The Deadbeat Debtor – Is it Worth it?

All too often, creditors are forced to face the realization that their debtor cannot, or simply will not, pay. Whether it be because of a tenant, purchase of goods or contractor, the creditor is faced with very few avenues to recover the debt. The creditor is forced to consider taking ten cents on the dollar and drawn-out payment plan or bringing a formal court action.

While suing a defaulting debtor can lead to a relatively quick judgment as some defaulting debtors simply do not defend, the creditor then faces the realization that the judgment they have obtained is not worth the payment it is written on. The creditor has spent time and money, including legal fees, to obtain a judgment that they will never collect on. To avoid this pitfall, there are ways for creditors to attempt to act quickly to ensure they obtain some form of payment.

First, focussing specially on the commercial landlord, landlords can attempt to distrain on their tenant’s property. In doing so, the landlord must act quickly as one can only distrain on property that remains on the leased property. The landlord must also avoid the common pitfall of terminating the lease and then attempting to distrain, as once a lease is terminated, the landlord’s right to distrain goes by the wayside.

Creditors may also attempt to register a lien in order to protect their interests. While the most well know lien is the builders’ lien, there are other lesser-known processes provided for in The Woodmens’ Lien Act, The Commercial Liens Act and The Threshers’ Lien Act. Any creditor who may have lien rights should act quickly to ensure the funds that are being held back under the lien legislation are not disbursed.

If you are one of those unfortunate creditors who cannot utilize a lien to enforce the debt, and do not have a security interest in the debtor’s property, you may be forced to consider whether pursuing the debt is worth while. If the debtor is unwilling to agree to a payment plan or other resolution, you will be forced to gamble on whether you can enforce your judgment through The Enforcement of Money Judgments Act. In making that decision, there are a few considerations worth noting:

  1. Does the debtor have land and if so, how many mortgages or judgments are registered against it? It is important to note that pursuant to the Bankruptcy and Insolvency Act and The Saskatchewan Farm Security Act, the debtor is entitled to certain exemptions for their homestead or home-quarter, as the case may be.
  2. Does the debtor own any vehicles and if so, more than one?
  3. Have you run a judgment search? If there are several judgments already registered against a debtor, the chances of you collecting are reduced as there are more people claiming a piece of the pie.
  4. If the debtor is a corporation, are they up to date on their taxes and payroll remittances? CRA holds a super priority interest on a debtor’s asset for unpaid remittances. Furthermore, the failure to remit to CRA is usually a strong indicator of financial health, or lack thereof.

In short, it is usually helpful to determine ahead of time if there is any meaningful chance of enforcing your judgment. This will help you save time, money and frustration in chasing a dead beat debtor who will not, and probably cannot, pay.

Contacting a Lawyer on this Subject

Should you require more information on how to efficiently and cost-effectively recover against your debtors, please contact Travis K. Kusch at (306) 933-1373

Protecting Farmer’s Equipment: A Bushel of Rights

Perhaps more than any other profession, farmers on the Prairies are susceptible to financial pressures. Whether it be due to a late winter, a lack or precipitation, family pressures or the present Covid-19 pandemic, the agricultural business carries many risks.

To that end, farmers can be faced with difficult decision as to which bills will be paid, which payments might be missed or deferred and in worst case scenarios, which equipment is to be forfeited. In response, the legislature has recognized the uniqueness of farming and implemented special protection for farmers.

The Farm Debt Mediation Act (“FDMA”)

The federal government recognized that farmers across the country required special protection to deal with their financial pressures. In response to these pressures, and in an effort to provide farmers with the opportunity to reach a compromise with their creditors, the federal government enacted the FMDA.

The main protection afforded by the FDMA is that a farmer’s secured creditors must serve a notice on the farmer indicating their intent to commence proceedings against a farmer (for example filing a Statement of Claim) or to enforce against the farmer’s property. The secured creditor must then wait fifteen business days before taking any further steps.

During the notice period, the farmer is able to apply for farm debt mediation. Applying for mediation prevents your creditors from taking any further steps against the farmer. However, it should be noted that once a farmer applies for mediation, all of his or her creditors receive notification that the farmer has applied for mediation. To a certain extent, all of the farmer’s creditors are now aware that the farmer is in financial trouble.

It should be noted that the FMDA notice provisions apply to both individual farmers and farming corporations.

