Does a retail debtor have to pay rent during a lockdown?
The Debtor operates over 300 retail stores in Canada and the US. The business was severely impacted by COVID-related, government-mandated closures, and the Debtor sought CCAA protection to undergo restructuring. The Initial Order provided that those who supplied goods, services or leased property to the Debtor could not require immediate payment. The Debtor argued that so long as the Manitoba and Ontario lockdown orders were in place, it was not “using” the premises it leased in those provinces and post-filing rent was neither due nor payable.
The Debtor’s application was based on s. 11 of the CCAA, which gives the Court discretion to make any order that it considers appropriate in the circumstances, subject to certain restrictions. One restriction is found at s. 11.01(a) of the CCAA, which protects the rights of suppliers who continue to work with the debtor during the restructuring process. It provides that no order made under s. 11 can have the effect of prohibiting a supplier from requiring immediate payment for goods, services or the use of leased property. The parties agreed that the Court could not issue an order that circumvents s. 11.01(a). Rather, the issue was what was meant by the “use of leased premises”.
The Debtor argued that “use” was not limited to the existence of a lease or the occupation of leased premises. Instead, to conclude that a debtor is using leased premises, the Court must be satisfied that the debtor is enjoying the economic benefit for which it bargained. The Debtor argued that, given the provincial restrictions, it was clearly not enjoying the economic benefits it had bargained for.
The Debtor operates retail stores for two main purposes: to provide a personal shopping experience (where human interaction is an essential feature); and to increase sales through marketing and foot traffic. For these reasons, the Debtor selects retail locations located in first-class shopping malls with significant visibility and foot traffic. Due to the government-mandated closures, the Debtor was not generating revenue or brand awareness from the retail stores. The number of “buy online, pickup in store” orders only accounted for 0.5% of its overall sales. Therefore, based on the roles retail stores play in its overall business strategy, the Debtor argued that it was not using the Ontario and Manitoba stores within the meaning of s. 11.01(a).
The Landlords argued that so long as the leases were not disclaimed, a debtor occupying the leased premises was using them within the meaning of s. 11.01(a) of the CCAA, and a landlord could not be prohibited from requiring the immediate payment of rent. They pointed out that under the terms of the leases, the Debtor remained responsible for the payment of rent even if it is unable to operate as a result of government regulations. They further suggested that the fact that the Debtor had chosen not to use the leased premises in ways that comply with the regulations should not be confused with an inability to do so.
The Court held that the order sought by the Debtor would violate the prohibition set out in s. 11.01(a) of the CCAA. It did not accept the Debtor’s argument that for a debtor to be making “use” of the property within the meaning of s. 11.01(a), it must be carrying on the activity for which the property was leased. If that were the case, a debtor could choose to temporarily shut down operations in leased premises and the landlord would not have the right to insist on immediate payment of rent.
While the Debtor’s ability to operate the Manitoba and Ontario stores was severely limited by the government restrictions, the Debtor was nevertheless using the premises within the meaning of the CCAA. The Debtor chose not to disclaim the leases for the retail stores because it had chosen the locations carefully and the stores are important to its restructuring efforts. In doing so, the Debtor asserted its right to “sole possession” of the stores, which is sufficient to trigger the application of s. 11.01(a) of the CCAA. Where leased premises are occupied by a debtor and cannot be leased to anyone else, the landlord is not prohibited from demanding immediate payment of rent, regardless of whether the debtor is actually carrying on business in the premises.
The Court concluded that the Order would strengthen the Debtor’s financial position in a manner that was unfair to the landlords. Granting the Order would effectively result in the Court redrafting the leases for the Ontario and Manitoba stores by allowing the Debtor to invoke government regulations as justification for nonpayment of rent. The Court dismissed the application with costs.
Counsel: Alain Tardif, Gabriel Faure and Pascale Klees-Themens of McCarthy Tétrault for the Debtor, Luc Morin of Norton Rose Fulbright Canada for Deloitte as Monitor and various counsel for various landlords.
Judge: Kalichman, J.S.C.