859587 Ontario Ltd. v. Starmark Property Management Ltd.

859587 Ontario Ltd. v. Starmark Property Management Ltd. Collection Decisions of the Court of Appeal Date 1998-07-27 Docket numbers C27783 Judges Krever, Horace; Osborne, Coulter Arthur Anthony; Doherty, David H. Subject Civil Decision Content DATE: 19980727 DOCKET: C27783 COURT OF APPEAL FOR ONTARIO KREVER, OSBORNE and DOHERTY JJ.A. BETWEEN: ) ) 859587 ONTARIO LIMITED, carrying on ) Emilio Bisceglia business as ATLANTIC INTERNATIONAL ) for the appellant EQUIPMENT SALES ) ) Applicant ) (Respondent) ) Bernie Romano ) for the respondent - and - ) ) STARMARK PROPERTY MANAGEMENT ) LIMITED ) ) Heard: June 16, 1998 Respondent ) (Appellant) ) DOHERTY J.A.: [1] This is an appeal from the judgment of Dambrot J. declaring that the appellant's (Starmark Property Management Limited) distraint and sale of a spray paint booth located on property leased by Starmark to a tenant was unlawful. Dambrot J. further held that the respondent, Atlantic International Equipment Sales, the vendor of the booth under the terms of a conditional sales contract, was entitled to reacquire possession of it upon compliance with ss. 34(4) and 34(5) of the Personal Property Security Act, R.S.O. 1990, c. P.10 (P.P.S.A.). [2] The essential facts are these: In February, 1996, H.K. Auto Centre rented certain premises from Starmark. Under the terms of the lease, all improvements, except trade fixtures, became the property of Starmark when the lease expired. The tenant was required to remove trade fixtures at its own expense at the expiration of the lease. The lease gave the tenant very limited rights to remove and replace trade fixtures during the term of the lease. That limited right was not available if the tenant was in default under the lease. In March, 1996, Atlantic sold the spray booth to H.K. Auto Centre for $27,659.00. Under the terms of the agreement, ownership of the booth remained with Atlantic until all payments had been made. Atlantic did not register its agreement under the P.P.S.A. The booth was installed in the leased premises in March, 1996. The booth was 28 feet by 14 feet and weighed some 3,500 pounds. It was attached to the floor by numerous small nails which could be easily removed and was connected by various pipes to the electrical, water and air systems within the leased premises. Exhaust fumes from the booth were expelled through a vent which exited the building through a hole in the roof. The vent was bolted to the roof. In September, 1996, H.K. Auto Centre owed rent arrears of about $12,000.00. Starmark levied a distress on the leased premises and took possession of the spray booth. The booth remained on the rented premises in the same condition it was in prior to the distraint. At the time of the distraint, H.K. Auto Centre had paid about $11,000.00 toward the purchase of the spray booth and owed Atlantic about $17,000.00. Starmark sold the spray booth to a third party who had agreed to lease the space formerly leased by H.K. Auto Centre. Atlantic became aware of the purported sale, registered its conditional sales agreement under the P.P.S.A., and commenced these proceedings. [3] Starmark claims that it was entitled to sell the spray booth and apply the proceeds to pay the rent arrears either because the booth was a fixture and became part of the property which it owned, or because the spray booth was a chattel, and although owned by Atlantic, was subject to distraint under s. 31(2) of the Landlord and Tenant Act, R.S.O. 1990, c. L.7. Atlantic takes the position that the spray booth was not subject to distraint as it was a fixture and that under the terms of s. 34 of the P.P.S.A., its interest had priority over Starmark's interest. [4] Dambrot J. made a careful and detailed analysis of the evidence and the issues. His reasons are reported (1997), 34 O.R. (3d) 43, and as I am in substantial agreement with them, I need not repeat much of what appears in those reasons. [5] Dambrot J. found that the spray booth was a trade or tenant's fixture. That finding involved the application of long- established legal principles to largely uncontested facts. As Dambrot J. neither misapprehended the evidence, nor the applicable law, his finding must stand unless it is unreasonable. Given the manner in which the equipment was attached to the land, the terms of the lease, and the purpose of the attachment (i.e. to improve the functioning of the machinery and not to improve the property), I think the characterization of the spray booth as a fixture and not as a chattel was a close call. I cannot say, however, that Dambrot J.'s characterization was unreasonable. The case must be approached on the basis that the spray booth was a trade fixture. [6] Can a landlord distrain against a trade fixture? If the answer is yes, then when Starmark distrained against the spray booth it acquired a lien over that property: Commercial Credit Corp. Ltd. v. Harry D. Shields (1981), 32 O.R. (2d) 703 (C.A.), aff'g. (1980), 29 O.R. (2d) 106 (Ont. H.C.). Under the terms of s. 4(1)(a) and s. 20(1)(a)(i) of the P.P.S.A., that lien would have priority over the security interest of Atlantic which was unperfected when the distraint occurred and the lien arose: Leavere v. Port Colborne City (1995), 22 O.R. (3d) 44 at 49-50 (C.A.). [7] As Dambrot J. observed, a landlord's right to distrain against trade fixtures is a matter of some controversy in the case law. Most of those cases come from the last century and make difficult reading for those unschooled in the intricacies and idiosyncracies of the common law of real property. As I understand the old cases, they describe two situations in which things