The Saskatchewan Farm Security Act (“SFSA”)

The legislature in Saskatchewan took these protections one step further in enacting the SFSA. As many farmers are likely aware, a creditor must give a farmer thirty day’s notice before attempting to seize any of the farmer’s equipment. After the farmer receives the notice, they are provided with a variety of rights to either delay or avoid the seizure.

At this point, it is helpful to draw a distinction between purchase money security creditors (“PMSI Creditors”) and general creditors. A PMSI Creditor is a creditor who provided financing for the direct purchase of a piece of farming equipment. For example, if you purchase a tractor from a dealership, and the dealership provides financing to purchase that equipment, the dealership would be a PMSI Creditor.

In the other example, there are general creditors such as banks, or other financers,  who often provide an operating line of credit to farmers. In consideration for providing this funding, banks are often provided with general security agreements over all of a farmers property and/or a mortgage. 

Where a PSMI Creditor serves a notice on a farmer, that farmer is able to apply to the Court to delay seizure. In those instances, the Court will sometimes delay the seizure where it can be demonstrated the farmer can 1) come up with a viable plan to rectify the debt in a reasonable period of time and/or 2) the farmer requires the equipment for farming. While the delay is not a guarantee the Court, and sometimes creditors, will agree to temporary reprieves in order to give the farmer a chance to remedy the arrears. After all, a creditor prefers cash in hand over the hassle of seizing and selling farm equipment. This exemption applies equally to individuals and corporations.

In the other situation, where a farmer is facing bankruptcy and/or cannot pay its general creditors, the general creditor will attempt to seize part or all of its security. In certain  situations, a farmer can apply for an exemption in order to avoid the seizure of its equipment. In order to qualify for this exemption, the farmer must demonstrate it has realistic and viable farming plan going forward and that the farming equipment is reasonably necessary for the proper and efficient operation of the farm. In these exemption applications, the exemption only applies if the equipment is owned by an individual and not a corporation.

As is set out above, there are multiple remedies available to farmers in order to delay or avoid the seizure of equipment. These tactics and remedies allow a farmer to get through the year and hopefully develop a practical solution to satisfy his or her creditors.  

Should you have any further questions about your protections as a farmer, or need advice negotiating with your creditors, please give our office a call to discuss.

Commercial Leases and the Impact of COVID-19

The novel coronavirus (COVID-19) continues to affect the day-to-day lives of millions of Canadians. As a result, businesses continue to face issues regarding cash flow, which in turn forces those businesses into difficult decisions as to which obligations they will pay, and which obligations will need to be deferred.

One of the consequences of these difficult decisions is that commercial landlords are now faced with tenants who either cannot pay their rent, do not wish to pay rent or have abandoned or are contemplating the abandonment of leased property. While COVID-19 gives rise to new business considerations, as will be seen below, the rights of the commercial landlord remain relatively unchanged.

This article, originally posted to our website in May, 2020, was amended on June 15, 2020 to reflect the emergency order issued by the Government of Saskatchewan in relation to the eviction of commercial tenants. This moratorium was issued pursuant to the provisions of The Emergency Planning Act.

It should be noted that the moratorium issued only applies to landlord who were eligible, but declined to apply, for the Canada Emergency Commercial Rent Assistance program (“CECRA”). This moratorium was issued in large part to assist new businesses in reopening during COVID-19.

Your Tenant Cannot (or Will Not) Pay Rent

 

As was the case before COVID-19, where a tenant fails to pay rent in a timely fashion the landlord, who has applied under the CECRA, is able to demand the rent and as permitted under the lease, takes steps to distrain or evict the tenant and take possession of the property. The Saskatchewan Legislature has, at this time, not taken any steps to alter the rights and remedies of the commercial landlord.

Before concluding that the tenant is offside their obligations by way of non-payment of rent, consideration should be given to whether the lease has a force majeure clause and if so, what effect that clause may have on the tenant’s position. For more information on this subject, Marinko Jelovic has prepared an article, Force Majeure and the Doctrine of Frustration – COVID-19, which addresses this issue with more specificity. https://www.rslaw.com/2020/03/18/force-majeure-doctrine-of-frustration-covid-19/

Before deciding on a course of action, a landlord may wish to give consideration to their existing relationship with the tenant and the current economic climate. A tenant who has occupied the same property for an extended period of time or is in the midst of a long-term lease, and who has not voluntarily defaulted on payment may still be better than the alternative. When the time arises for the preventative restrictions imposed by the Government of Saskatchewan to be lifted, prospective new tenants may be a rare commodity. If you consider the business foundation for a long-term tenant to be sound you may prefer having your existing tenant when business resumes, rather looking for a new occupant. Short term pain may be balanced by long term gain.

