Landlord conceals mitigation in tenant's bankruptcy

Syndic de Duchesne, 2025 QCCS 2771
Can a landlord that successfully mitigates its losses still make a claim in a tenant's bankruptcy?

Summary: In this case, the Court considered an appeal by a landlord of a bankruptcy trustee’s rejection of the landlord’s claim. The landlord filed a proof of claim for one year’s rent (about $30,000) in the bankruptcy, even though it had mitigated its losses in their entirety, including through a termination agreement entered into with a subsequent tenant that paid it $42,000. The Court agreed that the trustee had to take into account the sums received by the landlord after the termination of the lease, and found the landlord’s failure to inform the trustee of the existence of the termination agreement to be troubling. If the landlord wanted to argue that the trustee did not have to take into account the income generated by the termination agreement, it had every opportunity to put forward its arguments, but it could not hide such relevant fact in the hope of misleading the trustee. Such behaviour is “serious and must be punished”.

In July 2021, the Debtor filed an assignment in bankruptcy under the Bankruptcy and Insolvency Act. This was her second bankruptcy. The applicant creditor, 9225-7310 Quebec Inc. (“9225”), claimed to be a creditor of the Debtor pursuant to a commercial lease between 9225 and Senska Multisensory Centre Inc. (“Senska”), which was terminated in July 2021. The Debtor was the president and principal shareholder of Senska and had guaranteed Senska’s obligations under the lease limited to the equivalent of one year’s rent.

9225 filed its proof of claim for one year’s rent (about $30,000), and in June 2024, it filed a notice of opposition to the Debtor’s discharge. In October 2024, the Trustee in Bankruptcy of the Debtor partially rejected 9225’s claim, limiting it to about $13,000. The decision resulted from the fact that, among other things, the Trustee had learned that the premises had been re-let since the fall of 2021 to another company. 9225 appealed from the decision.

Before the appeal was heard, in February 2025, the Trustee amended its notice of dismissal and rejected 9225’s claim entirely, primarily on the grounds that 9225 had not suffered any damages as a result of the termination of the lease between it and Senska. Specifically, the Trustee learned that at the time of the termination of 9225’s lease with its subsequent tenant (“My Smile”), a termination agreement was entered into with My Smile in May 2023, which provided for My Smile to pay to 9225 compensation in the amount of $42,000.

This termination agreement was entered into before 9225 sent its statement of account to the Trustee in support of its proof of claim in September 2024, and was not disclosed to the Trustee even though the Trustee had specifically requested that 9225 take into account “all rents collected for the period of June 1, 2021 to February 29, 2024”. The Trustee concluded that the amount of 9225’s loss (being 32 months of rent) was less than the total all rents collected, which included the rent paid by My Smile, the amount paid by My Smile pursuant to the termination agreement, and the rent paid by the second subsequent tenant, Physios40.

9225 moved to appeal the Trustee’s decision regarding its claim, arguing that the Trustee erred in law and in his assessment of the facts supporting the calculation of the damages suffered by 9225 due to the termination of Senska’s lease. The lease was due to end on February 29, 2024, and provided for 9225’s right to recover all damages suffered and all expenses incurred as a result of the termination. Damages were defined as the difference between the amounts that Senska would have had to pay during the remainder of the term of the lease following such termination, and the net amounts actually received by 9225 during that period.

The Court analyzed the authorities relied on by the Trustee and did not detect any error of law, nor any manifest error of fact in the detailed and careful analysis carried out by the Trustee. The Court agreed that the Trustee had to take into account the sums received by 9225 after the termination of Senska’s lease. 9225’s failure to inform the Trustee of the existence of the termination agreement with My Smile was troubling. If 9225 wanted to argue that the Trustee did not have to take into account the income generated by the termination agreement, it had every opportunity to put forward its arguments, but it could not hide such relevant fact in the hope of misleading the Trustee. The Court noted that such behaviour is “serious and must be punished”.

Given the seriousness of 9225’s false statement, the sanction required was a total rejection of its claim.

Judge: L’Honorable Patrick Ouellet, J.C.S.

Professionals involved:

• Frédéric Richard, CIRP, SAI of Groupe Leblanc Syndic as the bankruptcy trustee

• Ludovic Audet of Kellner Avocats for 9225-7310 Quebec Inc.