What are the rights of a commercial landlord in Ontario vis-a-vis a bankrupt tenant and the tenant’s other creditors? A recent decision of the Court of Appeal of Ontario, Curriculum Services Canada, 2020 ONCA 267 addresses this issue.
In May 2017, Curriculum Services Canada (“Curriculum” or the “Tenant“) entered into a 10 year agreement to lease 8,500 square feet of downtown Toronto office space. At the time the lease was entered into, the Landlord agreed to pay for certain leasehold improvements, in the amount of $45,000, and offered free rent for a six-month period, totalling $175,000.
Less than a year later, Curriculum filed for bankruptcy and Curriculum’s Trustee in Bankruptcy, disclaimed Curriculum’s rights under the lease.
The Landlord sought to recover the amounts owing to the Landlord as a result of Curriculum’s default, including the amounts that the Landlord had paid to induce Curriculum to enter into the lease.The Landlord claimed $100,000 as a preferred claim for three months’ accelerated rent in accordance with section 38 of the Commercial Tenancies Act and the priority of claims prescribed by section 136 of the Bankruptcy and Insolvency Act.
The Landlord also advanced an unsecured claim in the amount of $4,000,000 for recovery of the tenant inducements, as well as the future rent payable for the balance of the unexpired portion of the 10-year lease term. Fortunately for the Landlord, another tenant in the building was prepared to take over Curriculum’s space and the Landlord was able to quickly mitigate its damages for future rent. This reduced the Landlord’s claims considerably.
In response to the Landlord’s remaining claims the Trustee issued a notice of partial disallowance, allowing only a portion of the Landlord’s preferred claim in the amount of $24,571 (the actual value recovered from the Tenant’s property located on the leased premises).
The Landlord appealed the disallowance of its claims to the Superior Court of Justice. The bankruptcy Judge dismissed the Landlord’s appeal, and the Landlord appealed to the Court of Appeal.
In a unanimous (3-0) decision, the Court of Appeal found that once the Trustee in Bankruptcy disclaims a tenant’s rights under a commercial lease, a landlord has no claim against a bankrupt tenant in respect of the unexpired term of the lease or unpaid tenant inducements; the Landlord has only what is specifically provided for by the Commercial Tenancies Act and the Bankruptcy and Insolvency Act – a preferred claim for three months’ accelerated rent. The Court of Appeal also determined that, to the extent the Landlord’s preferred claim for three months’ rent is not satisfied, the Landlord is entitled to claim as an unsecured creditor for the balance.
For many landlords, the prospect of dealing with a bankrupt tenant or their trustee can be daunting. The advice and assistance of experienced lawyers can help maximize your recovery.