The Distress of Distraint
In the previous blog entry, I highlighted the need for commercial landlords to specify in their leases the manner in which the tenant’s personal property is dealt with upon termination of the lease, either by its terms or by way of court action (summary dispossess). Doing so gives the commercial landlord the flexibility needed to get the newly vacated space ready for re-letting.
What can a landlord do to protect its interests where a tenant is in default for non-payment of rent, has valuable equipment or personal property in the leased premises that can be used to reduce the rent balance due, and has a lease that does not address the disposition of personal property? Under New Jersey law, a landlord has the right to distrain (a.k.a. “distress”) a commercial tenant’s property for rent arrears. A landlord or his duly authorized agent may, for arrears of rent, distrain:
The goods and chattels of his tenant, found upon the demised premises, except such as are by law exempt from distraint and except the goods and chattels of another in possession of the tenant…
According to the statute, the property subject to distraint shall be appraised, sold and disposed of at the time and in the manner provided for by statute.1
The statute sets forth a procedure whereby a landlord may impound a commercial tenant’s property, at the subject premises or otherwise, to recover up to one year’s rent arrears. The tenant has 10 days to redeem its property by paying the landlord the rent due. Otherwise, upon specified notice to the tenant, the property is to be inventoried, appraised, and ultimately sold. The statute includes a variety of provisions to protect the tenant from wrongful or excessive distraint and the landlord’s failure to follow the statutory procedures. Thus, it is important for any landlord undertaking the sale of a tenant’s property under the statute to have able counsel to assist with all of the necessary steps.
In 1983, the New Jersey Supreme Court held that the distraint statute is unconstitutional to the extent it authorizes governmental assistance to effectuate a distraint without providing procedural due process protections to the tenant; that is, taking the tenant’s property without allowing the tenant an opportunity to be heard. In Callen v. Sherman’s, Inc., a constable assisted the landlord by padlocking the door to the premises. The Court expressly limited its holding to a distraint by a constable or sheriff, as opposed to a landlord who exercises distraint without government assistance. Indeed, the Court recognized that under certain circumstances a landlord has no real alternative but to exercise self-help, such as where the tenant is loading his goods onto a truck in the dead of night to avoid a just claim by the landlord. However, the Court strongly cautioned landlords against using self-help distraint. This is good advice from the New Jersey Supreme Court.
Landlords who are not faced with an imminent situation in which the tenant is attempting to empty a warehouse and speed away in the dead of night need not exercise self-help and are well counseled to enlist the aid of the court. Otherwise, a landlord may very well place itself in a situation whereby it has opened itself up to a lawsuit by the tenant. An angry tenant can make a landlord’s life miserable by asserting claims of wrongful distraint, conversion, wrongful eviction, abuse of process, intentional interference with tenant’s business, and malicious prosecution -- to name a few of the types of claims tenants are known to bring against landlords who have decided to act alone in seizing a tenant’s property.
The need for a landlord to risk acting alone is rarely ever necessary. New Jersey Rules provide a speedy procedure whereby the landlord may obtain the appropriate order pursuant to which a judge of the Superior Court will supervise the taking and sale of the tenant’s property by the landlord. This approach provides the landlord with a measure of protection against a claim by the tenant that the landlord’s conduct was somehow overreaching, or unwarranted in the first instance. The cost attendant to defending against claims by a tenant relating to the taking of its property can be staggering when compared to the relatively minor cost of seeking the aid of the court in the first instance.
1 There are statutory exemptions for distraint (a) at residential premises, (b) for up to $500 worth of property, and (c) for all wearing apparel.