Legal Blog

Illegal Distraint Damages

On occasion, a case comes along that is filled with so many legal concepts that it is very difficult to distil them in the space allotted to us. One such case is 2105582 Ontario Ltd. (Performance Plus Golf Academy) v. 375445 Ontario Limited (Hydeway Golf Club), 2017 ONCA 980.

Fore

Landlord golf club leased to tenant, without a formal lease, land adjacent to the golf course for the use as a driving range. Tenant invested approximately $200,000 to construct the driving range and purchase the necessary equipment. The driving range went into operation around September 2006, but, one year later, tenant fell into arrears. Landlord terminated the lease as of December 6, 2007.

Tenant vacated the premises on that day and removed some assets, but landlord called the police to prevent tenant from removing all of them. Tenant tried again on Feb. 15, 2008 and was attempting to remove the remaining assets when landlord again summoned the police to prevent tenant from removing them.

Landlord then operated the driving range, with the disputed assets, for another 8 years – when both the golf course and the driving range went out of business.

Trial

The driving range deck was a 9,000 sf wooden platform, with a permanently attached ball shack, covered by a steel canopy. It was affixed to the land with pressure treated wood beams and a concrete base. Water and electrical wiring ran through the structure. The 60′ high barrier poles were drilled 5 feet into the ground and secured with steel anchors. The nets, which remained during winter, were fastened to the poles with steel clips and cables.

The trial judge found that all of the assets were trade fixtures, landlord had unlawfully distrained them, and landlord was liable for damages for the tort of conversion. The trial judge valued the depreciated trade fixtures at $188,000 and awarded that amount to tenant in compensatory damages. In addition, he ordered $80,000 in “exemplary” damages, calculated at $10,000 per year for the 8 years that landlord used the converted assets. Landlord appealed.

Trade Fixtures

Landlord argued that the assets were true fixtures that ran with the land because they could not be removed without material damage to the land. That argument was quickly rejected because the trial judge had found as a fact that the assets could be removed without material damage to the land.

The Court noted the following:

1. Fixtures are assets that are sufficiently affixed to real property to be considered permanent in nature and part of the land. Whether they are sufficiently affixed depends on the degree and object of annexation to the land.

2. Trade fixtures are assets that a tenant affixes to leased premises for trade or commercial purposes. Tenants are presumptively allowed to remove trade fixtures at the end of a tenancy as long as the removal does not materially damage the premises. In tenancy situation, rather than land sale situations, the object of annexation is presumptively not one of permanence.

3. The test to determine whether an asset is a leasehold improvement is the same as the test for whether an asset is a fixture. In a lease context, a fixture is the same as a leasehold improvement. Trade fixtures, by definition, are not leasehold improvements.

Distraint

A landlord cannot distrain the chattels of a tenant if the landlord has terminated the tenancy. Distraint can only be used when the tenancy is still in effect, either before the end of the tenancy or while a tenant overholds.

Further, trade fixtures, while they remain affixed to the land, are never subject to the landlord’s remedy of distress. Distraint is to be used against a tenant’s property found on the land, but not against the land itself. Trade fixtures may be distrained only when they have been severed from the land and resume their nature as chattels.

These are simple common law concepts, which most bailiffs and small landlords do not understand or about which they do not care.

By refusing to allow tenant to remove the assets, landlord distrained them – illegally.

Abandonment

Landlord contended that tenant had abandoned its assets by not removing them on or before the termination date. The Court, noting that abandonment is a defence to conversion, disagreed with landlord’s contention. Abandonment means a giving up, a total desertion, an absolute relinquishment, of an interest in chattels. Normally a tenant is supposed to remove its trade fixtures by the end of the tenancy – subject to exceptions. In this case, tenant had insufficient time to remove its trade fixtures and, absent a contractual provision otherwise, tenant could remove its trade fixtures within a reasonable time after having vacated the premises. Tenant attempted to do so and landlord thwarted those efforts. Tenant did not abandon the assets.

Exemplary Damages

Private law damages are meant to be compensatory. In tort, this means returning the plaintiff to its position before the tort. Private law damages are generally not intended to punish or place the plaintiff in a better position than the original status quo.

Some facts call for exemplary damages. These damages can take the form of punitive damages, designed to address retribution, deterrence and denunciation of malicious, oppressive, or high-handed conduct. They can also take the form of disgorgement damages (i.e. damages based on the tortfeasor’s gain, not the plaintiff’s loss) as an alternative to compensatory damages. In short, exemplary damages are comprised of punitive damages (in addition to compensatory damages) and disgorgement damages (as an alternative to compensatory damages).

Accordingly, when plaintiffs request exemplary and punitive damages, their lawyers do not know of what they speak. If asking for exemplary damages, punitive damages are redundant and, if the claim is not for disgorgement damages (as an alternative to compensatory damages), then the proper claim is for punitive damages.

Conversion

Conversion is a strict liability tort by which a tortfeasor is forced to purchase the converted asset at its market value as of the conversion date. Detinue differs from conversion: conversion is a single wrongful assertion of dominion over personal property, while detinue is the continuous wrongful detention of personal property. The general remedy for detinue is the return of the asset (or damages for its market value as at the end of trial) plus damages representing the tortfeasor’s “rental” of the asset during the detention.

Rather than the general measure of damages for conversion or detinue, a plaintiff can instead choose a remedy known as “waiver of tort.” It allows a plaintiff to claim disgorgement damages based on the tortfeasor’s gain. However, as stated, a plaintiff cannot claim both compensatory damages as well as disgorgement damages because that would result in over-compensation.

The trial judge awarded $80,000 in “exemplary” damages, but did not define what he meant by them. The Court decided that he did not award these damages as punitive damages because landlord had an honest belief that it had the right to seize the assets and the trial judge did not find that the conversion was malicious or high-handed.

The trial judge therefore had to have awarded disgorgement damages and erred in doing so. Once he awarded 2007 market value for the assets, tenant was deemed to have sold those assets to landlord at that time and therefore landlord had every right to use them. Tenant adduced no evidence to suggest that it had intended to continue operating a driving range business elsewhere or that the converted assets appreciated in value; therefore, there was no basis to award additional compensatory damages for consequential lost chance of profits. Further, prejudgment interest compensated for the loss of the time value of the compensatory damages.

The Court set aside the $80,000 award in exemplary damages, but upheld the compensatory damages award.

 

Image courtesy of trestle.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.