landlord and tenant

Occasionally we do not receive any assistance from the debtor in determining which assets, if any, do not belong to them. The BIA allows for a person who claims any property in the possession of the Trustee to file a proof of claim. The form of “property claim” is provided for in the BIA and must be supported by an affidavit. When no property claims have been submitted, the Trustee may dispose of all assets on the premises.

If it is subsequently discovered that property that was not property of the bankrupt, was sold without notice to the trustee, the trustee’s liability is limited to the amount realized from the sale of the property.

Upon filing a proposal, or between the date of the filing of a Notice of Intention to File a Proposal and the filing of the proposal, a commercial tenant may disclaim a lease. The tenant must give the landlord thirty days notice of its intention to disclaim the lease. The form of notice is provided for in the BIA. The tenant is not obligated to negotiate the disclaimer with the landlord in advance.

Upon receiving the notice from the tenant, the landlord has fifteen days to apply to Court for a declaration that the tenant’s disclaimer is invalid. If the landlord applies for such a declaration, the tenant must prove to the Court that it is not able to file a viable proposal without the ability to disclaim the lease. The onus of proof is on the tenant. If the tenant fails to satisfy the Court, its disclaimer will be declared invalid.

If the tenant is successful, the lease is terminated and the landlord will have no claim for accelerated rent. However, the proposal must allow the landlord to file a claim as an unsecured creditor for its actual losses or for the lesser of:

• The rent provided for in the lease for the first year following the date the disclaimer becomes effective, and fifteen per cent of the rent for the remainder of the term of the lease after that year, or
• Three years rent.

The Courts have found that property on the premises includes only those goods and chattels capable of being located physically on the premises, in other words, only “fixed assets”.

Accounts receivable, trademarks, patents, share certificates, software source code and other intangibles are not to be considered part of the realization from the premises.

This could severely reduce the landlord’s claim in most high-tech businesses.

The CTA provides that a Trustee has the right to assign the lease of a bankrupt to a third party. If the lease contains a covenant or condition that the tenant may not assign or transfer the lease without the consent of the landlord, the Trustee could either obtain the consent of the landlord, and if that consent is not forthcoming, apply to Court to approve the assignment of the lease. The assignee will be required to provide security to the landlord in this situation equal to amount not to exceed three months rent.

Instrument appointed Receiver’s do not have any rights of occupation beyond the rights of the debtor. Therefore, if the lease does not allow the tenant to assign the lease, the Receiver will not have the right to assign it.

The Trustee, with the permission of the Inspectors, may disclaim the lease. Upon disclaiming its interest in the lease all rights and responsibilities under the lease are terminated. This will bring an end to the lease and the Trustee’s obligations under it, including any future obligation for occupation rent.

Failure to disclaim an interest in the lease, or occupying the premises, beyond the three months permitted can bring on significant liability. The landlord may take the position that the Trustee has elected to retain the lease and the Trustee will then become liable for the entire term remaining. Therefore, it is important that all leases are dealt with conclusively to ensure there is no uncertainty regarding future obligations to the landlord.

A Trustee in disclaiming its interest in the lease may also extinguish the personal liability of any guarantors for any future obligations under the lease. Presumably, this will not release the guarantors from their liability for any arrears of rent owing at the date of bankruptcy.

There have been numerous cases where the Courts have ruled that as the lease has come to an end, so to have the guarantees. However, this is to be determined between the Guarantors and their legal advisors. Liability pursuant to an Indemnity, which is a separate legal agreement with the landlord, will not necessarily be extinguished in this situation as the Indemnity operates independently of the lease. Therefore, that obligation may not end when the lease is terminated.

Absent a stay of proceedings, the landlord retains the right to distrain against the goods on the premises or terminate the lease. These options are mutually exclusive, and irrevocable. The right of distress, under the Rent Distress Act, requires a commercial tenancy. Therefore, if a landlord has terminated the lease, he has ended the tenancy. He cannot then distrain against the assets on the premises. Once the landlord has distrained, he cannot terminate the lease without abandoning the distress and releasing the property seized.

If the landlord elects to terminate the lease and re-enter the premises, it must ensure that the lease allows for him to terminate the lease for the breach cited. Termination of the lease by the landlord may act to release the guarantors from their liability for future rent. Also, if a landlord has terminated the lease he can then not accept a payment on account of current rent.