Court tightens scrutiny of break fees in credit bid sale process

1000688136 Ontario Inc. v. 20 Caldari Development Inc., 2026 ONSC 2182
What is the test for approval of a break fee where the offer is a credit bid?

Summary: In this case, a receivership involving a Vaughan commercial property, the Ontario Court considered whether to approve a $400,000 break fee attached to a stalking horse credit bid advanced by parties connected to the debtor and existing secured debt. While recognizing that break fees can be appropriate in insolvency proceedings to provide deal certainty, establish a price floor, and compensate bidders for real risk and effort, the Court held that a premium break fee is not routine where the bid is primarily a credit bid rather than a source of substantial new money. Because the bidder faced only limited incremental risk and stood to recover much of its existing investment in any higher sale, the proposed fee was found unreasonable, particularly since it could deter competing bids between the stalking horse price and the fee-adjusted amount. The Court therefore declined to approve the break fee as proposed, leaving only reasonable bid preparation costs and expenses to be reviewed later.

The subject receivership involved a large piece of industrial, commercial and warehouse property in Vaughan, Ontario. The property was the subject of previous receivership proceedings, which culminated in an order transferring the interest in a mortgage originally held by the Canadian Western Bank to the Applicant in this case. Subsequent defaults culminated in a consent order providing a repayment schedule, pursuant to which the Respondent was expected to make significant payments. One of the payments was missed by a day and a receiver was appointed.

Following the Receiver’s appointment, the Respondent made considerable efforts to obtain new financing for the property and address the defaults. However, despite these efforts, the Respondent remained in default and the receivership continued. The Receiver concluded that the best way to maximize the value of the Respondent’s assets was to sell the real property.

The Receiver sought the Court’s approval of a sale process that incorporated a stalking horse bid for the property. The bid was submitted by a group that included a 50% shareholder of the Respondent, who was also the principal of the company that held the second mortgage. As part of the stalking horse deal, the Applicant sought a break fee of $400,000, which would be payable in the event that the receiver accepted another bid, and would be payable in addition to the monies that the Applicant was owed in respect of the mortgage. At issue on the motion was whether the break fee was reasonable and should be included as part of the price.

The Applicant argued that the break fee was justified on the following grounds:

1. The proposed break fee was approximately 2.5% of the value of the total transaction. Other case-law supports that this type of percentage is reasonable.

2. The Applicant was putting additional money at risk if they were the successful bidder, as they would have to borrow approximately $1.2 million in order to cover various expenses beyond the value of their mortgages.

3. The Applicant’s bid provided stability to the process and ensured that the property would not be disposed of in a “fire sale” as it put a firm floor on the price.

4. The Applicant’s bid meant that there would not be any broker’s fees for the sale of the property.

5. The break fee encouraged Court efficiency, as there would be no need for a further hearing over what the amount of reasonable costs and expenses associated with the break fee should be.

The Respondent did not oppose a break fee but argued that the quantum proposed by the Applicant was disproportionate and unjustified. The Respondent argued:

1. The case law does not support the Applicant’s position that this was a reasonable break fee. Instead, this was a credit bid and, as a result, there should not be any premium attached to the break fee.

2. The Applicant was not putting any new money (or at least not any significant new money) into this bid and, as a result, the break fee should be limited to the reasonable costs and expenses associated with the stalking horse bid.

3. The issues of court efficiency and reasonableness were for the Court to adjudicate and should not be ignored.

Break fees and expense and costs reimbursements in favour of a stalking horse bidder are frequently approved in insolvency proceedings. Break fees do not merely reflect the cost to the purchaser of putting together the stalking horse bid. A break fee may be the price of stability, and thus some premium over simply providing for out of pocket expenses may be expected. Break fees in the range of 3% and expense reimbursements in the range of 2% have recently been approved by this Court.

While in this case, the Applicant was required to pay additional monies of approximately $1.2 million in order to cover some of the various expenses that would flow if their bid was accepted, the Court found that there was much less additional risk in this case than there would be if the money being advanced was all new money. A risk premium for a credit bid would be a “rare” event. The Court rejected the Applicant’s assertion that this type of break fee is routine in these types of circumstances.

The Court was also not persuaded that the break fee was reasonable. The break fee would have the effect of precluding any bids between the price in the stalking horse bid and $400,000 higher. While the Court agreed that the stalking horse bid put a floor on the price and provided stability, it did not justify a risk premium in the form of a break fee. There was only minimal additional risk for the stalking horse bidder here. In fact, there were benefits for the proponents of the stalking horse because, if there was a higher bid, they would receive virtually all of the money that they had put into the property.

The Court was not persuaded that the break fee proposed for this transaction was reasonable, and ordered that the break fee be reviewed by the Court when reviewing the reasonable costs and expenses associated with the preparation of the bid.

Judge: Justice Lemay

• Dillon Gohil of Paliare Roland for the Respondent

• Charles Skipper of Fogler Rubinoff for the Applicant