My name is Ira Smith Team, president of Ira Smith Trustee & Receiver Inc.
,
First of all, the Ira Smith Team hopes that you and your family
continue to be safe, healthy and secure during this coronavirus pandemic.
The topic of today's Brandon's Blog
is about commercial landlords and their tenants in Ontario
and the interplay between the Commercial Tenancies Act Ontario
and the Bankruptcy and Insolvency Act Canada.
I hope you can watch until the end of this
video because I know you will get value from it.
We always thought that the law in Ontario was fairly well settled when it came
to commercial tenancies, but this Court of Appeal decision
makes even a finer distinction to help commercial landlords
and trustees understand exactly what the law for commercial tenancies
is when a corporate tenant goes bankrupt.
I'll stress that the information contained in this blog relates only to the province
of Ontario because the commercial tenancies are under provincial law.
But it is an interesting interplay between the provincial
commercial tenancy law and the Canadian Federal Bankruptcy and Insolvency Act.
On October 28th, 2020, the Court of Appeal for Ontario released its decision.
The name of the case and all the major
details are all spelled out by Brandon below in detail in the blog.
What I want to do in this video is focus on the main issue in the case.
You know, there's no dispute
if the corporate tenant went bankrupt and close to three months later,
the trustee in bankruptcy disclaimed its interest in the lease.
Now, the law, as we've always understood it
in Ontario, is that under
the Commercial Tenancies Act, the trustee in bankruptcy has up to three months
to occupy the premises if it chooses to do so.
And regardless, even if it does or does not occupy the premises,
it has up to the same three month period to either disclaim its interest
in the lease or to adopt it and assign it to another party.
And the reason a trustee would adopt it
and assign it to another party, although that has its issues with it,
is because the rental rate being paid by the tenant
and the future rent increases within the lease for the remainder of it
is below the market rent at the time the company went bankrupt.
Therefore there's value in the lease. When there's value in the lease
it's an asset that the trustee can sell.
As a matter of fact, one of our bankruptcy cases,
corporate bankruptcy cases many years ago was a retail store in Yorkdale.
And the lease was under market and it had great value.
And we ended up selling the lease as the trustee for one million dollars.
It was the most valuable asset in the entire bankruptcy administration.
That is an example of how valuable a lease can be, depending on where it is,
what term is left and what the rental rates are now.
In the case described below,
the landlord also had a requirement stipulated
in the lease that the tenant had to post a letter of credit
for two and a half million dollars
as security for its obligations under the lease and for any claim the landlord
might have if the corporate tenant went bankrupt.
That additional requirement is what distinguishes this case
from many, many others.
So the landlord had the letter of credit.
The company had put up cash collateral to The Bank of Nova Scotia.
The money was invested in a GIC.
The bank took security on that asset and others,
registered a financing statement under the Personal Property Security Act
of Ontario and issued the letter of credit to the landlord.
The letter of credit, of course, had various rules on it,
outlining what the landlord needs to do
in order to qualify to be paid from The Bank of Nova Scotia.
It had to prove that a debt was owed by the tenant, that the tenant had not
repaid it, provide proof of that and then the bank would pay off.
So after the company went bankrupt, the landlord did exactly that.
The landlord made a claim for certain arrears of rent.
The landlord made a claim for certain costs of putting the premises back
to their original condition and some other costs that the landlord was allowed
to claim for under the letter of credit.
The landlord then filed its proof of claim with the trustee.
In the proof of claim, the landlord claimed.
for three months, accelerated rent.
What that is, is that if the lease allows for it,
the landlord can claim three months rent starting from the date of bankruptcy
and the landlord did that.
There were some other items in there as well, but that was the main
claim as a preferred claim. Under the Bankruptcy and Insolvency Act,
a claim for three months of rent arrears, plus three months of accelerated rent is
a preferred claim, subject only to the value of the property
of the tenant on the premises at the date of bankruptcy
that was not subject to either a trust claim or a secured claim.
There had to have been equity in the property for the trustee in bankruptcy.
The trustee in bankruptcy disallowed the landlord's claim.
The landlord appealed the trustee's disallowance, which is its right.
They went before the Registrar in Bankruptcy.
Other than for one month of double counting that the landlord did by mistake,
the Registrar allowed the landlord's claim as being proper.
The landlord had also
got the entire two and a half million dollars from the letter of credit
for other claims that it could not make
in the bankruptcy.
The trustee took the position that the landlord did not have the right
to claim on the letter of credit for those other things
and went to court.
The trustee's main argument before
the judge in motion court was that once a trustee in bankruptcy disclaims a lease
it is the same as if the tenant has
surrendered the lease and the premises and the landlord has accepted that surrender.
There was nothing else owing.
The landlord's position was.
we have a letter of credit that stands as security
for non-payment by the tenant, plus if the tenant goes bankrupt.
we can claim on that letter of credit for all the other things we cannot claim
for in the bankruptcy estate itself. And further,
our ability to claim on the letter of credit is a private contract between
us, the landlord and The Bank of Nova Scotia.
It has nothing to do with the trustee
and we are allowed to do that and we are allowed to get the money.
The motion judge didn't see it that way.
The motion judge said a disclaimer of the lease by the trustee is the same as
a surrender and therefore there was nothing else owing
under the lease other than the landlord's claim for three months accelerated rent.
He turned down the landlord's submission that it had a private contract through
the letter of credit with The Bank of Nova Scotia.
And the judge also said that The Bank of Nova Scotia's liability under
the letter of credit is only in relation to the preferred claim,
in this case, the accelerated rent claim,
and The Bank of Nova Scotia does not have to pay out anything more.
And therefore, the money is subject to any trust claimants, secured creditors.
And if there are none, it goes to the trustee in bankruptcy.
The landlord appealed that to the Court of Appeal for Ontario.
And although there are various issues
which are mentioned below by Brandon in the appeal, the main issue was
did the motion judge err
in determining that the landlord did not have the right
to go on the letter of credit and The Bank of Nova Scotia had no obligation to make
the payments once the lease was disclaimed by the trustee in bankruptcy?
The decision of the Court of Appeal has now clarified the issue.
The Court of Appeal said
that the disclaimer is for the sole benefit of the bankrupt commercial tenant.
While a disclaimer does operate
to finish the bankrupt tenant's responsibilities under the lease,
the disclaimer
cannot be interpreted to be a surrender for any purpose whatsoever.
It is a surrender.
And under the lease,
the bankrupt commercial tenant's obligations to the landlord stop,
but it can't be said for every purpose in relation to that tenancy.
Further, the Court of Appeal said
the trustee's disclaimer of a bankrupt tenant's lease ends the legal rights
of the landlord against the bankrupt tenant's Estate
regarding the unexpired term of the lease
and for other things such as cost of restoration.
But the Court of Appeal went on to say
that because the lease said the letter of credit was standing
specifically in case the commercial tenant
went bankrupt and therefore to pay these extra costs,
and it was also stipulated that way
in the letter of credit, according to the laws of letters
of credit, that contract between the landlord
and the bank stands.
It's a private contract between the two
of them, and the landlord had the right to get the money from the bank.
So those are the issues, the main issues
in this case, as I say down below, Brandon has written a lot more words about
the entire decision and case that was before the Court of Appeal.
So I hope you've enjoyed this video.
I encourage you to read the entire Brandon's Blog.
Again, we hope that you and your family are safe, healthy and secure.
I want to assure you that the Ira Smith Team is fully operational.
We are conducting all meetings
and answering all questions, either by telephone or video meeting.
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