Under the Bankruptcy and Insolvency Act (“BIA”) a trustee in bankruptcy may, with permission of the inspectors, “…surrender, disclaim or resilate any lease of, or other temporary interest or right in, any property of the bankrupt” (section 30(1)(k) of the BIA). The BIA also provides that landlords have a priority claim for “arrears of rent for a period of three months immediately preceding the bankruptcy and accelerated rent for a period not exceeding three months following the bankruptcy if entitled accelerated rent under the lease (section 136(1)(f) of the BIA). However, the BIA did not specifically address landlord claims for the unexpired portion of the lease and/or any inducements or other benefits provided to the, now bankrupt, tenant under the lease.
Historically, many insolvency professionals (and landlords alike) treated the portion of a landlord’s claim not covered by section 136(1)(f) of the BIA as an unsecured claim in the bankruptcy on the basis of a breach of contract. Practically speaking, landlords submitted their priority claim to the trustee in bankruptcy, and then claimed the balance of their losses for the unexpired portion of the lease as an unsecured claim. The trustee in bankruptcy would review the claim, ensure losses were appropriately calculated and that mitigation efforts were properly explored and then arrive at an appropriate amount for an unsecured claim. In other words, the landlord’s unsecured claim was assessed in a similar manner to any other creditor with a claim for breach of contract by the bankrupt.
The recent decision of the Ontario Superior Court of Justice in Re: Curriculum Services Canada/Services Des Programmes D’Etudes Canada (“Curriculum”) has called into question whether landlords have any claim in bankruptcy beyond the priority claims provided for in section 136(1)(f). In Curriculum, the trustee in bankruptcy disallowed the landlord’s unsecured claim in its entirety on the basis that the law deems “the disclaimer of a lease in Ontario by a trustee in bankruptcy as a consensual surrender of the lease by the tenant to the landlord, and consequently no claim for damages can be founded on the cessation of obligations under the lease”. The landlord appealed the trustee’s decision arguing that the landlord’s losses stemming from the premature disclaimer of the lease are contractual damages and “should be treated equally with any contractual damages potentially suffered by any of Curriculum’s other creditors”.
The Court agreed with the trustee in bankruptcy and dismissed the landlord’s appeal. In doing so the court distinguished Ontario’s Commercial Tenancies Act (“CTA”) from similar legislation in other provinces in that the CTA is silent on whether landlords can pursue unsecured claims as against a bankrupt tenant. The court then relies on Re: Mussens Ltd. (“Mussens”) a 1933 decision of the Ontario High Court of Justice and a more recent decision of Registrar Nettie in 2009 (quoting liberally from Mussens) for the trustee in bankruptcy’s position that the disclaimer of a lease by the trustee in bankruptcy is akin to a “consensual surrender” of the lease and, as such, the landlord cannot claim damages for a consensual surrender of the lease.
With the recent increase in retail related bankruptcies and insolvencies, landlords often form one of the larger creditor groups in the process. Further, the ability to mitigate losses is becoming more and more difficult. With the decision in Curriculum, the landlord’s ability to claim damages in a bankruptcy has also become more difficult.