placed on the leased premises by the tenant for the purpose of carrying out the tenant's business could not be distrained by the landlord. First, if the thing had become fixed to the property so as to become part of it, it could not be distrained. Second, even if the thing had not become affixed to the property so as to become part of it, it could not be distrained if, upon payment of the arrears, it could not be returned to the tenant in the same condition it was in before the distraint. This second qualification on the landlord's power to distrain developed when distraint required the actual removal of the goods from the leased premises to a pound. If that removal would damage the property so as to render restitution in the same condition impossible, then the property could not be distrained: Hellawell v. Eastwood et al. (1851), 155 E.R. 554 at 5611; Darby v. Harris (1841), 113 E.R. 1374. [8] As indicated above, Dambrot J. found that the spray booth was a trade fixture. A trade fixture is a thing which has become part of the property, is used by the tenant in the tenant's business and is removable at the instance of the tenant: Deloitte & Touche Inc. v. 1035839 Ontario Inc. (1996), 28 O.R. (3d) 139 at 150 (Gen. Div.), aff'd, without reference to this point, June 23, 1998 (C.A.). The status of trade fixtures while they are attached to and are part of the property was explained by Meredith C.J. in Stack v. T. Eaton Co. et al. (1902), 4 O.L.R. 335 at 338 (Div. Ct.): That, even in the case of tenants' fixtures put in for the purposes of trade, they form part of the freehold, with the right, however, to the tenant, as between him and his landlord, to bring them back to the state of chattels again by severing them from the soil, and that they pass by a conveyance of the land as part of it, subject to this right of the tenant. [Emphasis added.] [9] A trade fixture is as much a part of the freehold as any immoveable fixture as long as the trade fixture has not been severed from the freehold by the tenant at the time of the distraint. As distraint runs against the tenant's property found on the land and not against the land itself, it follows that trade fixtures which are part of the land at the time of the purported distraint cannot be subject to distraint: Crossley Brothers Limited v. Lee, [1908] 1 K.B. 86 at 90; Provincial Bill Posting Company v. Low Moor Iron Company, [1909] 2 K.B. 344 at 349 (C.A.); Bailey v. Miller, [1932] 3 W.W.R. 260 at 263 (Sask. C.A.); Bruce v. Smith, [1923] 3 D.L.R. 887 at 889 (Alta. C.A.); Cashman Holdings Ltd. v. Canada Trustco Mortgage Co. (1990), 1 C.B.R. (3d) 80 at 85 (B.C.S.C.). [10] Dambrot J. referred to Howell v. Listowell Rink and Park Co. (1886), 13 O.R. 476 and Davy v. Lewis (1859) 18 U.C.Q.B. 21 (C.A.) as cases which suggest that a landlord can distrain trade fixtures. Both predate Chief Justice Meredith's definitive description of the status of a trade fixture in Stark v. T. Eaton Co. et al, supra. Furthermore, Davy v. Lewis did not involve a distraint by a landlord. It was a dispute between the landlord and a party claiming the equipment under the tenant's rights to the equipment as set out in the lease between the tenant and the landlord. Burns J. held, at p. 30, that the respective rights of the landlord and those claiming under the tenant fell to be determined by the terms of the lease which declared the property to be the "sole and absolute property" of the tenant. He held that in those circumstances the equipment was the property of the tenant throughout the term of the lease and the tenant could remove it from the leased premises and sell it at any time. He said, at p. 30: ... Whether the law would make all this machinery trade fixtures, and liable to rent, or not, the parties, in my opinion, have completely separated the right of property from the freehold, even though the steam engine and parts of the machinery were annexed to it, and they have intentionally preserved its character of chattels under all circumstances. That character was not to commence at the expiration of the lease, or when the lessee should sever it from the freehold, but was to be at once, at the commencement of the term, and so remain. ... [11] Davy v. Lewis stands for the proposition that as between the landlord and tenant, the terms of the lease govern their respective rights to property described in the lease. The lease made it clear that the equipment remained the property of the tenant and could be removed by the tenant at any time. [12] In Howell, supra, at p. 402, Cameron C.J. specifically declined to determine whether the property was distrainable. He did, however, suggest that all tenants' fixtures, even if they had become part of the freehold, were subject to distraint if they could be returned to the tenant in the same condition they were in before the distraint. This view seems to be contrary to the common law as described in Hellawell v. Eastwood et al., supra. According to that case, the ability to restore the property to the tenant in its prior condition was only relevant if the object in question had not been so attached to the property as to become part of the freehold. In any event, Chief Justice Cameron's comments are dicta and somewhat unclear. Indeed, the authors of Williams and Rhodes, Canadian Law of Landlord and Tenant, 6th ed., Vol. I at pp. 8-66 cite Howell as authority for the proposition that trade fixtures are exempt from distraint. [13] It has long been established that immoveable fixtures are not distrainable at common law. Trade fixtures are different from immoveable fixtures in that they can be restored to the status of chattels at the option of the