As a result of financial challenges facing a number of American landlords including, most notably, General Growth Properties (the owner of over 220 malls across the United States), much has been written about the impact of landlord bankruptcy on the rights of tenants.
Most distressing for American tenants is that a Chapter 11 bankruptcy allows the bankrupt landlord (or its bankruptcy trustee) to elect to terminate existing leases. In such situations, the bankruptcy trustee is also permitted to sell the property of a bankrupt landlord free and clear of any tenant interests in the property, subject to certain conditions. As a result, American tenants are counselled to be very versed on the impacts of landlord bankruptcies and to be prepared to go to court to assert their rights.
Fear has risen among tenants operating businesses in Canada that bankruptcies of Canadian landlords could result in similar outcomes. Before exploring the Canadian legislative framework, a brief refresher of the lexicon of financial impecuniosity is helpful.
Although the words "bankruptcy" and "insolvency" are synonymous to non-lawyers, they have different meanings in law. Insolvency is a financial condition, whereas bankruptcy is a legal status. Insolvency, as defined in the Canadian Bankruptcy and Insolvency Act (the "BIA"), is the condition used to characterize a debtor that is unable to meet its obligations as they fall due, that has ceased paying its current obligations, or whose property value is insufficient to pay its debts. Bankruptcy, on the other hand, is the legal status of an insolvent debtor that has become "bankrupt" pursuant to a formal proceeding under the BIA. A bankrupt person is always insolvent, but an insolvent person is not necessarily bankrupt. A debtor may also be "in receivership," meaning that a person has been appointed, either under a security agreement or by a court order, to take possession or control of the business property of an insolvent or bankrupt person. Often times, a bankruptcy will operate contemporaneously with or near the same time as a receivership proceeding and, therefore, a tenant may have to deal with a receiver. The nature of a receiver's obligations and powers will depend on whether the receiver was judicially or privately appointed and the content of the receivership order.
Section 30(1)(k) of the BIA provides that in a bankruptcy, the trustee in bankruptcy may "elect to retain ... assign, surrender, disclaim or resiliate any lease." As such, it would appear that the legislative authority for a trustee of a bankrupt landlord to terminate a lease exists in Canada. However, case law has held that this section only applies in the case where the tenant is the bankrupt, not where the landlord is the bankrupt.
Prior to recent amendments to the Companies' Creditors Arrangement Act (the "CCAA"), the ability of a debtor seeking CCAA protection to terminate a contract, including a real property lease, was determined by judicial precedent. This judicial precedent permitted a debtor company, subject to certain restrictions, to terminate almost any form of contractual obligation. However, similar to case law under the BIA, the courts did not extend this termination right to real property leases where the landlord was the debtor company.
Recent amendments to the BIA and the CCAA (the majority of which were proclaimed in force on September 18, 2009) have sought to clarify the distinction between tenant and landlord bankruptcy. Specifically, section 65.11(10) of the BIA specifies that a lease of real property may not be unilaterally disclaimed or resiliated by a debtor landlord. Section 32(9) of the CCAA contains a similar provision.
A tenant dealing with a receiver of a bankrupt or insolvent landlord can take some comfort in the fact that a receiver, whether judicially or privately appointed, will not possess any power greater than that of the landlord to terminate an existing lease. Therefore, provided the lease is not terminable as a result of tenant default, the tenant's leasehold interest is not threatened by the appointment of a receiver.
Accordingly, for a Canadian tenant, the risk is not that its leasehold interest in a property is terminable as a result of landlord financial hardship, but rather remains in ensuring that the terms of its lease are enforceable against subsequent purchasers and that the priority of such lease is maintained vis-a-vis the landlord's secured creditors. As such, the traditional safeguards of registering notice of a tenant's leasehold interest in the Land Registry Office and requiring non-disturbance agreements from any mortgagees holding a prior registered interest in the property remain the proper prudent steps for protecting a tenant's rights.
The author would like to acknowledge the assistance of Steven Graff and Ian Aversa in preparing this article and strongly recommends the more thorough review of these issues which can be found at the following link (http://tinyurl.com/y8try5c).
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.