Distraint actions shall be well-known legal remedies for the recovery of outstanding rents from tenants. But it appears that sometimes landlords and tenants may not have a comprehensive understanding of distraint actions. As the economy of Hong Kong continues to suffer during the ongoing pandemic of COVID-19 and cases of non-payment of rents skyrocket, let's have a succinct revision about distraint actions.
What is a distraint action?
In simple term, a distraint action can be described as follows:-
- A tenant has failed to pay outstanding rents to the landlord.
- In order to secure the payment of outstanding rents, the landlord applies for a Warrant of Distress (“Warrant”) from the District Court of Hong Kong.
- The Warrant empowers the Bailiff (accompanied by a security guard and usually the legal representative of the landlord) to enter the subject premises, seize the goods and chattels therein, and sell them by public auction.
- The sale proceeds, after deducting the relevant expenses, will be paid to the landlord in full or partial settlement of the outstanding rents.
The criteria for applying for a Warrant of Distress
Apart from the requirement that the tenant owed outstanding rents to the landlord, the following criteria must be satisfied:-
- There must be a subsisting tenancy. If the landlord has forfeited (i.e. terminated) the tenancy by reason of non-payment of rent, the landlord loses the right to commence a distraint action. He can of course sue for the outstanding rents and recovery of possession of the premises by commencing civil proceedings.
- Section 79 of the Landlord and Tenant (Consolidation) Ordinance (Cap. 7) (the “LTCO”) provides that no Warrant shall be issued in any case for arrears of rent due for more than 12 months at the time of the application.
What the landlord cannot achieve by a distraint action?
The purpose of distraint actions is to seize the goods and chattels and use the sale proceeds to pay the outstanding rents. It cannot give the landlord the following rights and remedies:-
- To evict the tenant from the premises. The tenant will be entitled to enter or remain in the premises and continue to operate its business even if the Bailiff seizes the goods and chattels (though in practice their business shall usually come to a halt as the goods and chattels were seized).
- To forfeit (i.e. terminate) the tenancy, sue for the outstanding rent, and claim for possession of the premises. These have to be achieved by separate legal proceedings.
- To distrain for other charges owed by the tenant such as management fees or promotional fees. The landlord can only distrain for outstanding rents.
How to apply for a Warrant of Distress?
The procedure is governed by Part III of the LTCO and is intended to be simple and straightforward. The landlord will only have to make an ex-parte application (i.e. without giving any notice to the tenant) for the Warrant by filing an affirmation. The affirmation shall state the name and address of the tenant, the amount of outstanding rent, the subject premises, and the period in respect of which the rent is due.
Apart from legal costs, the landlord will have to pay the following expenses:-
- Filing fee for applying for the Warrant;
- A deposit for the Bailiff's traveling expenses; and
- A deposit for the cost of a maximum of 8 days' services by the security guard.
How is the Warrant executed?
On the date of execution, the Bailiff will enter the subject premises between 7 am – 9 pm together with a security guard (and usually the legal representative of the landlord). Pursuant to section 87 of the LTCO, the bailiff will seize the movable goods and chattels found on the premises and in the apparent possession of the tenant. Fixtures to the premises will not be seized.
After the seizure, the tenant will be given a prescribed notice which states the goods and chattels that have been seized and their appraisal, the rent due, and the date on which the goods and chattels will be sold if the rent is not settled within 5 days of the seizure (pursuant to section 89 of LTCO). The tenant may apply for a postponement if he needs time to pay.
If there is still no payment of rent after 5 days, the goods and chattels will be sold by way of public auction and the sale proceeds will be paid to the Court to meet costs of the distraint action and to satisfy the outstanding rent. The surplus of the sale proceeds, if any, will be released and returned to the tenant.
Possible complications?
Third parties may argue that they, not the tenant, are the true owners of the goods and chattels. This may be proven by, for example, evidence showing that the goods and chattels were left to the tenant for sale on a consignment basis, that the third parties have retained the legal title of the goods and chattels or that the goods and chattels were only leased to the tenant. Such goods and chattels will then have to be returned to the third parties. A classic example is the printing machine. It is usually (but not always) leased to the tenant by a third party and may not be seized.
Winding-up proceedings against a corporate tenant will also cause complications. In summary:-
- Where the goods and chattels were seized and sold before the commencement of the winding-up, the distraint action shall remain valid.
- Where the goods and chattels were neither seized nor sold before the commencement of the winding-up proceedings, the distraint action shall be invalid.
- Where the goods and chattels were seized before the commencement of the winding-up proceedings but the sale took place after the commencement, the court may avoid or validate the sale. It has been held by the Court that where there were ample funds available to satisfy the claims of preferred creditors and no special reasons existed which would render the sale inequitable, the landlord shall be entitled to complete the distraint proceedings.
Conclusion
An action for distress provides landlords with a relatively fast and cost-effective remedy to recover the outstanding rents from the tenant. It would be difficult, if not impossible, for a tenant to raise any defence, although we have encountered unusual cases where tenants disputed that no rents have been owed or the tenancy has been forfeited before the distraint action.
No doubt, there are other alternatives that can protect the landlords' position, e.g. forfeiture of lease and claiming for recovery of possession of the premises by commencing a civil action in the Court. On the other hand, tenants may also be interested to know what rights and remedies they may have when facing a claim by the landlord. We hope to explore these topics together with you in the future.
