the documents carefully – get help if you need it. Relying on the lease summary exclusively can be misleading!

SCENARIO 1 NON-PAYMENT OF RENT

Non-Payment of Rent  The landlord must elect to either keep the lease alive or terminate  If the landlord elects to continue with the lease, it may:  Sue for rent arrears as they come due, in which case there is no duty to mitigate; or  Exercise its right of distress – seize and sell the tenant’s property to pay rent.  Alternatively, the landlord may elect to terminate the lease and sue for past and future rent, in which case the duty to mitigate is triggered

Non-payment of rent (Distress)  Lease must be alive; cannot distrain after termination.  Can only distrain for arrears of rent – generally lease provides any amounts owed by the Tenant to the Landlord is “rent”.  Retain a good bailiff to conduct the distress.  Beware of governmental super liens for unpaid HST (GST & PST) arrears and source deductions – the Landlord could be liable to pay the Tenant’s arrears.  Often inspires Tenants to pay rent.

Non-payment of rent (Termination)  Notice of Default – key document.  Always, always, review lease carefully to determine how much notice is required, who is to receive notice, where is notice to be sent, and how notice is to be delivered .  To effect a termination you must lock the Tenant out. If you can’t lock out peacefully, obtain a Court order.  No time limit on default notice – but be wary of waiver.

SAMPLE OF TENANT ARREARS STATEMENT (INCORRECTLY RECORDED)

SCENARIO 2 THE LATE PAYER

The Late Payer  Talk to your tenant  Send a letter to the tenant indicating rent was paid late and should be paid on the 1 st day of a month  Monitor the tenant’s payments for repeat delays in payments  Insist on EFT or Pre-Authorized payments wherever the lease permits  A tenant may be deprived of options under its lease where such options are dependent on the Tenant not being in default under its lease

SCENARIO 3 THE SURRENDERING TENANT

Acceptance of Keys and Surrender  When a tenant abandons its premises, it often hands in the keys  Try not to accept the keys, because doing so may amount to the landlord accepting a surrender of the lease  If the landlord accepts a surrender of the lease, it cannot sue for rent payable after the date of surrender, but it can still sue for arrears up to the date of surrender  However, if the landlord has no other choice but to accept the keys, when a tenant drops off the keys, the landlord should retain the keys and send a letter to the tenant advising that the landlord is NOT accepting a surrender of the lease, and that the landlord maintains its right to sue for all losses, including loss of rent

SCENARIO 4 WAIVER

Waiver of Landlord’s Right to Terminate  If the landlord elects to terminate the lease as a result of the tenant’s default, it must treat the tenant as a tenant in default until the default is cured. Otherwise, the landlord may waive its right to terminate for the default  Waiver applies to the right to terminate only, not the right to sue for the rent owing  When a tenant is in default, do not carry on business as usual (e.g. make repairs, invoice or issue statement of readjusted rents)  When talking to a tenant, always be clear – discussions are without prejudice to landlord’s right to terminate and landlord is not waiving this right

Partial Payments from Defaulting Tenants  Tenant may tender partial payment of rent. How should this be handled?  Landlord may accept the payment. Landlord should notify tenant in writing that the payment will be applied to the oldest rent owing and that the default has not been cured  Never apply or allocate rent payments to the current month’s rent

SCENARIO 5 RENT PAID BY SOMEONE OTHER THAN TENANT

Rent Paid by Someone Other Than the Tenant  Sometimes rent is paid by someone other than the named tenant and there is no record of that third party occupying the space  This is most common in a franchise situation where a franchisee pays the rent  CAUTION: if you accept rent from someone other than the tenant, you have consented to them whether or not that was your intention  If you receive a payment from a party other than the tenant, ASK THE TENANT about the nature of the relationship BEFORE accepting the payment – a consent to sublease or assignment may need to be processed  If you decide not to consent, INSIST ON payment from the tenant (or have a legal letter prepared stating that rent is being accepted from the third party on behalf of the tenant, without prejudice to the landlord’s rights – but note that it might not be adequate to protect the landlord especially over repeated instances)

SCENARIO 6 NON-MONETARY DEFAULTS

Non-Monetary Defaults  As in monetary defaults, always, always review the lease carefully to determine how much notice is required, who is to receive notice, where is notice to be sent, and how notice is to be delivered  Commercial Tenancies Act section 19(2) provides that a Tenant must be given a reasonable opportunity to cure a non-monetary default (often called a “19(2) notice”) – this overrides the lease. In your notice of non-monetary default, you must specify the breach, the cure period to rectify the breach, and what needs to be done in order to bring the lease into good standing

SCENARIO 7 “MIDNIGHT MOVE”

Midnight Move 1. BE PROACTIVE  Look for signs before a tenant attempts a midnight move – late payment of rent, changes in tenant’s staffing, inventory, the appearance of its premises, attempts to sublease  Take pictures of what the premises looks like in full operation so that if the tenant later attempts to remove its items, the landlord has evidence of what was removed and its value. Great idea to implement (a) soon after Commencement Date, and (b) at any time you suspect a tenant is a flight risk. Be sure to understand how you may legally gain access to the Premises

