The recent decision of the Alberta Court of Queen's Bench in
Alignvest Private Debt Ltd v Surefire Industries
Ltd, 2015 ABQB 148 ("Alignvest") raises
important issues for landlords to consider respecting the
provisions in a lease that deal with security deposits. In
particular, Alignvest provides guidance on how landlords
can protect their rights to a security deposit in the event of a
tenant's insolvency, and illustrates the risk of failing to do
The case arose from a sale and lease back transaction between
York Realty Ltd., as purchaser-landlord ("York"), and
Surefire Industries Ltd., as seller-tenant ("Surefire")
which closed on February 15, 2013. The lease entered into between
York and Surefire included a $3,187,500 security deposit, which was
held by York as an adjustment to the purchase price for the
The relevant term of the lease provided as follows:
6. Security Deposit/Rent Credit
(a) The Tenant will pay to the Landlord ... a deposit of ...
$3,187,500 plus goods and services tax (the "Security
Deposit"), which Security Deposit is to be held without
interest by the Landlord as security for the performance by the
Tenant of its obligations under the Lease ... Subject to the
foregoing, the Security Deposit will, provided that the Tenant has
paid all amounts due to the Landlord under this Lease and is not
otherwise in default ..., be applied during the term as
[applied to monthly rent commencing on the 13th month of the
term, and certain following months during the term of the
In the event of default under the lease, York was entitled to
retain the deposit. York did not register its interest to the
deposit in the Personal Property Registry.
The dispute arose when Surefire became insolvent and was placed
into receivership by a secured creditor, Alignvest Private Debt Ltd
("Alignvest"), which held a perfected security interest
over all of Surefire's assets. Surefire had defaulted on rent
payments under the lease with York in the days prior to the
appointment of the receiver, but York did not exercise its option
to retain the deposit and the failure to pay rent was remedied.
In an application before the Court, Alignvest took the position
that the $3,187,500 deposit in the hands of York was property of
Surefire and therefore subject to its security interest. York
argued that the deposit was pre-paid rent or a non-refundable
deposit, and therefore not the property of Surefire. Accordingly,
the Court looked to the terms of the lease to determine which
interpretation of the deposit could be substantiated.
Ultimately, the Court determined that the deposit could not be
considered pre-paid rent or a non-refundable deposit, and York was
ordered to forfeit the deposit to Alignvest. In coming to this
conclusion, the Court considered the following factors:
the provision in the Lease which
specified that the deposit was held as "security for the
performance by the Tenant of its obligations under the
the fact that the deposit would be
credited to rent for certain future months of the tenancy if the
tenant was not in default, but did not immediately credit the
deposit to future months; and
there were circumstances in which the
deposit would be refundable to the tenant, including a breach of
the lease by the landlord, or, as was the present case, a
disclaimer of the lease in insolvency proceedings which was
confirmed by the Court.
The Court determined that the deposit was properly characterized
as security to guarantee the performance of Surefire's
obligations under the lease, and that York therefore held a
"security interest" which was required to be registered
under the terms of the Personal Property Security Act
(PPSA). Since York did not register its security interest,
its claim to the deposit was subordinate to Surefire's
perfected interest and ineffective against the bankruptcy trustee
that was eventually appointed over Surefire's assets.
The Court's decision in Alignvest provides a
cautionary tale as well as important guidance to landlords on how
to minimize the risks arising from a tenant's insolvency. In
particular, landlords should be careful to consider the
implications of language in the lease that may have the effect of
bringing the deposit within the parameters of the PPSA.
When in doubt, filing a financing statement in the Personal
Property Registry is an inexpensive and effective way to protect a
deposit from a claim by a bankruptcy trustee.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Ontario Court of Appeal confirmed that courts will generally support and uphold decisions of condominium directors because they are better positioned than judges to make decisions pertaining to their buildings.
According to the city bylaws in Calgary, the grading of lots for new buildings must be done properly so that the water never flows toward the new building or any other nearby properties, but away from those buildings.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).