In the Matter of the Bankruptcy of Curriculum Services Canada, 2019 ONSC 1114

Does the disclaimer of a lease by a trustee in bankruptcy prevent a landlord from claiming unsecured damages?

Pursuant to a Lease dated May 26, 2017 (the “Lease”), the Tenant rented the sixth floor of 150 John Street West, Toronto, Ontario (the “Premises”) from the Landlord. On March 28, 2018, the Tenant filed an Assignment for the General Benefit of Creditors (the “Assignment”). The Tenant had assets totaling $1.9MM and liabilities totaling $5.6MM, resulting in a deficiency of $3.7MM. The single largest liability was the Tenant’s liability to the Landlord.

On April 20, 2018, the Landlord filed a Proof of Claim with the Trustee claiming: 
  • a preferred claim for three months’ accelerated rent in the amount of $100.6M under s. 136(1)(f) of the Bankruptcy and Insolvency Act (the “BIA“); and
  • an unsecured claim in the amount of $4.0MM for the unexpired portion of the term of the Lease under s. 136(3) of the BIA. 
On April 23, 2018, the Trustee issued a Notice of Disclaimer of the Lease pursuant to s. 30(1)(k) of the BIA, effective that date. On September 19, 2018, the Trustee disallowed part of the Landlord’s preferred claim, on the basis that the Trustee had realized only $24.6M from the assets on the leased premises. The Trustee therefore admitted the Landlord’s preferred claim for $24.6M under s. 136(1)(f) of the BIA, in addition to the occupation rent that the Trustee paid to the Landlord. The Trustee disallowed the entirety of the Landlord’s claim for the unexpired portion of the term of the Lease.
 
Following the Disclaimer, the Landlord successfully mitigated its damages for the unexpired portion of the term of the Lease by obtaining another tenant. The Landlord amended its claim for the unexpired portion of the term to seek recovery of the tenant inducements provided to the Tenant under the terms of the Lease. These inducements were leasehold improvements provided by the Landlord under the Lease, costing $45.3M and free rent for a six-month period, worth a total of $175.2M. The Landlord also sought the balance of its claim for accelerated rent.

The Landlord appealed the Notice of Disallowance, claiming that damages for the unexpired term of the Lease were contractual damages, and should be treated equally with any contractual damages potentially suffered by any of the Tenant’s other creditors.

Pursuant to s. 136(3) of the BIA, a creditor whose rights are restricted by s. 136 is entitled to rank as an unsecured creditor for the balance of any claim due to him. Pursuant to s. 146 of the BIA, subject to priority for arrears of rent and accelerated rent, the rights of lessors are to be determined according to the law of the province in which the leased premises are situated. In Ontario, the Commercial Tenancies Act  (the “CTA“) is silent as to whether a landlord can pursue an unsecured claim for its damages over and above its preferred claim.

In the context of an insolvency, s. 146 of the BIA and ss. 38 and 39 of the CTA apply. After a disclaimer, there is no right in Ontario for a landlord to claim damages on the unexpired portion of the lease. A trustee in bankruptcy may surrender or disclaim a lease, with the effect of a consensual ending of the lease—regardless of whether or not the lessor is willing. The tenant in liquidation will be in the same position as if the lease had been surrendered with the consent of the lessor.
 
The Court therefore dismissed the appeal.

CounselCatherine Francis of Minden Gross LLP for the Appellant Medallion Corporation as authorized agents for 280 Richmond Street West Limited and Alex Ilchenko of Pallett Valo LLP for the Trustee, RSM Canada Limited

 
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