When a debtor’s lease gets assigned, do ALL the rights and obligations of the debtor get assigned?
In May 2016, Aeropostale Canada Corp. (“Aeropostale”) filed a Notice of Intention under the Bankruptcy and Insolvency Act (the “BIA“), and a sales process for its various leasehold interests was initiated. Aeropostale had a lease at the Conestoga Mall in Waterloo, Ontario (the “Lease”). Arden Holdings Inc. (“Arden”) sought to acquire the Lease and the sale received court approval on June 28, 2016 (the “ Order”). Ivanhoe Cambridge Inc. (the “Landlord”) neither consented to nor opposed the sale of the Lease to Arden.
The Lease contained a rent discount provision, which entitled Aeropostale to pay a lower rent in certain circumstances, so long as it remained the tenant. Arden noticed the discount provision almost a year after purchasing the Lease, and sought to apply the provision in its favour.
Arden argued that the Court already approved the assignment of all Aeropostale’s rights and obligations under the Lease pursuant to s. 84.1 of the BIA when it granted the June 28th Order. It cited case law for the proposition that the purpose of s. 84.1 of the BIA is to place the assignee in the same legal position vis-à-vis the landlord under the lease as held by the bankrupt lessee immediately before bankruptcy. The Landlord cannot insulate the Lease from the effects of s. 84.1 by including provisions that purport to create personal obligations in a commercial contract that can be performed by many other parties.
The issue for the Court to consider was whether Arden acquired all the rights and obligations of Aeropostale under the Lease, or whether it acquired only the rights and obligations of a “Tenant” under the Lease, excluding any rights or obligations that expressly applied to Aeropostale only for so long as Aeropostale was a tenant.
The Court held that, as specified in the June 28th Order, all of the rights and obligations of the bankrupt Aeropostale were assigned to Arden. The June 28th Order was not limited to those rights and obligations that Aeropostale had a contractual right to assign. While the provision applied only for “so long as the Tenant is Aeropostale”, the rights and obligations thereby created applied to the “Tenant” in that capacity and not to Aeropostale in some other capacity.
In Ford Motor Company of Canada, Limited v. Welcome Ford Sales Ltd., the Alberta Court of Appeal held that non-assignable rights or obligations are those agreements that are based on confidences, or considerations applicable to special personal characteristics, and so cannot be usefully performed to or by another. In this case, the rights and obligations created by the discount provision are not by their nature personal or non-assignable. In this case, the rent to be paid is paid in entirely fungible currency and not in personal services of a unique or irreplaceable value.
The Court concluded that Arden acquired all of the rights and obligations of Aeropostale under the Lease, including, without limitation, all of the rights and obligations expressed to apply “so long as Aeropostale is Tenant”. This outcome was deemed entirely fair and consistent with the policy considerations underlying s. 84.1.
Counsel: Steven Graff and Miranda Spence of Aird & Berlis LLP for Arden Holdings Inc. and Aubrey Kauffman and Dylan Chochla of Fasken Martineau DuMoulin LLP for Ivanhoe Cambridge Inc.
Full case: http://canlii.ca/t/hqscp