Andrew Wilson

May 27, 2020

This article was co-authored by Randell Trombley, a former associate at JSS Barristers.


Short answer – the priority between a distraining landlord and a registered security interest (other than a purchase-money security interest) is determined by whoever seizes the assets first. However, a purchase-money security interest does have priority over a distraining landlord.

Analysis

At common law, a landlord could restrain against all assets on the leased premises, regardless of the interests in those assets.

With respect to statute, the Personal Property Security Act does not apply to arrears of rent, or in the words of that Act, “the creation or transfer of an interest in a right to payment that arises in connection with an interest in land, including an interest in rental payments payable under a lease of land” (Personal Property Security Act, s 4(g)). The Civil Enforcement Act does apply to arrears of rent, and in fact limits the broad common law right of distraint to the assets belonging to the tenant in arrears, or any other person liable for arrears: “In carrying out a distress by a landlord for rent, the following applies: […] (b) a landlord shall not distrain for rent against personal property that belongs to any person other than the tenant or a person who is liable for the rent” (Civil Enforcement Act, s 104(b)). That protection does not extend to “a person who has a security interest in personal property on the premises other than a person who has a purchase-money security interest in the personal property as original collateral or as proceeds” (Civil Enforcement Act, section 104(c)(iii)). Thus, holders of “security interests” do not have protection, but holders of a purchase-money security interest are safe.

To verify the foregoing assertions, see Blackfoot Mobile Home Park v Hornberger, 1995 CanLII 9050 at para 13 (and to identical effect, Heritage Village Holdings Ltd v Moviestar CD & Video Entertainment Inc, 1995 CanLII 9102 (AB QB) at paras 51-52):

It is clear that the legislature intended to create priority for a purchase money security interest over the rights of a distraining landlord. The common law does not apply, as the matter is specifically addressed by statute. Roderick Wood and Michael Wylie have addressed the issue in an article, "Non-consensual Security Interests in Personal Property" (1992), 30 Alta. Law Rev. 1055 at 1084:

Section 19 of the Seizures Act provides the priority rules relating to a landlord's distress. The provision has been in effect in Alberta for many years, and was amended when the PPSA came into effect. It overrides the common law rule that all goods found on the leased premises are subject to distress by restricting the exercise of the right of distress to goods that are the property of the tenant or person liable for the rent. However, there are certain exceptions to this general rule. In particular, the landlord may distrain on goods that are subject to a security interest other than a purchase-money security interest in the goods as original collateral or as proceeds. Thus, a purchase-money security interest will have priority over a landlord's distress, but other security interests will not.

This clearly decides that there is no inconsistency in a priority contest between purchase-money security interests under the Personal Property Security Act and a landlord’s right of distress under the Civil Enforcement Act. However, there is no similar certainty with respect to a priority contest between other security interests under the Personal Property Security Act and a landlord’s right of distress under the Civil Enforcement Act. All that is stated is that other security interests will not have priority, and not that a landlord’s distress will have priority.

The uncertain priority contest between security interests (other than purchase-money security interests) under the Personal Property Security Act and a landlord’s right of distress under the Civil Enforcement Act has persisted. In 954470 Alberta Ltd v GDS & Associates Systems Ltd (2007 ABQB 242 at para 55) the Court stated: “The Landlord’s interest may be superseded by a general security holder where that holder has properly crystalized it’s interests and has used the proper authorities to seize the property.” The very recent decision of E Dehr Delivery Ltd v Dehr (2018 ABQB 846 at paras 23-27) was even more equivocal:

[23] Roderick J. Wood in “Supplementing PPSA Priorities: The Use and Abuse of Common Law and Equitable Principles” (2014) 56:1 Can Bus LJ 31, discusses the concept of NCSIs. Professor Wood explains that “the PPSA brings most types of consensual security interests within its embrace, but there are dozens of non-consensual securities devices that remain outside”. The PPSA is silent as to the priority competition between consensual security interests and non-consensual security interests.

[24] In “Non-Consensual Security Interests in Personal Property” (1992), 30:4 Alta L Rev 1055, the authors explain NCSIs in more detail. They state: “[NCSIs] are not governed by the PPSA because they do not arise by virtue of an agreement between the parties, but are given to a claimant through operation of law”. They explain that the characterization of a device as an NCSI is simple. “If the interest is created by statute or through the operation of the common law, it is properly regarded as an [NCSI] which falls outside the scope of the Act”, but “[I]f the interest arises out of a contract between the parties, the PPSA will apply to it.”

