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Insolvent Commercial Tenants – What Happens Now?

Posted in Commercial leasing
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Recently, a number of retail enterprises have availed themselves of the protection of the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), Canada’s insolvency statutesThe BIA and CCAA, as federal statutes, have various provisions that allow a debtor to deal with their leases in a manner which may be inconsistent with the terms of the written lease agreement or BC’s Commercial Tenancy Act (CTA) and wishes of the landlord.

A necessary component of any insolvency proceeding is an evaluation of each business location, and any lease agreements pertaining to it, to determine which, if any, should be retained, disclaimed, or assigned, those being the three ways that a commercial property lease can be dealt with under the provisions of the BIA and CCAA.  This article is intended to provide a brief overview of how these options are implemented and what recourse, if any, a landlord has upon receiving notice from an insolvent tenant, or the court’s officer, of such steps being taken.

Retaining Leases: A debtor restructuring under the CCAA or BIA, or a trustee under the BIA, may wish to retain a real property lease, and continue to occupy the premises accordingly.  Landlords are in fact stayed from terminating leases after an insolvency event, solely because of that insolvency event (s. 65.1 BIA) notwithstanding that the lease may provide that such an act is a default (s. 65.5 BIA).  Absent a post filing default, a landlord can find themselves stayed for a considerable period of time while the insolvency proceedings take shape, as long as the current rent obligations are met. A restructuring business will generally wish to retain leases for two reasons, to maintain ones that are necessary for its restructured business to continue or to enable the debtor to assign it to a third party as part of its restructuring effort. In a bankruptcy scenario, a trustee may retain a lease (s. 30(1)(k) BIA), which it will generally do if there is value to the estate in its assignment (as described below).

Disclaiming Leases:  Both the BIA and CCAA provide for the disclaimer of a lease, whereby the landlord’s rights under the lease can be extinguished in the insolvency proceedings, leaving the landlord with only a provable claim against the estate assets which may be limited (as described below).  Where the debtor is restructuring its business under a BIA Proposal there are strict timelines for the disclaimer.  The debtor can only do so between its initial filing and the filing of the Proposal/Plan itself, on 30 days’ notice.  In a CCAA proceeding, a debtor has no specific time limits, although it would practically occur before the Plan is filed.  A landlord may object to any disclaimer, but must do so within 15 days of receiving the notice (s. 65.2 BIA; s. 32 of CCAA).  The onus then shifts on the debtor to establish that the disclaimer is necessary for a successful restructuring.

Assignment of Lease: In a bankruptcy, after electing to retain a lease a trustee may assign the lease to a third party (s. 29 of the CTA, and s. 30(1)(k) and 146 of BIA), notwithstanding that the lease contains a prohibition of such assignment.  Similarly, the CCAA allows for a debtor company to seek a court order assigning such rights, but all monetary defaults must be remedied before such an assignment can occur (s. 11.3).  A landlord can oppose such an assignment, but it will generally be granted when the assignee is able to establish that they are capable of performing the obligations and it is not otherwise inappropriate, upon depositing up to 3 months’ rent or guarantee bond to secure it. The lease is assigned on its existing terms, including any terms as to base and additional rent terms, or use clauses.  The landlord must consent to any amendments being sought by an assignee.

Proof of Claims against the Estate: In a bankruptcy, a landlord is entitled to a “preferred” claim (i.e. to be paid prior to other unsecured creditors, under a specific priority scheme) for the arrears of rent owing for a 3 month period immediately preceding the insolvency event, and accelerated rent, if provided for under the lease, for 3 months thereafter, up to the realizable value of the assets left on the premises.  To the extent that the realizable value of the assets in the premises is insufficient to pay the landlord’s claim in full, the landlord can claim as a general unsecured creditor for the shortfall arising from that. However, it is prohibited from claiming rent for the unexpired term of the lease over and above those amounts (s. 29(7) CTA).  If there has been a disclaimer of the lease in a proposal proceeding, the proposal must provide for the manner that the claim will be dealt with, the options for which are prescribed in the BIA, but can include full damages owing under the lease (s. 29(5)(6) CTA; s. 65.2(4)(5) of the BIA).

As the above illustrates, there are various remedies a commercial tenant has in an insolvency proceeding which can be imposed upon a landlord.  A landlord’s options in response are generally limited both in time and scope. As such, it is important that if any notice is received as to insolvency proceedings being commenced by or against a tenant as against the lease rights, legal advice is immediately sought to preserve and maximize all available rights and remedies arising therefrom.