tenant. Despite that difference, trade fixtures have been treated, certainly in this province, as true fixtures as long as they are attached to and part of the land. The strong weight of authority supports the position that as long as trade fixtures are fixtures, they are no more subject to distraint than immoveable fixtures. The complaint that this position makes the landlord's right to distrain depend, in some cases, on matters as inconsequential as a few screws or nails has validity, but is not a new complaint: see Crossley Brothers Limited v. Lee, supra. Although the landlord and tenant relationship is now closely regulated by statute, the Legislature has not seen fit to abandon the common law distinction between fixtures and other goods and chattels of the tenant for the purpose of determining the landlord's right of distraint. Nor has the Legislature altered the common law definition of fixture applicable to the law of distraint. As long as the common law prevails, the manner in which the property is attached to the land will be a significant consideration when deciding whether property is subject to distraint. [14] In the absence of any legislative initiative, I do not think it would be wise for the judiciary to strike out on a different course and formulate a new approach to the determination of the landlord's rights to distrain property on a leased premise. The present law as to the nature of trade fixtures has been settled in this province for over 90 years. I am not convinced that a different approach would yield benefits that would offset the inevitable uncertainty that a new approach would engender. [15] Having determined that Dambrot J. correctly held that the tenant had no right of distraint against the spray booth and hence no lien, I move to s. 34 of the P.P.S.A. That section settles priorities between those who have a security interest in a fixture and those who have an interest in the property to which the fixture is attached. Section 34(1) provides: (1) A security interest in goods that attached, (a) before the goods became a fixture has priority as to the fixture over the claim of any person who has an interest in the real property; or (b) after the goods became a fixture, has priority as to the fixture over the claim of any person who subsequently acquired an interest in the real property, but not over any person who had a registered interest in the real property at the time the security interest in the goods attached and who has not consented in writing to the security interest or disclaimed an interest in the fixture. [16] The scheme created by s. 34 constitutes a legislative determination that the annexation of secured goods to realty should not result in the loss of a security interest which had attached but had not been perfected prior to the goods becoming part of the land: Surrey Metro Savings Credit Union v. Chestnut Hill Homes Inc. (1997), 29 B.L.R. (2d) 43 at 50-51 (B.C.S.C.). [17] It was argued that s. 34 applies only to immoveable fixtures and not to trade fixtures. The case law reviewed above denies the validity of that distinction. Nor does s. 34 qualify the use of the word fixture. Indeed, s. 34(3), which gives the secured interest holder a qualified right to remove the secured goods from the property, strongly supports the conclusion that s. 34 applies to trade fixtures. I would align myself with those authorities which have so held: Deloitte & Touche v. 1035839 Ontario Inc., supra; Cormier v. Federal Business Development Bank (1984), 25 B.L.R. 194 at 205 (Ont. Cty. Ct.). Section 34 of the P.P.S.A. applies to this case. [18] Section 34(1)(a) is the applicable subsection. Even though Atlantic did not perfect its security interest until after distraint proceedings, it had, under the terms of s. 11 of the P.P.S.A., an attached security interest at the time the spray booth was installed on Starmark's property. Starmark had no interest in the spray booth before it became a fixture. Under the terms of s. 34(1)(a), Atlantic's attached secured interest had priority over Starmark's claim which arose out of its interest in the real property. Atlantic was entitled to reacquire the property under s. 34. [19] After concluding that Atlantic had priority, Dambrot J. went on to consider the nature of Starmark's interest in the property (pp. 55-56). As Atlantic had priority over that interest, whatever it may have been, I find it unnecessary to decide the exact nature of Starmark's interest in the spray booth. [20] Dambrot J. also considered Starmark's right to distrain against the spray booth on the assumption that it was a chattel and not a trade fixture (pp. 47-53). While I find his analysis of the arcane language in s. 31(2) of the Landlord and Tenant Act persuasive, I prefer to leave that issue to a case in which it actually arises on the facts. [21] I would affirm the judgment of Dambrot J. In that judgment, he directed that Starmark could acquire the booth upon payment to Atlantic of the outstanding balance of the purchase price, together with interest, costs and expenses as set out in the judgment. Starmark did not seek to acquire the booth, but instead appealed that judgment. I would give Starmark 15 days from the release of this judgment to acquire the spray booth from Atlantic upon compliance with the terms set out in paragraph 3 of the judgment of Dambrot J. [22] The respondent is entitled to its party and party costs on the appeal. Released: July 27, 1998 _______________________________ 1 The correctness of the result reached in Hellawell, but not the principles laid down by it, has been questioned in subsequent cases: see Crossley Brothers Limited v. Lee, [1908] 1 K.B. 86.