The bankruptcy of a tenant is disruptive and may be confusing to
a landlord; however, arming yourself with knowledge of some warning
signs of financial distress and an understanding of your basic
rights will, along with your trusted legal advisor, help you be
prepared in the unlucky event that your tenant goes bankrupt.
3 Signs of an Impending Bankruptcy
1. Rent Delinquency
If your tenant has always been diligent in paying rent, but then
starts paying rent late, asking if it can make partial payments, or
telling you to wait a few days before withdrawing or cashing a
monthly payment, be prepared for trouble. Cash flow problems are a
good indication that your tenant is on the financial skids. Rent is
likely to be one of the last payments a tenant fails to make, as
having premises is necessary to its continued business and its
ability to pay its trade and other creditors.
2. Staff Changes
If the staff members you've been dealing with on behalf of
the tenant no longer work there, or key members of the management
team have resigned, the tenant may be experiencing financial
difficulties. The resignation or termination of staff or management
points to an unstable business, one that cannot afford to pay its
employees or is having difficulty retaining staff due to the stress
of meeting client and creditor demands.
3. Other Creditors are Enforcing
When the secured and trade creditors of a tenant begin to start
realization proceedings or sue for overdue accounts, especially
when more than one creditor is enforcing, you could be receiving a
notice of bankruptcy in short order. Not only does it signal that
the company is in financial distress, but it also means the
business has to spend more time, energy and money negotiating with
creditors and responding to claims, with less of those resources
available to run the business.
If any of these signs surface, the best thing you can do is
contact your legal advisor. Bankruptcy law is complex, especially
where it intersects with landlord and tenant rights. Timing is key
in such circumstances and legal expertise is therefore invaluable
to the preservation and enforcement of your rights.
3 Important Things to Remember on Bankruptcy
The federal Bankruptcy and Insolvency Act (BIA) provides
that landlords' rights are governed by provincial law, subject
to certain exceptions. Alberta has specific legislation to deal
with the bankruptcy of a tenant, namely the Landlord's Rights on Bankruptcy Act
(LRBA). The following points are specific to the operation of these
laws in Alberta.
1. The Trustee Becomes your Tenant
Pursuant to the BIA and the LRBA, the trustee in bankruptcy can
be your tenant for as long as it needs the premises to deal with
the tenant's estate. The trustee has to pay occupation rent,
subject to set-off of amounts payable for accelerated rent (see
2. Claims for Arrears and Accelerated
The BIA gives a landlord priority to other creditors for rent
arrears for up to three months before bankruptcy and for three
months accelerated rent, provided the lease allows for it. This is
also reflected in the LRBA. Unfortunately, the amount payable in
priority can't exceed the amount realized from the sale of the
tenant's property in the leased premises; and any amount
payable for accelerated rent must be credited against the
occupation rent payable by the trustee, according to both the BIA
and the LRBA. The LRBA prohibits the landlord from claiming against
the bankrupt tenant for the unexpired term of the lease.
3. Limits on Distress
The limits on your ability to claim for rent might have you
thinking that distraining before bankruptcy is a good idea, but it
won't help you much. Distraint is not open to you after your
tenant goes into bankruptcy, per the LRBA, and if you managed to
distrain before the bankruptcy, the BIA requires you to deliver to
the trustee any seized property or any proceeds of sale, although
you will have priority to payment for the costs of seizure.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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