Distraining Goods for Unpaid Rent in Commercial Leases

 In Commercial & Property, International Law

Under a commercial lease, a landlord has a right to distrain goods in premises for outstanding rent. This right entitles a landlord (or a person lawfully authorised by the landlord) to enter the premises, seize goods on the premises and to sell them by public auction for the best price that can be obtained in order to satisfy any outstanding rent due to the landlord. The procedure is governed by the Landlord and Tenant Act 1936.

Distraining goods can be a powerful self-help remedy which allows a landlord to recover outstanding rent without the need for court action.

Right to distrain

In South Australia, the right to distrain is governed by common law, as modified by the Landlord and Tenant Act 1936.

Under section 125 of the Real Property Act 1886, it is implied in every lease that the landlord has the “power to distrain according to law”.

There are a number of important points to consider in relation to the exercise of this right:

  • The right can only be exercised during the term of the lease. It cannot be exercised after the lease has come to an end (for example, after termination or after the lease term has expired). It can be exercised without giving any prior notice to the tenant.
  • The right is only available where there is rent due and owing to the landlord.
  • The right only applies to unpaid rent. It does not extend to outgoings, GST or other amounts due and payable by a tenant under a lease.
  • All goods in the premises may be distrained. There are exceptions to this, including goods belonging to a third party; clothes, tools and implements of trade, and household items to the total value of $20.00; and records of a health practitioner.

There may be serious consequences to a landlord who does not comply with these requirements. For example, if a landlord distrains and sells goods when in fact no rent was due and owing, then the owner of the goods may take legal action against the landlord to recover double the value of the goods sold together with legal costs.

Before proceeding with distraining goods, a landlord should search the Personal Property Securities Register (PPSR) to verify if there is any security interest registered over the goods. If a landlord sells goods that have a registered security interest over them on the PPSR such as a purchase money security interest (PMSI), then the secured creditor could potentially bring a legal action against the landlord. Depending on the registered security interest, it may take priority over the landlord’s right to distrain.

 

Process of distraining goods

The procedure for distraining goods is set out in the Landlord and Tenant Act 1936.

A Warrant to Distrain must be completed, signed and served on the tenant. This may be attended to by either the landlord or its lawyer. We can assist with the preparation of a Warrant to Distrain and the associated documents.

The distraint must be carried out by the landlord personally or a person lawfully authorised by the landlord. Normally, a bailiff is engaged to distrain the goods. We can recommend bailiffs who regularly deal with distraining goods.

The goods can only be distrained between 6.00am and 6.00pm.

The person distraining the goods must complete a written inventory of the goods distrained. That person must:

  • deliver a copy of the completed inventory to the tenant, or some person residing on the premises; and
  • if there is no person residing on the premises, nail or affix a copy of the inventory on some conspicuous part of the premises, and a copy of that notice must then posted to the tenant’s address.

Once the goods have been distrained, the landlord or its agent may impound or secure the distrained goods in such place, or on such part of the premises, as are most fit and convenient for impounding and securing them.

A landlord must hold the distrained goods for five days. At the expiry of those five days, the landlord may proceed to sell the distrained goods for the best price that can be obtained.

At any time up until the date of the actual sale, the tenant may pay the outstanding rent to the landlord. If that rent is paid, then the landlord cannot proceed to sell the goods.

 

The process of selling the distrained goods is as follows:

  • The sale of the goods must be by public auction. The auction must be conducted by a licensed auctioneer, or may, with the written consent of the tenant, be made by the landlord or its agent.
  • The goods may be sold on the premises, but where the goods cannot advantageously be disposed of on the premises, then the landlord may remove the goods to a more convenient location for sale.
  • Any person may attend the premises where the goods are impounded and secured in order to view or buy them or remove them on account of the purchase.

 

The proceeds of the sale are dealt with in the following manner:

  • first – in payment of the costs of and incidental to the distraining of goods and auction (usually the legal costs, process server’s costs and the auctioneer’s costs);
  • secondly – in satisfaction of the rent for which the distraint was made; and
  • thirdly – any remaining proceeds must be paid to the tenant.

 

If a third party has goods in the premises and seeks their recovery, that third party must complete a declaration setting forth that the tenant has no right of property in the goods and that such goods are the property of the third party. The declaration must be annexed to an inventory of the goods referred to in the declaration. The declaration and inventory must be served on the landlord. There may be serious consequences to a landlord who proceeds to sell goods belonging to a third party who has complied with this procedure. A landlord has a right to dispute a declaration.

 

Our commercial property lawyers have extensive experience in acting for landlords in all aspects of commercial leases, including recovering debts and distraining goods. If you need assistance with recovering a debt from a tenant or resolving any lease dispute, please contact Michael Stannard or Andrew Mitchard.

 

The content of this article is intended to provide a general guide to the subject matter. It is not legal advice. Specialist advice should be sought about your specific circumstances.

 

As a firm we pride ourselves on our progressive, personal and professional approach to all areas of law.

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