Help for Commercial Landlords in South Carolina: How distress and distraint allows recovery from tenants who go darkPDF
It’s a familiar story. A shopping center tenant falls behind on its rent payments and, eventually, “goes dark,” walking away from its lease entirely. The tenant leaves furniture, fixtures and equipment (not to mention a lot of other junk) cluttering up the landlord’s space. What’s a landlord to do? Can it throw away the tenant’s stuff? Can it sell these things to offset the back rent? And what about the tenant’s other creditors who might have a right to this personal property?
For commercial landlords in South Carolina, distress and distraint is an often overlooked remedy, which, if properly used, is a valuable (and usually cost-effective) tool to help commercial landlords recover past-due rent from a defaulted tenant. In addition to the recovery of aging receivables, the distress and distraint process gives a commercial landlord a convenient forum to dispose of any personal property remaining when a tenant has abandoned the premises. Below is an explanation of the background, process and common questions that arise in the context of distress and distraint.
What is Distress and Distraint?
Distress and distraint allows a landlord to apply to the Magistrate’s court for seizure and sale of personal property belonging to a defaulted tenant (and, in some instances, third-parties) to satisfy the past-due rent obligations of the tenant. Sometimes called a “landlord’s lien,” distress and distraint has its roots in the common law of England and has been adopted by statute in South Carolina. See Gentry v. Recreation, Inc., 192 S.C. 429, 7 S.E.2d 63 (1940); S.C. Code Ann. § 27-39-210, et seq.
How Does This Work, and What Procedures Must be Followed?
Generally speaking, distress and distraint proceeds as follows:
- The landlord files with the Magistrate’s court having jurisdiction over the premises the following: (a) an affidavit of the landlord, attesting to the amount of the rent due and some basic information concerning the lease; and (b) a notice of hearing to the tenant stating the amount of rent due and providing a time and place for a hearing on the matter (known as a “pre-distress hearing,” which the Magistrate’s court will schedule). If the tenant has abandoned the premises, the landlord must also file with the Magistrate an affidavit of abandonment, attesting that the premises have been abandoned for at least 15 days. See S.C. Code Ann. § 27-39-210. In addition to filing for distress and distraint, it is a good practice also to seek ejectment of a tenant at this stage, so that any questions over the right to possession of the premises may be resolved by the Magistrate.
- The Magistrate provides these documents (which, in the case of the notice of hearing, the Magistrate should have signed) to the Sheriff or constable for service on the tenant. This critical step is often complicated when a tenant has abandoned the premises – and, particularly, when the tenant cannot be found within the county. In such a case of abandonment, copies of the landlord’s affidavit and notice of hearing may be served by the Sheriff or constable leaving them affixed to the most conspicuous part of the premises and delivering them to the county clerk of court (i.e., not the clerk in the Magistrate’s office). In the case of abandonment, the tenant is deemed to have appointed the clerk of court as its agent for acceptance of service. See S.C. Code § 27-39-210.
- Next, the pre-distress hearing is held at the place and time identified in the notice of hearing. At this hearing, the Magistrate will likely want to confirm that service of the tenant was properly accomplished and that the rent claimed by the landlord is valid. Critically, distress and distraint of personal property to cover future rents under an acceleration clause is not permissible under relevant precedent, see Gentry v. Recreation, Inc., 192 S.C. 429 (1940); however, the landlord’s costs should be allowed by the Magistrate, pursuant to S.C. Code. Ann. § 27-39-220. (Notably, it is not clear whether the landlord’s “costs” may permit the recovery of attorneys’ fees, but in any event, the landlord should be careful that the distraint is not unreasonable, due to statutory penalties for unreasonable distraint. See S.C. Code. §§ 27-39-290, 300). Provided that all is in order, the Magistrate will issue a distress warrant to the Sheriff or constable. See S.C. Code Ann. § 27-39-220.
