While many landlords know what to do if their tenant is in default or likely insolvent, in our experience, once that tenant starts a bankruptcy or other insolvency process many landlords feel there is little they can do. Afraid to throw good money after bad, landlords often elect not to retain counsel and instead sit on their hands in frustration, not knowing that a more active approach could get them better results. However, experienced bankruptcy and insolvency counsel can do much more for a landlord than just help it fill out a proof of claim form. Here are just five of the many reasons why retaining experienced bankruptcy and insolvency counsel can make a big difference.
1. All Bankruptcies are not Created Equal
The first mistake that many landlords make is not appreciating the difference between a bankruptcy and a bankruptcy proposal or a restructuring under the Companies' Creditors Arrangement Act (the "CCAA"). In a bankruptcy, the landlord's options are relatively few and their rights are relatively codified. However, if it is a bankruptcy proposal, the rules are different. Major chains of stores almost never go straight into bankruptcy. In recent events, Boutique Jacob filed a proposal, Mexx filed a proposal, and Bowring and XS Cargo each used the CCAA in connection with their insolvency proceedings. None of these corporations went straight into bankruptcy (although Jacob and XS Cargo ended up there). In a proposal or restructuring proceeding, the tenant often needs the vote of its landlord to actualize its plans. Indeed, in most retail bankruptcies, the landlords collectively will be the largest single voting bloc, therefore having a material influence on the direction the proceedings will take. Retaining experienced bankruptcy and insolvency counsel to speak with other landlords in order to try to form a unified front can be very effective in improving the outcome of the insolvency for landlords.
2. You Can Ask for More?
Bankruptcy or restructuring proposals are just that: a proposal. However, many take it as a, "take it or leave it" proposition, even where the proposal is patently ridiculous. For example, the recent Boutique Jacob proposal offered landlords less than 1 cent on the dollar and allowed the principal of Jacob to retain the name, possibly to start a profitable online business, possibly to use it in tax planning, but definitely for some new business purpose which was not fully explained. Nonetheless, 95% of the creditors accepted this offer and, as far as we know, not one took steps to ask for more. Experienced bankruptcy and insolvency counsel will tell you, the first offer in a proposal is seldom the best offer the debtor is prepared to make. However, a lowball first offer is based on the often true belief that creditors will not take the time to retain counsel and ask for more. Experienced bankruptcy and insolvency counsel can analyze the proposal and advise where the opportunities are to receive better treatment.
3. Your new Tenant is going to be who?!?
It is established that in a bankruptcy, the trustee can assign a lease without the consent of the landlord, provided it meets certain criteria. However, you may not know that in a proposal or a CCAA proceeding, the law was recently amended to also allow for such an assignment. In order to have the best chance of making sure that the landlord has some degree of control over its space and some input on whether or not its lease may be assigned, and to whom, the landlord needs counsel. A landlord who is active in the insolvency process can ensure that the insolvent tenant is held to a strong standard before an assignment is granted, or may even prevent the assignment entirely. A landlord needs counsel to be on the service list to make sure that it has notice of motions, either by the tenant looking to assign its lease or by other parties bringing motions that may impact whether or not the lease will be assigned. It may also be that a landlord taking an active approach can influence a tenant to elect to simply terminate its lease and not assign it, which may be a preferable outcome.
4. Hate the game, but know the Players
This can't be overstated: there are only so many experienced counsel who really know how to deal with bankruptcy and insolvency matters before the courts in Ontario and there are a small number of judges who oversee these matters. The truth is, we all know each other. Given how important your leases are to your business, you want someone looking out for your interests whose presence is going to be taken seriously by the other players in this game. When we write to opposing counsel to tell them we are bringing a motion, they know it is not frivolous and that we can follow through. Remember to hire expert insolvency counsel when dealing with bankruptcy and insolvency matters. This is a must in bankruptcy and insolvency scenarios. Your regular leasing counsel will not be able to do the same job that bankruptcy and insolvency counsel will. As the saying goes, "A good lawyer knows the law, but a great lawyer knows the judge!"
5. Making a Good Exit instead of Quick Getaway
Often the insolvency process ends with the premises being abandoned or sold to someone else. Either way, your relationship with your tenant is often about to end. However, experienced bankruptcy and insolvency counsel will help make sure that 1) the premises is not left in a state of repair that is not in keeping with the lease or the rules governing insolvency, and 2) that you are paid rent for the entire restructuring process.
There are situations where an insolvency process can change from a proposal to a bankruptcy. In this scenario, a landlord who has not taken steps during the insolvency process to protect themselves can be left with a very unsatisfactory unsecured claim in a bankruptcy. By taking the necessary protective steps in one of the recently large retail insolvencies, other landlords lost as much as $100,000 from the sudden bankruptcy, while our client suffered no loss at all. In fact, in that case, due to steps we took, our client suffered no loss and the tenant paid our legal fees, too.
The current system is certainly designed to give the tenant the advantage in the hope that the tenant will be able to restructure and resurface as a healthy corporation. While this is a celebrated goal, in our view, all too often the road to that goal is paved over the backs of landlords. Experienced bankruptcy and insolvency counsel can help a landlord limit the negative side effects of the insolvency of your tenant and, at a minimum, help to mitigate loss and put the landlord in a much better position to make a clean transition to a better, rent-paying, and solvent tenant.
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.