Lease assignment rejected

Donnelly Holdings Ltd. (Re), 2024 BCSC 275 
On what grounds can a landlord object to the assignment of its lease as part of a sale under the CCAA?

Overview: In this case, the City of Vancouver, the landlord under a lease with one of the entities forming part of hospitality giant The Donnelly Group, objected to the assignment of its lease pursuant to section 11.3 of the CCAA. The Court refused to grant the assignment, finding that it was not appropriate to impose a nine-year contract on the City in circumstances where the proposed counterparty is a shelf company, and there is no information as to how it will finance the purchase price. In addition, the principals of the proposed purchaser had experience in the restaurant business that was very different than the one being acquired, and there was nothing to suggest that they could make the business a success when The Donnelly Group, an experienced restaurant and bar operator in the area, had not been able to make a go of it.

The Donnelly Group, a major player in the hospitality industry in Greater Vancouver and Toronto, obtained CCAA protection in May 2023. At the time of the filing, it employed about 750 people and owed about $14.85 million to BMO. In July 2023, the Group’s creditors voted to approve a CCAA plan, which the Court subsequently sanctioned.

Since July 2023, The Donnelly Group has made efforts to sell some of its redundant operations. No other offers have emerged, save for an offer for Cinema Public House, which owns and operates a restaurant and bar at 901 Granville Street in the heart of Vancouver’s “Granville Entertainment District”. It operates on premises leased from the City, which is still owed approximately $94,000 for deferred rent owing under the lease. The lease can only be assigned with the written consent of the City, which is not to be unreasonably withheld. The offer for Cinema was received from 1442029 B.C. Ltd., a company owned by a married couple who both work as credit analysts for TD Canada Trust, and was conditional on the City providing its consent to the assignment of the lease. The City refused to grant its consent to the assignment, and The Donnelly Group sought an approval and vesting order, including approval of the lease assignment.

The statutory basis for the lease assignment is section 11.3 of the CCAA. Subsection (3) provides that the court is to consider, among other things, whether the monitor approved the proposed assignment, whether the assignee would be able to perform the obligations, and whether it would be appropriate to assign the obligations to that person. Section 11.3 of the CCAA is an extraordinary power and must only be exercised after a consideration of the competing interests and all the circumstances in the case. It is not necessary for the debtor to establish that the assignment is “absolutely required” to the reorganization, although the degree of importance will no doubt be a factor in the balancing exercise. The burden is on the petitioners to satisfy the court that the approval of the assignment is appropriate.

The principals of the proposed purchaser had some history in the restaurant business, having owned and supervised a small unlicensed restaurant in suburban Edmonton at the same time that they were employed by Easy Financial as financial sales or service representatives. However, the City opposed the lease assignment on the basis that the principals did not have any history of operating a licensed restaurant and pub in a unique environment such as the Granville Entertainment District. The City argued that the term of the lease was lengthy (over nine years), and that there was a significant risk that the proposed purchaser would default on its obligations under the lease given that The Donnelly Group — a long-standing, experienced and knowledgeable operator of these types of business — was not able to operate the business profitably.

The Court agreed with the City that the lack of evidence that the proposed purchaser will be able to perform its obligations under the lease gave rise to significant concerns. The evidence does not need to reach the level of guaranteeing the success of a purchaser; rather, there must be an evidentiary foundation to support that the purchaser will be able to perform the obligations, as required under the CCAA, s. 11.3(3)(b). The proposed purchaser in this case is a shelf company, and there is no information as to how it will finance the purchase price. On the face of the limited information before the Court, the restaurant previously operated by the principals of the proposed purchaser seemed to be a very different type of business than the one being acquired.

In addition, Cinema has been suffering substantial losses over the last few years. While the principals of the proposed purchaser may “know what they are getting into”, their plan is to continue the same operations as before. The Court emphasized that The Donnelly Group, an experienced operator in terms of running bars and restaurants in Vancouver, and particularly the Granville Entertainment District, was not able to make a go of it. There was simply nothing to suggest that the proposed purchaser, which does not have that same level of experience, would be more successful. Finally, there was no evidence that the proposed purchaser had the financial ability to pay cure costs and, if so, that it was prepared to do so and when.

In addition, although the Monitor had approved the proposed lease assignment, the Court was not satisfied that the assignment was appropriate in the circumstances. While the sale and lease assignment appear to generate a positive result for BMO and The Donnelly Group more generally, that benefit was not fair and reasonable when balanced against the interests of the City, in terms of imposing a new counterparty on the City in a nine-year long contractual relationship where there are significant risks.

Accordingly, the Court refused to grant the lease assignment, but stated that The Donnelly Group has leave to renew the application if further information becomes available to address the concerns noted in the Court’s reasons.

Judge: The Honourable Justice Fitzpatrick

Counsel: John Fiddick and Robert Fischer of Whitelaw Twining for the City of Vancouver; Tevia Jeffries of Farris for The Donnelly Group; Noor Mann of Lawson Lundell for BMO; Glen Nesbitt of Fasken for EY as Monitor