By Russell Cocks, Solicitor
First published in the Law Institute Journal
Distress is an ancient common law right entitling a landlord, initially, to seize and retain a tenant’s goods if the tenant failed to pay rent. Eventually the right was extended to permit the landlord to sell those goods if the tenant continued to fail to pay the rent. It would be hard to imagine, perhaps short of flogging, a right more at odds with modern consumer protection principles and, not surprisingly, this right fell by the wayside many years ago, 1948 to be exact. However, as observed by DP. Macnamara in VCAT in Kiwi Munchies P/L v Nikolitis [2006] VCAT 929 “It is staggering the number of agents and solicitors who seem to be ignorant of this fact.”
That case, amongst other issues, considered the consequences of the landlord effectively exercising distress by demanding that a defaulting tenant pay arrears of rent before allowing the tenant to recover the tenant’s goods from the premises. Absent a right to distress, now long since gone, the landlord’s actions in seizing the tenant’s goods amount to trespass and conversion. The result was disastrous for the landlord, with an order for compensation for equipment and stock, at that stage stored in a shed in the landlord’s backyard, of $14,000 in respect of premises that were let for less than $12,000 per year.
The recording of the contractual agreement between the landlord and tenant in that case was less than clear. The arrangement had commenced with a ‘skeleton’ lease of 12 months, was then recorded by a ‘standard’ lease which included an option, and by the time the dispute arose it appears that the tenant was overholding in accordance with the terms of the ‘standard’ lease. The landlord’s agent served a (badly worded) ‘Notice to Remedy’ and subsequently re-entered the premises and changed the locks. Whilst it was common ground that the lease had eventually come to an end, the exact timing of the determination of the lease was not identified and the actions of the landlord, which amounted to distress and were thus illegal, were regarded as having taken place before the lease had come to an end.
This was a distinguishing feature with the recent case of Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546. This is a real David v. Goliath dispute but again centred on the tenant’s failure to pay rent and the seizure by the landlord of the tenant’s equipment and goods. The tenant issued proceedings based on detinue and conversion and if the landlord’s actions amounted to distress then they were unjustified and the tenant would succeed.
The landlord however foreswore the remedy of distress and based its claim on particular clauses in the lease that it claimed created a contractual right for the landlord to remove any of the goods of the tenant from the premises after breach and store them at the cost of the tenant. The landlord did not claim the right to sell the goods, merely that the lease gave the landlord a possessory lien over the goods and thereby a defence to the claim of conversion.
The landlord argued that the possessory lien created by the lease could only come into existence after the lease had been terminated and the landlord had taken possession of the goods. The lease created the contractual right, but it only crystallised after termination of the lease when the landlord actually took possession of the goods. Hence that could not amount to distress, as distress can only be levied during the subsistence of the lease, as had been the case in Kiwi Munchies. This argument was accepted.
The landlord relied upon two clauses in the lease to justify its actions. Whilst one of the relevant clauses referred to the right to remove the tenant’s property as arising after ‘reentry’ (which amounted to termination of the lease), another clause suggested that the lien arose upon mere ‘breach’ by the tenant. The Tribunal concluded that as this clause was capable of giving the landlord the right to seize the tenant’s goods for mere breach that did not amount to termination of the lease, the clause therefore purported to authorise conduct that ‘amounts to distress for rent and is illegal’. It followed that such a clause is contrary to public policy and therefore void. It was irrelevant that the possessory lien had in fact been exercised after termination and therefore did not amount to distress, it was sufficient that the clause purported to authorise such conduct during the term of the lease, which conduct would have amounted to distress.
The Tribunal therefore concluded that whilst the landlord’s conduct had not constituted distress, as it had occurred after the lease had been terminated, nevertheless there was “no contractual or other right to seize or retain the Goods following termination of the Lease, pending payment of outstanding monies owed under the Lease.” The hearing was adjourned to consider the appropriate order, which would have included an order for compensation to the tenant for trespass and conversion.
This case does not mean that a lease cannot include clauses giving landlords contractual rights in respect of tenant’s goods after termination of the lease. It simply means that such clauses must be very carefully drawn.
Addendum: Sharon-Lee Holdings P/L v Asian Pacific Building Corporation P/L [2012] VCAT 546 reconsidered by Supreme Court at Asian Pacific Building Corporation Pty Ltd v SharonLee Holdings Pty Ltd [2013] VSC 11.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.