Recent Case: Rights Of A Commercial Landlord As A Creditor In Bankruptcy Of Tenant – Real Estate and Construction – Canada – Mondaq News Alerts

10 August 2020

Minden Gross LLP

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On April 27, 2020, the Ontario Court of Appeal released itsdecision in Curriculum Services Canada/Services DesProgrammes D'Etudes Canada (Re), 2020 ONCA 267("Curriculum"). This case addresses a commerciallandlord's rights as a creditor in the bankruptcy of its tenantfollowing the disclaimer of the lease by the trustee inbankruptcy.

By way of background, it is worth noting that:

Following the tenant's bankruptcy in Curriculum,the landlord filed a proof of claim in bankruptcy, asserting both aPreferred Claim (relying on the BIA) and an unsecured claim forFuture Damages (relying on the principles stated in HighwayProperties). The trustee in bankruptcy disclaimed the leaseand allowed the Rental Arrears Portion of the Preferred Claim,without addressing the Accelerated Rent Portion of the PreferredClaim. Further, the trustee disallowed the landlord's unsecuredclaim for Future Damages on the basis that the law deems "thedisclaimer of a lease in Ontario by a trustee in bankruptcy as aconsensual surrender of the lease by the tenant to the landlord,and consequently no claim for damages can be found on the cessationof obligations under the lease."

Not surprisingly, the landlord appealed the trustee'sdecision to the Ontario Superior Court of Justice, arguing that thelandlord's losses flowing from the disclaimer of lease arecontractual damages and "should be treated equally with anycontractual damages potentially suffered by any of Curriculum'sother creditors." The Superior Court sided with the trusteeand dismissed the landlord's appeal.

The landlord appealed again. The Ontario Court of Appeal allowedthe appeal in part, to allow the landlord to rank as an unsecuredcreditor for the Accelerated Rent Portion of its Preferred Claim,relying on Section 136(1)(f) of the BIA. However, the Court foundthat the disclaimer of the Lease by the trustee in bankruptcyoperated to end the tenant's obligations under the Lease anddismissed the landlord's claim to rank as an unsecured creditorto recover Future Damages.

The Court of Appeal explained that Mussens Ltd., Re,[1933] O.W.N. 459 (Ont. S.C.) ("Mussens")"stands for the principle that, under Ontario law, the trusteeof a bankrupt tenant is permitted by statute to bring an end to thelease, and all future obligations of the tenant thereunder, bysurrendering possession of the leased premises or disclaiming thelease within three months of the bankruptcy."

The Court found that while it would not support aninterpretation of Mussens that would characterize adisclaimer as a consensual surrender for all purposes, Crystalline Investments Ltd. v. DomgroupLtd., [2004] 1 S.C.R. 60 (S.C.C.) left intact therule articulated in Mussens that on disclaimer of acommercial lease by its trustee, an Ontario landlord has no claimas an unsecured creditor in the bankrupt tenant's estate forFuture Damages, except to recover the Accelerated Rent Portion ofthe Preferred Claim, which is specifically provided for bystatute.

Further, while Highway Properties recognized that alease is also a contract, and provided for a landlord's optionto accept a tenant's repudiation and sue for Future Damages,the case did not address a situation of bankruptcy or insolvencyand the remedies for a tenant's repudiation do not apply once atrustee has disclaimed the lease.

We were relieved to see the Ontario Court of Appeal allow thelandlord's Preferred Claim in its entirety (both the RentalArrears Portion and the Accelerated Rent Portion). However, wequestion the correctness in law of the decision regarding FutureDamages in light of the Supreme Court's decision in HighwayProperties. Additionally, we do not understand why thelandlord would be entitled to claim as an unsecured creditor forthe Accelerated Rent Portion of its Preferred Claim, which clearlyincludes post-disclaimer obligations, but not for Future Damages.Unfortunately, since the landlord chose not to appeal to theSupreme Court, the Court of Appeal's decision inCurriculum is now binding law in Ontario, and it will berelied upon by trustees in bankruptcy to reject a landlord'sunsecured claim for Future Damages.

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