Facts

On August 2, 2007, a bakery entered into a lease with a landlord. On November 9, 2007, the bakery entered into a General Security Agreement with Emcan Bakery Equipment & Supply Ltd., under which the bakery purchased equipment from Emcan, but Emcan retained ownership of the equipment until the full purchase price was paid.

The bakery fell into arrears of rent under the lease and also ceased making payments on the equipment from Emcan. The total financed value of the equipment was $64,861.40, including GST. The amount still owing on the equipment was $24,000 plus interest. Ignoring the calculation of interest, the bakery’s contribution to the equipment to date was $40,861.40. The arrears of rent totalled $25,049.73.

The landlord sent a bailiff to appraise the goods and chattels of the bakery, which amounted to $20,825.00 for everything, including the Emcan equipment. DMI, the property manager, conducted an auction shortly thereafter and agreed to sell the goods and chattels of the bakery, including the baking equipment from Emcan, to Toronto Bakery Equipment for $12,100.00.

Emcan commenced an action against DMI, the bailiff, the bakery, and the landlord. It sought a declaration that Emcan was entitled to remove and possess the bakery equipment.

Issue

The issue at bar was whether the landlord had the right to take possession of the goods and chattels at the leased premises, including the equipment bought from Emcan but not fully paid for, and sell it, and apply the proceeds of sale to the arrears of rent and the costs of distress.

Holding

The court found that the landlord had no such right and that the distraint was unlawful.

Analysis

The court relied on the decision in Atlantic v. Starmark, [1997] OJ No 2474, which was based on a similar fact scenario. The court held that Starmark could acquire the item at issue (a painting booth) upon payment of the outstanding balance of the purchase price. The court stated:

It permits a landlord to distrain the interest of a tenant in goods owned by a third party, but in the possession of a tenant under a conditional sales contract. Since the tenant’s interest includes the right to possess the goods, the landlord can take possession of them, and hold them, but does so subject to the rights of the owner. Similarly, if the landlord sells such an item ... , the sale is subject to the rights of the unpaid vendor.

The court therefore held that the partially paid vendor, Emcan, was entitled to possession of the equipment. As property in the equipment had never passed to the tenant, the landlord had no right to take possession of and sell the equipment. The landlord’s interest pursuant to its right of distress for unpaid rent was equal to the bakery’s interest in the equipment; the landlord could acquire the equipment by paying Emcan the amount owing on it ($25,000.00) within 10 days.