On the other hand, if the tenant is in default and the history of the landlord-tenant relationship is not happy one, this may be an opportunity to end the relationship, with a view to attracting a more desirable tenant.

Much will turn on the landlord’s view of the value of its relationship with the tenant.

To the contrary, where a landlord has failed or otherwise declined to take part on the CECRA program, the landlord is now prevented from re-entering the property, terminating the lease or exercising the right of distraint. The Government of Saskatchewan has, at this time, limited the remedies available to a commercial landlord who has elected not to participate in CECRA.

Your Tenant Abandons Their Lease

 

In Saskatchewan the legislature has declined to, at this time, amend or enact new legislation that would affect a commercial landlord’s rights. As such, the provisions of The Landlord and Tenant Act continue to apply, as do the provisions of the lease itself.

Under The Landlord and Tenant Act, if the tenant abandons their lease leaving rent unpaid a landlord may exercise its right of distress. In doing so, the landlord is permitted to retain and sell personal property left on the premises by the tenant. However, given the current economic climate a landlord may wish to consider whether or not exercising their right of distress makes financial sense.

While The Landlord and Tenant Act permits the landlord to recover the costs of the seizure and sale of abandoned or seized property, the practical reality is that the property may not be worth the cost and effort of sale. Much will turn on the nature of the tenant’s business and the type of property present in the leased space. As businesses continue to attempt to cut down and reduce overhead costs, depending on the nature of the tenant’s business there may be a reduced, or non-existent, resale market for the goods due to COVID-19. Attempting to seize and sell the property may result in substantial costs being incurred, with little net recovery, if any, toward the unpaid rent.

However, if the decision is to move to terminate, or to accept abandonment, the landlord can proceed in the usual way. The landlord’s rights are largely governed by the lease. Most provide that the landlord may bring action to recover unpaid rent, as well as rent for the remainder of the term of the lease, should a tenant abandon its lease (subject of course to the duty to mitigate and find a new tenant as soon as reasonably possible, though depending on the short and mid-term commercial leasing market it may be of little moment). For more information on the subject, please see the following article on enforcing the landlord’s rights: https://www.rslaw.com/wp-content/uploads/2011/12/1226000394Enforcement-of-Commercial-Leases-A-Practical-Guide.pdf

It should be noted that nothing in the in the June 5 moratorium impacts the landlords rights in the event the tenant has abandon their lease. Similarly, the landlords right remain unaffected if the lease expired on or before June 4, 2020.

Where the lease expires after June 4, 2020, and the landlord has elected not to sign up for or participated in the CECRA

Conclusion

 

As the consequences of COVID-19 continue to be felt in the business community, and with no timeline as to when the government imposed restrictions will be softened or lifted, landlords will continue to face business decisions on how to deal with tenants who do not pay their rent. Consideration must be given to the risk of evicting a tenant and attempting to recover unpaid rent versus the cost and time spent attracting a new tenant. Landlords will know that when the Government of Saskatchewan lifts social distancing restrictions, it may still be several months before new tenants can be found, as the economy slowly recovers from the economic downturn. As such, maintaining strong business relationships during this pandemic may best serve to provide a practical benefit down the road. Where the relationship is not so strong, different considerations may apply, and ending the landlord-tenant relationship may be the best outcome.

For more information, please contact:

 

M Kim Anderson, Q.C.

306.933.1344

Email: mk.anderson@rslaw.com

 

Travis K. Kusch

306.933.1373

Email: t.kusch@rslaw.com

Kusch and Clavelle Contribute to CBA BarNotes

The most recent issue of the Canadian Bar Associations’s BarNotes contains articles by two RS lawyers.

Travis Kusch’s article “Closely Held Corporations: Avoiding the Messy Break-up”  offers practical advice to families who enter into business together.

Curtis Clavelle contributed “When Can an Employee Sue an Employer?”.  In the article he gives guidance on the scope and effect of c. 43 of The Workers’ Compensation Act.

BarNotes is published three times a year and is provided to members of CBA Saskatchewan.

 

 

Lawyers Travis K Kusch