[25] In the text, authored by Ronald C.C. Cuming, Catherine Walsh and Roderick J. Wood, “Personal Property Security Law”, 2nd ed (Toronto: Irwin Law, 2012), the authors discuss replevin orders in the section titled “Seizure by Judicial Action”. While the common law did not provide a general recovery remedy for an owner of goods to recover possession, the common law did provide for a limited means by which an owner could regain possession through the “ancient writ of replevin”. This was later replaced by a statutory replevin action, often found in the Rules of Court. They note that the “replevin procedure is cumbersome, and a secured party may choose to resort instead to the power conferred by the PPSA” (emphasis added).

[26] Ronald C.C. Cuming and Roderick J. Wood, in Alberta Personal Property Security Handbook, 4th ed (Toronto: Carswell, 1998), discuss the seizure of personal property pursuant to the CEA. Part 2 of the CEA gives civil enforcement agencies the right to carry out seizures under a right of distress, which includes seizures under a secured interest governed by the PPSA.

[27] There do not appear to be any reported cases that specifically address the interplay between the PPSA and the CEA, or whether or not a seizure pursuant to a civil enforcement is considered an NCSI.

[emphasis added]

It seems to have been implicitly accepted that seizure proceedings pursuant to the Civil Enforcement Act brought under a security agreement pursuant to the Personal Property Security Act, and seizure proceedings pursuant to the Civil Enforcement Act brought under the Civil Enforcement Act itself (i.e. landlord’s distraint), are parallel in nature and on equal footing.

The acceptance of parallel treatment of the Civil Enforcement Act and the Personal Property Security Act is written into policy. The Civil Enforcement Procedure Manual asserts a deadlock between a distraining landlord and holders of registered security interests; both of these parties are included in “Class H” of the priority ranking for seizure proceeds distribution. The Manual gives priority to the party initiating seizure proceedings first in time. Of course, the Manual could be incorrect, but as the recent judicial commentary is consistent insofar as it is equivocal, I think this is the best we can do absent clear law or a will to address this head-on in Court.

Admittedly, the foregoing analysis is beset with uncertainty. However, and despite the inherent vulnerability of equivocal precedent, there may be reason to suspect that the status quo won’t be departed from lightly. After all, there is considerable difficulty in reconciling the Personal Property Security Act with the Civil Enforcement Act, or even identifying conflict, given:

  • A landlord’s right to distrain is expressly excluded from the priority regime under the Personal Property Security Act;
  • The Personal Property Security Act contains a conflicts clause “Except as otherwise provided in this or any other Act, if there is a conflict between this Act […], this Act prevails” (Personal Property Security Act, s 74(2)); and
  • A landlord’s right to distrain is expressly included in the seizure regime under the Civil Enforcement Act, with references to “security interest” and “purchase-money security interest” but not “priority”.

Accordingly, it is very unclear whether there is a conflict allowing the Personal Property Security Act to prevail, whether the Civil Enforcement Act prevents a conflict by “providing otherwise” and creating a quasi-priority that links in with the Personal Property Security Act’s regime, or whether there is no conflict and the two statutes run parallel. The law currently rests on the lattermost proposition, and the interpretative difficulties in play may afford that proposition some inertia.

Interesting but Peripheral Points

  • The power to distrain is lost if the landlord terminates the lease (Town of Cobourg v The Cyclone Woven Wire Fence Co, 57 SCR 289, 1918 CanLII 5 (SCC)).
  • There is authority for the proposition that the Statute of Anne is in force in Alberta, allowing distress of up to one year’s rent in priority of seizure in execution of a writ (Circa 1880 Imports Ltd v Antique Photo Parlour Ltd, 1983 CanLII 1090 (AB QB)).
  • Re, Target Liquidators Inc. (Bankruptcy of) (2003 ABQB 295 at para 27): “A distraining landlord’s secured position in a bankruptcy was ousted by the 1949 Bankruptcy Act.  A distraining landlord is no longer a secured creditor except for its distress costs: Re Profoot Enterprises Ltd., (1981) 31 A.R. 420 (Reg); Federal Bsuiness Development Bank v. Quebec (Comm. de la santé du travail,1988 CanLII 105 (SCC), [1988] 1 S.C.R. 1061.  A secured creditor now trumps a distraining landlord if there is a bankruptcy: Re Fresh Air Fireplaces of Canada Ltd.,45 Alta. L.R. (2d) 278 (Q.B.), aff’d 1987 ABCA 35 (CanLII), 52 Alta. L.R. (2d) 184 (C.A.).  The scheme of distribution under what is now s. 136 is “subject to the rights of secured creditors”.  The limited exception is that given a distraining landlord by s. 73(4).  Other than this limited exception the landlord is now just a preferred creditor under s. 136 and no longer has priority over secured creditors.”

 

 Andrew Wilson is the managing partner at JSS Barristers. Click here for his bio.

Randell Trombley is a former associate at JSS Barristers.