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It’s a phone call no landlord wants to receive: Your tenant has pulled a “midnight move” and abandoned the property you leased to them, saddling you with months of unpaid rent and the unhappy task of finding a new tenant.
Your first instinct may be to keep or sell anything the tenant has left behind in an effort to recoup some of your losses.
However, landlords should be aware that other parties might have priority claims over the tenant’s property, significantly impeding your rights to it.
Frequently, a commercial tenant will grant a security interest over its personal property to a creditor as collateral for loans or financing, for instance, to pay for the acquisition of equipment or inventory. This means that a landlord may not have first rights to the tenant’s personal property, even if it is on the landlord’s premises.
Provincial and federal legislation, including the Personal Property Security Act (PPSA), Rent Distress Act and Bank Act, furnishes detailed priority rules when multiple parties stake a claim over the personal property of a debtor in default. The legislation provides clarity in such circumstances, but the determination of priority can sometimes turn on minute and unexpected details. For example, the priority of an interest in property may be decided by the difference of a day in registering that interest.
The outcome of a dispute between a landlord and a secured creditor can depend on a variety of factors, including whether the items in dispute are fixtures, and whether the secured creditor has what is known as a purchase money security interest or PMSI (referred to in legal circles, somewhat affectionately, as “pimzee”).
A PMSI is typically a security interest taken in collateral, including leased collateral, where the secured creditor provided financing to the debtor to acquire the collateral. For instance, a company that sells a debtor inventory on a conditional sales agreement will have a PMSI in that inventory.
In the world of secured transactions, not all PMSIs are created equal. Perfected PMSIs, which usually come about if the security interest has been registered in the Personal Property Registry, will generally take priority over the claims of others, including landlords.
However, a landlord may have a higher ranking claim if the personal property in dispute is a “fixture.” A fixture is something that has been fixed or attached in a relatively permanent way to a building or land, depending on the degree and intent of annexation. Whether or not something is a fixture will depend on the circumstances.
Let’s take the example of abandoned equipment. A tenant rents premises for its business, and acquires certain machinery through a financing company. The tenant affixes the machinery to the premises by bolting it to the floor and attaching it to the electrical, water and air systems. The financing company takes a secured interest in the machinery as collateral for the loan, and registers this interest in the Registry. Since the financing company provided the financing that allowed the tenant to acquire the machinery, it has a PMSI. So who gets the machinery when the tenant defaults against both the landlord and the financing company?
While a landlord typically has a right under the Rent Distress Act to seize a tenant’s property when rent is owing, she can only confiscate property that actually belongs to the tenant. In this scenario, the tenant does not own the machinery since it is being financed. Furthermore, the financing company has a PMSI and thus takes priority.
The landlord may not, however, be completely out of luck. The PPSA may still grant her priority over the financing company, depending on the facts of the case. If the machinery is indeed a fixture, priority depends on whether the financing company registered its PMSI before or after the machinery became affixed to the premises. If the machinery was affixed before the financing company perfected its security interest, then the landlord takes priority subject to certain exceptions, such as if she consented to the security interest.
There is a further wrinkle. A party with a secured interest in fixtures can, but is not obligated to, register a “fixtures notice” on title with the Land Title Office.
To continue our example, if the financing company did not register a fixtures notice—or did so outside the timelines provided for in the PPSA—and the landlord purchased the premises after the affixture of the machinery, the new landlord takes priority even if the PMSI was perfected before or at the time the machinery became a fixture. From a policy perspective, this makes sense because the new landlord could not have otherwise known when buying the premises that the fixture did not come with the purchase.
If the financing company has priority, the landlord is entitled to reimbursement for any damage to the premises caused during the removal of the fixture, but not for any loss in property value caused by the removal.
The landlord may refuse to grant the financing company access to the premises until she has received adequate security for this reimbursement. In addition, she has the right to keep the fixture by paying the financing company the lesser of: the amount owed by the tenant to the financing company that was secured by the security interest in the fixture; or the market value of the fixture if it were removed from the premises.
Priorities between landlords and secured parties can vary considerably depending on the specific facts of the case. When multiple parties are in dispute over personal property—especially if banks are involved—determining the order of priority can quickly become complicated.
Seizing the personal property of tenants over which other parties have priority may open up landlords to legal action. Landlords and creditors would do well to note there may be competing claims over the personal property, and to clarify their rights in that personal property before taking any steps to recoup their losses.
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