- After receiving the distress warrant from the Magistrate in the amount of rent owed, the Sheriff or constable will seek to present this warrant to the tenant for payment. See S.C. Code Ann. § 27-39-240. This presentation of the distress warrant operates as the tenant’s “last chance” to pay the past-due rent, and if payment is not made, then the Sheriff or constable may distrain sufficient property in the premises to pay the amount stated in the distress warrant. The Sheriff or constable must provide the tenant with a list of the property distrained. See S.C. Code Ann. § 27-39-240.
- The tenant has five days after distraint to post a bond in double the amount claimed by the landlord, in order to free the property from distraint. If such a bond is posted, then the case is tried. See S.C. Code Ann. § 27-39-240. If no such bond is posted, then the Sheriff or constable sells the distrained property at a public auction. See S.C. Code Ann. § 27-39-320. Proper notice of such sale must be given by posting a notice of such sale for five days upon the premises and two other public places in the county stating the time and place of such sale. See S.C. Code Ann. § 27-39-320.
- The proceeds from the distraint sale are remitted to the landlord for its back rent, with any excess to be paid to the tenant. S.C. Code Ann. § 27-39-350.
Common Questions Answered
Perhaps due to the arcane nature of the distress and distraint remedy, a number of questions often arise when a party seeks distress and distraint of personal property. These questions often relate to the procedures and authority for seizing the personal property, as well as the rights of the landlord to sell property that might be subject to some other, third-party property interest. Although South Carolina case law does not address all of the questions that might arise in a commercial context, below are answers to some common questions that arise when a commercial landlord seeks to exercise its remedy of distress and distraint.
Q: What sums can be recovered?
Only back rent actually owed is properly subject to distress and distraint in South Carolina. Further, the distress and distraint statutes expressly provide that “[A]ny distress must be reasonable in respect to the amount of property distrained.” S.C. Code Ann. § 27-39-290. In fact, a landlord who makes unreasonable and unnecessary distress is liable for “all damages sustained by the tenant whose goods are distrained by reason of such excessive distress.” S.C. Code Ann. § 27-39-300.
As a practical matter, this means the landlord does not have a right to distrain property for future rents owed, even if the lease contains an acceleration clause. In Gentry v. Recreation, Inc., 192 S.C. 429, 7 S.E.2d 63 (1940), the Supreme Court held “that both at common law and under our statutes … a distress warrant cannot be issued except for rent in arrears. And it is our considered judgment that rent cannot be deemed in arrears merely by virtue of a clause in the lease attempting to accelerate the future and unearned rent by reason of the vacating of the premises before the expiration of the term.” In analyzing the acceleration clause at issue, the Gentry court concluded that it was penal in nature and, thus, did not give rise to a claim for distress in the accelerated amounts.
Q: What about attorneys’ fees?
Although the distress and distraint statutes repeatedly mention the landlord’s right to recover its costs, an open question remains whether a landlord’s attorneys’ fees are properly recoverable through distress and distraint. The Gentry case suggests that, when asked, South Carolina courts will analyze this question to determine whether such a clause is “in the nature of a penalty,” as opposed to a reasonable mechanism to protect the landlord from the tenant’s default. In any event, a landlord’s claim for fees is bolstered where the commercial lease documents make clear that such amounts are due and payable as “rent” under the lease. As a practical matter, a landlord may ask the Magistrate for its attorney’s fees, but should be careful that the distress is not thereby made “unreasonable,” in violation of S.C. Code §§ 27-39-290, 300.
Q: May distress & distraint exceed the jurisdictional limit of the magistrate’s court?
Attorneys sometimes wonder whether it is proper to bring an action in the Magistrate’s Court for distress and distraint in excess of the jurisdictional limit of $7,500. By statute, a distress and distraint proceeding must be brought before “[a]ny magistrate having jurisdiction” over the premises. S.C. Code. § 27-39-210. Further, the listing of actions over which a Magistrate has concurrent jurisdiction does not include distress and distraint proceedings, thereby implying that the Magistrate has exclusive jurisdiction over all distress and distraint proceedings. See S.C. Code Ann. § 22-3-10. This is distinguishable, for example, from actions in claim in delivery, over which the Magistrate has jurisdiction for property valued at not more than $7,500. See S.C. Code Ann. § 22-310(11).