Midnight Move cont’d 2.UPON A TENANT STARTING TO REMOVE ITEMS FROM THE PREMISES:  Do not provide assistance or services to a tenant who is attempting to move out contrary to its lease – DO NOT USE PHYSICAL FORCE  Ask for names of persons (and/or take a picture of their ID) moving and assisting in the moving of the goods  Take picture of the persons and items being removed  Document any conversations  Confirm if tenant is in monetary arrears. If so, managers and their security guards may warn those removing goods (and providing assistance) that they will be held personally responsible for 2X the value of the items removed. The Commercial Tenancies Act states that those that remove (and those that assist them in removing) goods from the premises are responsible for 2X the value of all goods removed and may have to return them

Midnight Move cont’d 3.THE KEY TO HANDLING A MIDNIGHT MOVE IS TO DOCUMENT THE SITUATION AND OBTAIN PHOTOGRAPHIC EVIDENCE

SCENARIO 8 ABANDONMENT

Removal of Tenant’s Property ;  At the end of the lease, the landlord generally gives the tenant notice to remove its property by a certain date, failing which the landlord will “dispose of the property, as it sees fit”  Where the property has value, the landlord may want to keep the property or transfer it to the incoming tenant  Difficult in that the property belongs to the tenant, and the tenant’s creditors may have a security interest in the goods

Tenant’s Equipment and Furniture  Once the lease is terminated, the tenant may remove its chattels (i.e. equipment and furniture)  Generally (although the lease may state otherwise), the tenant may remove its trade fixtures, being the equipment affixed to the premises by the tenant for purpose of the tenant’s business  Tenant may not remove the landlord’s fixtures or the leasehold improvements, being the items attached to the premises for the purpose of improving the premises (although the lease may state that the tenant is required to remove certain leasehold improvements)

Abandoned Property  Goods can be removed by a bailiff or liquidator and put into storage, at the tenant’s expense. Or, goods may be sold under the Repair and Storage Liens Act  Goods may be left in the premises and if the new tenant accepts the premises “as is, where is”, the new tenant can use the equipment without any assurances from the landlord  If the goods are being sold, beware of government liens for unpaid HST (GST & PST) and source deductions

SCENARIO 9 IF THE TENANT IS IN DEFAULT – WHERE DOES THAT LEAVE THEIR SUBTENANT AND/OR OCCUPANT?

Dealing with Subtenant/Occupant  There is no legal connection between the landlord and the subtenant or occupant  It is essential to review the documents that provide the legal link between the landlord and the subtenant or occupant. This is found in the consent to sublease and the covenant of the occupant. There you will determine what rights and obligations the subtenant and the landlord have to each other, both if lease is being kept alive or on a termination  Do not accept a surrender of the lease from a tenant without considering whether there are subtenants. Section 17 of the Commercial Tenancies Act provides that where a tenant surrenders the lease, the landlord and the subtenant become bound to each other directly by the terms of the sublease. This does not happen if the landlord exercises its right to terminate

Dealing with Sub-Tenant/Occupant Continued  Absent a special deal between the landlord and the subtenant, if the lease terminates then the sublease terminates as well. However, under Section 21 of the Commercial Tenancies Act, the subtenant may claim relief from forfeiture – the right to stay in the premises and be the direct tenant of the landlord subject to terms the court may impose. The court must be satisfied that the landlord will not be unfairly prejudiced  Although the typical consent to sublease DV prepares has the tenant waive these rights, there is no conclusive caselaw that these waivers are enforceable

NOW…LET’S TALK ABOUT BANKRUPTCY

Part B: BANKRUPTCY Agenda  Bankruptcy  BIA Proposal v. CCAA Plan of Arrangement  Court-Appointed Receiver v. Private Receiver  Landlord’s Preferred Claim in Bankruptcy  Landlord’s Compensation when its Lease is Disclaimed  Objecting to an Assignment of Lease by a Trustee  Rights of Subtenants when Head Tenant goes Bankrupt

Bankruptcy  Proposal/Plan v. Bankruptcy (Restructuring/Voting v. Liquidation)  When a landlord received a Notice of Intention to File a Proposal under the Bankruptcy and Insolvency Act (“BIA”), it cannot terminate the lease for past defaults, including arrears of rent  Going forward, rent must be kept current  When a tenant goes bankrupt, the trustee in bankruptcy may retain premises for up to three months

Bankruptcy Cont’d  Trustee may be liable to pay occupation rent to the landlord  Trustee can “disclaim” the lease, i.e. terminate the lease. During the proposal phase, a landlord may object to a disclaimer. During bankruptcy, the trustee also has the option to retain or assign the lease  Under the BIA, landlord has preferred claim for up to six months’ rent – more on this later

BIA Proposal v. CCAA Plan of Arrangement  CCAA is more flexible and is used by large companies with debts over $5,000,000  CCAA starts with an Initial Order – sets the ground rules including a stay and the appointment of a “monitor” who oversees (but does not actually operate) the business  The Initial Order will prevent the landlord from terminating the lease for past defaults and will require the tenant to comply with its lease obligations going forward, including the payment of rent. Aside from the right to disclaim, the Initial Order should not amend an existing lease

