Legal Blog

Distress

Your client calls you. She is operating a video store and, as a result of exorbitant rent, is losing money and is in arrears of rent. She is in year 2 of a 7-year lease. She has found better and cheaper premises down the street at half the rent. Finally, and the best of all, her existing lease is in the name of a shell company. You advise her to incorporate a new corporation, enter into a lease for the new premises, surreptitiously move her stock to the new store, and then to tell her landlord to (expletive deleted). Is your advice sound?

Fraudulent Removal

Were it not for sections 48 and 50 of the Landlord and Tenant Act, your advice might have merit. However, with them, your client could be in big trouble.

Section 48 states that where a tenant “fraudulently or clandestinely, … carries off from the premises .. goods and chattels to prevent the landlord from distraining them for arrears of rent …”, the landlord may, within 30 days, follow those chattels, seize them and distrain against them.

Section 50 states that “if a tenant so fraudulently … carries off … goods or chattels, or if any person wilfully and knowingly aids or assists … in so doing, or in concealing them, every person so offending shall forfeit and pay to the landlord double the value of such goods or chattels”.

If this sounds punitive and draconian, it is because it is. There have not been many cases under these sections, probably because not many litigation lawyers are aware of them. We have been involved in two of these cases, acting for the landlord. We won one and lost one.

The Hard Way

The latest case to surprise an officer of a tenant was Cowie Industrial Developments v. National Clearance Warehouse Ltd. Et al, a 1997 unreported decision of Madam Justice Lax of the Ontario Court (General Division).

Phil Wynn operated National Furniture and, using another corporation, leased the landlord’s premises as a warehouse. The recession hit, sales plummeted, and there was no money to pay any rent, much less the 1980’s rent stipulated under the lease.

The landlord was forced, on one occasion, to distrain against the chattels in the warehouse. However, the landlord and tenant made a deal overnight whereby the tenant would pay some of the arrears and the landlord would discontinue the distraint.

There was a bitterly fought issue as to whether the distraint resulted in the termination of the lease, because the lock on the door was inadvertently broken when the landlord entered the premises. The judge held that the landlord never intended to terminate and, given the other indicia of non-termination, the lease had not been terminated.

The judge did not comment on the fact that the distress was carried out at night and was, therefore, illegal. However, the illegality of the distress would not necessarily terminate the lease and, accordingly, is not relevant to the judge’s ultimate decision.

Gone with the Wynne

Within months of the first distress, the tenant, using its own trucks and over a period of approximately one month, emptied the warehouse of all of its contents. The landlord had been watching the warehouse, but nothing looked unusual. The tenant then informed the landlord that it had vacated. Of course, the tenant was judgment proof.

The landlord traced some of the furniture to another warehouse. The landlord videotaped Mr. Wynn refusing access to the landlord’s representatives.

Personal Liability

The judge held the tenant liable for arrears of rent. This was important, not because the landlord could collect from the tenant, but because section 50 talks about an attempt to prevent distress. A landlord cannot distrain unless there are arrears.

The judge further held as follows:

1. The chattels were moved in such a manner as to conceal what was really happening. They were moved in a short period of time, but over a long enough period to arouse no suspicion. Large tractor-trailers were not used. The move was clandestine.

2.   Phil Wynne was the directing mind at al times and was  therefore personally liable. His son Leslie had been brought into National Furniture to clean up the inventory “mess”. He knew what was happening. He “served as his father’s agent and is cloaked with his knowledge”. “He ought to have questioned his father’s advice as to why he was being asked to participate in a dishonest activity. He cannot escape liability now by maintaining that his father took care of things.”

3.    The inventory was worth, at minimum $500,000.

The Result

The building had been sold. Loss of rent to the date of sale was $236,641.20. Phil and Leslie Wynn were personally liable for $1,000,000. Costs were awarded on a solicitor-client basis because fraud had been proven.

Advice to Give

If there are no arrears, it is doubtful whether section 50 applies. Tell the tenant to pay the rent up-to-date. If three months accelerated rent comes due for a breach under the lease, have the tenant pay that also. Then clean out the chattels with impunity. In the alternative, since the place was a warehouse, transfer the furniture to the stores in the normal course, but do not transfer more furniture into the warehouse.