Perhaps just as importantly, actions for distress and distraint filed in the Magistrate’s court routinely exceed $7,500. (In fact, one Magistrate once told the author that he rarely sees distress and distraint actions filed for less than $100,000.) Typically, commercial landlords will not want to go through the time and effort of the distress and distraint procedure, unless for an amount substantially more than $7,500.
Q: What happens if the tenant refuses to turn over the distrained property?
An aging line of cases and attorneys general opinions establish that an action for distress and distraint does not give the Magistrate or his constable the right to breach the peace to recover personal property. See Burnett v. Boukedes, 240 S.C. 144, 125 S.E.2d 10 (1962); State v. Christensen, 194 S.C. 131, 9 S.E.2d 555 (1940); 1979 S.C. Op. Atty. Gen. 13 (S.C.A.G.), 1979 S.C. Op. Atty. Gen. No. 79-7, 1979 WL 29013. Thus, if a tenant or other party in possession of property that is subject to distraint refuses to relinquish the property for sale, the landlord must file an action in claim and delivery to recover the property, on the theory that his lien (much like a UCC lien) gives him a right to repossess the property peaceably. To address this difficulty, the Magistrate’s Benchbook advises landlords in such a situation to simultaneously file a claim and delivery action at the same time as an action for distress and distraint is filed. See Magistrate’s Summary Court Judges Bench Book, Section N.4; see also 1979 S.C. Op. Atty. Gen. 13 (S.C.A.G.), 1979 S.C. Op. Atty. Gen. No. 79-7, 1979 WL 29013. Of course, if the value of the property subject to distraint exceeds $7,500.00, then the landlord would need to seek claim and delivery through the Circuit Court, while proceeding in the Magistrate’s Court on the distress and distraint. See S.C. Code § 22-310(11).
Q: What about third-party property on the premises?
Property that belongs to persons other than the tenant can be distrained and sold, unless the property of the tenant is sufficient to cover the amount of the back rent and other costs. See S.C. Code Ann. § 27-39-250; Tolemac, Inc. v. United Trading, Inc., 326 S.C. 103, 484 S.E.2d 593 (1997). However, if at any time before the sale, the landlord receives written notice that some property is owned by a third party, the third party is given an opportunity to object and prove that the property was not transferred to him by the tenant seeking to avoid distraint. See S.C. Code Ann. § 27-39-250. If the third party carries this burden, his property is exempt from distraint.
Q: Can a landlord distrain personal property that has been removed from the premises?
In a situation where the tenant removes property from the rented premises, the property remains subject to distraint and sale, “provided such distraint be made within thirty days after such removal.” S.C. Code Ann. § 27-39-270.
Q: What about security interests and other liens?
In many cases, property found in the possession of a tenant will be subject to the security interests of third parties. The Court has expressly ruled that the perfected security interests of secured parties are treated differently than third-party property. See In Re J.M. Smith Corporation v. Wingard, 341 S.C. 442, 447, 535 S.E.2d 131, 133 (2000). Although a landlord does acquire a perfected interest pursuant to the distress proceedings, the J.M. Smith court noted: “A landlord does not become a lien creditor until it levies for distress.” Id. at 341 S.C. 448, 535 S.E.2d 133. Accordingly, “a secured party who perfects its security interest before the creditor … has priority over the lien creditor.” Id. Thus, a landlord will typically acquire a subordinated lien interest in distrained property. Although South Carolina law is somewhat unclear on whether a landlord may foreclose this lien by public sale, the correct legal result is that a landlord (or the constable) may conduct such a sale, with any purchaser at the sale taking the property subject to any senior security interests, in accordance with the priority rules of Article 9 of the UCC.
Q: Is there anything that cannot be distrained?
Certain items are not subject to distress and distraint, including for example, “personal clothing and food within the dwelling” and “cooking utensils.” A comprehensive list of items not subject to distress and distraint can be found at S.C. Code Ann. § 27-39-230.