Court-Appointed Receiver v. Private Receiver  Security documents such as a general security agreement, will grant a secured creditor the right to appoint a receiver  A private receiver appointed by a secured has no greater rights, vis- à-vis the landlord than the tenant. The appointment of a receiver is often an event of default under a lease for which a landlord may terminate  An Interim Receivership Order issued by a Court under the BIA will include a stay that prevents the landlord from terminating the lease during the receivership. Rent must be paid and the receiver must comply with the lease. Just to confuse you, upon bankruptcy, a “Receiving Order” is issued by the Court

Landlord’s Preferred Claim in Bankruptcy  Under the BIA, upon a tenant’s bankruptcy, the landlord is a preferred creditor for 3 months’ rent arrears, if any, and up to 3 months of accelerated rent, provided the lease allows for acceleration of rent  The landlord’s preferred claim is limited to the amount realized from property on the premises. As secured creditors are entitled to realize on the tenant’s property first, there is generally little, if anything, left to satisfy the landlord’s preferred claim  Rent paid during the 3 months following bankruptcy is deducted from the amount of accelerated rent to which the landlord is entitled

Landlord’s Compensation when its Lease is Disclaimed  In bankruptcy, the landlord’s preferred rent claim is all there is – there is no entitlement to an unsecured claim for the other lost rent  Under a bankruptcy proposal, the BIA allows a landlord to vote to approve/reject the proposed terms based on the landlord’s claim of either its actual loss or the less of: (i) 1 year’s rent plus 15% of the rent payable over the remainder of the term, or (ii) 3 years’ rent – whatever amount the proposal calls for. The landlord is an unsecured creditor  Under the CCAA, there are no fixed rules. Compensation, if any, depends on the terms of the plan of arrangement as approved by the creditors (through voting) and the court

Objecting to an Assignment of Lease by a Trustee  A trustee in bankruptcy may elect to assign a lease following the tenant’s bankruptcy  The lease must be in good standing, all rent must be paid and, if the landlord does not consent to the assignment (which it has no obligation to do), the trustee may apply to the court to approve the assignment. The court will approve the assignment if it is satisfied that the proposed tenant is a fit and proper person who will observe and perform all terms of the lease. No change of use is guaranteed but it may be possible (Dylex – BiWay/Dollarama sale)

Rights of Subtenants when Head Tenant goes Bankrupt  Where the tenant is bankrupt and a subtenant is in possession of the premises prior to the bankruptcy, a subtenant may make an application to become a direct tenant of the landlord  The subtenant is subject to the original tenant’s liabilities as well as obligations under the lease at the date of the assignment  If the subtenant becomes a direct tenant of the head landlord, it must do so on the same terms as the head lease (which may include occupying the entire premises and paying the rent set out in the head lease but not clearing up the arrears)

PRACTICAL SCENARIOS IN HANDLING TENANT DEFAULTS Scenario 1 The tenant has occupied the premises for several years and is halfway through its long-term lease. There are rumors that the tenant has been facing financial problems over the last several months. As well, there have been several instances where the tenant has not paid its rent in full. Some of the underpayments stretch back over two years. This month, the tenant has again underpaid its rent and additional rent. Can the past arrears be used to terminate the lease? What is the best course of action in the circumstances?

PRACTICAL SCENARIOS IN HANDLING TENANT DEFAULTS (cont’d) Scenario 2 Throughout the term of the lease, the tenant has consistently failed to properly maintain the exterior of its leased premises. Often garbage is not picked up around the premises or not properly stored, which has led to foul odors emanating from the property and the attraction of the rodents and pests. The landlord has spoken to the tenant on several occasions about the problem, and, while the tenant has made token efforts to resolve the problem, it remains a concern for the landlord. What steps can the landlord take to resolve the problem? What remedies are available to the tenant and how should the landlord respond?

PRACTICAL SCENARIOS IN HANDLING TENANT DEFAULTS (cont’d) Scenario 3 While driving past the tenant’s premises, the landlord notices that it is unusually quiet and deserted. The landlord walks up to the front door and notices that all the furniture and equipment in the premises has been removed. The front doors are locked and none of the tenant's staff is present. The landlord calls the tenant but receives no response. The tenant is current on its rent and there is no requirement in the tenants lease that it continuously operate its business from the premise. What can the landlord do?

PRACTICAL SCENARIOS IN HANDLING TENANT DEFAULTS (cont’d) Scenario 4 The landlord has terminated the lease of a restaurant for non-payment of rent. The tenant has vacated the premises in accordance with the landlord’s termination. The landlord enters the premise only to find that the tenant has left behind much of its equipment, some of which may have value and some which has no value at all. What can the landlord do with the equipment?

Questions or Comments? Contact us at: Gasper Galati Partner (Litigation) (416) Kenneth Pimentel Associate (Litigation) (416) Join our News ReLease distribution list -or- Check out our website to access our News ReLeases and other recent publications: