Can a landlord claim more than three months’ accelerated rent in a bankruptcy?
The Landlord and Tenant were parties to a lease dated May 26, 2017 (the “Lease”). After the Tenant made an assignment in bankruptcy, the Trustee occupied the leased premises and paid occupation rent to the Landlord. The Landlord claimed $100,558.59 as a preferred claim for three months’ accelerated rent, in accordance with the priority of claims prescribed by s. 136(1) of the Bankruptcy and Insolvency Act (the “BIA”). Because the realization of property on the leased premises yielded an amount that was less than the preferred claim ($24,571), the Landlord asserted its right to claim the balance of the unrecovered preferred claim ($75,987.59) as an unsecured creditor.
This appeal is about the rights of a commercial landlord as a creditor in the bankruptcy of its tenant following the disclaimer of the lease by the trustee in bankruptcy. Specifically, the issue is whether a landlord has a claim arising from the disclaimer of its lease for any amount in relation to the unexpired term of the lease, other than its preferred claim for three months’ accelerated rent under.
While s. 136 of the BIA sets out a scheme of payment priorities, the landlord’s rights on a tenant’s bankruptcy are established under provincial law. The Ontario law that defines a commercial landlord’s rights on a tenant’s bankruptcy is found in the Commercial Tenancies Act (the “CTA“), specifically sections 38 and 39. They have been consistently interpreted to limit an Ontario landlord’s rights once a lease has been disclaimed by a bankrupt tenant’s trustee in respect of claims for damages relating to the unexpired term of the lease.
The Landlord advanced a different interpretation of these provisions that would permit it to claim, as an unsecured creditor in the bankruptcy of its tenant, the specific amounts it bargained for under the Lease, which are payable on bankruptcy and specifically in the event of a disclaimer. In effect, the Landlord proposed an interpretation of sections 38 and 39 of the CTA that, upon disclaimer, would give priority to its claim for up to three months’ accelerated rent, while permitting it to claim damages in respect of the unexpired term of the Lease in accordance with the terms of the Lease.
Re Mussens stands for the principle that, under Ontario law, the trustee of a bankrupt tenant is permitted by statute to bring an end to the lease, and all future obligations of the tenant thereunder, by surrendering possession of the leased premises or disclaiming the lease within three months of the bankruptcy. Re Mussens interpreted the absence of a landlord’s statutory right of compensation for termination of the lease after a disclaimer (other than the claim for up to three months’ accelerated rent) as meaning that there is no such right.
The Landlord argued that recent cases, including Crystalline Investments, specifically overruled the Re Mussens line of cases, such that a disclaimer does not bring an end to all obligations under the lease. As a result, the Landlord argued that the obligation to pay the tenant inducements, which was specifically contemplated by the Lease as an obligation upon any termination of the Lease, bankruptcy of Curriculum, or disclaimer by its trustee, must survive.
The Court held that neither the ratio decidendi nor the obiter dicta of Crystalline Investments addressed whether a landlord can claim unsecured damages in the bankruptcy proceedings of its tenant upon the disclaimer of a lease by the trustee in bankruptcy. The key underlying principle that emerges from Crystalline Investments is that the disclaimer of a lease by the tenant’s trustee benefits only the insolvent party. The Supreme Court of Canada did not contradict the premise that a trustee’s disclaimer ends the obligations of the tenant under the lease.
The Landlord’s rights and remedies in this case were determined by statute and not by the terms of the Lease. The remedies provided under the Lease for default—even those specifically applicable in bankruptcy or upon disclaimer—were not available once the Lease was disclaimed. On bankruptcy, the Lease vested in the Trustee and was subject to the various rights and remedies prescribed by the legislation. The Trustee’s disclaimer brought to an end the rights and remedies of the Landlord against the Tenant with respect to the unexpired term of the Lease, apart from the three months’ accelerated rent specifically provided for under the CTA and BIA.
The Landlord’s unsecured claim was precluded because the disclaimer brought to an end both the Tenant’s ability to insist on performance of the Lease by the Landlord and the Landlord’s ability to claim in the Tenant’s bankruptcy in respect of any of its remedies. The Landlord was entitled to rank as an unsecured creditor for the unpaid balance of its preferred claim.
The Court allowed the appeal, but only to the extent of permitting the Landlord to claim the balance of its preferred claim for three months’ accelerated rent as an unsecured creditor in the Tenant’s bankruptcy.
Counsel: Catherine Francis of Minden Gross LLP for the appellant and Alex Ilchenko and Monty Dhaliwal of Pallett Valo LLP for the respondent.
Judges: K. van Rensburg J.A., Alexandra Hoy A.C.J.O., L.B. Roberts J.A.
On appeal from the order of Justice Victoria R. Chiappetta of the Superior Court of Justice, dated February 15, 2019, with reasons reported at 2019 ONSC 1114.