Tenant Insolvency: Liquidation Sales

A lease agreement may contain a clause that prohibits on-site liquidation, or bankruptcy sales.

Many landlords believe that on-site sales will cause disruption to the other tenants and fear that the sales will be conducted in an offensive manner.

Landlords will often consent to on-site sales if they are provided with an overview of the sales and marketing process in advance and are assured that the Trustee will conduct the sale in a professional manner.

Failing the agreement of the landlord, it may be necessary to obtain the consent of the Court to conduct an on-site sale. Courts have found in favour of Trustees and permitted liquidation or bankruptcy sales.

Tenant Insolvency: Landlord’s Claim

The BIA provides landlords with a preferred claim for arrears of rent in the three months immediately preceding the date of bankruptcy and a claim for accelerated rent for the three months following the date of bankruptcy.

The claim for accelerated rent is only permitted if the lease agreement provides for such a claim. The landlord’s claim is reduced by two factors:

  1. It may not exceed the realization from the property on the premises;
  2. Any payment made by the Bankruptcy Trustee for occupation rent will be set-off against the accelerated rent portion of the claim.

Tenant Insolvency: What is Rent

The Trustee is obligated to pay “rent” only.

The lease agreement should be read carefully to determine what is included in the calculation of rent. Often additional items, such as common area costs, insurance, property taxes, GST, etc. are defined as rent or additional rent. In this case, the Bankruptcy Trustee is obligated to pay these additional costs.

Tenant Insolvency: Priority over Bailiff

Commercial tenants who are behind in their rent payments are subject to having the landlord seize their inventory or other chattels. The landlord will appoint a bailiff to seize, or distrain against, the assets on the landlord’s behalf. The bailiff is required to inventory the assets and have the assets appraised. After five days the inventory or other chattels can be sold.

All assets can be sold except property belonging to third parties and inventory subject to security granted under the Bank Act or a Purchase Money Security Interest. Normally, the bailiff takes his fees and pays the balance of the funds to the landlord on account of rent.

Any property under seizure for rent at the time a stay of proceedings is imposed by the BIA must be turned over to the Trustee. As previously stated, the costs of distress rank as a first charge against the property. If the bailiff has sold the property and the sale proceeds have yet to be turned over to the landlord, the proceeds must also be paid to the Trustee, less the costs of distress.

Landlord Insolvency: Using a Bailiff

When a landlord is considering distraining or terminating a tenant’s occupancy, he is likely to use the services of a bailiff. The distress against or termination of a lease are covered by the CTA and the Rent Distress Act. The three most frequent distress methods carried out by bailiffs are:

Walk in Seizure

The bailiff attends the premises and negotiates a repayment schedule with the tenant. Once repayment arrangements have been made the bailiff places all goods on the premises under seizure by completing a physical inventory with the tenant. The tenant is then expected to sign a Bailiee’s undertaking stating that all goods are under seizure and that no chattels will be removed. In the event the tenant defaults on the payment arrangement, the bailiff is at liberty to sell the chattels upon expiry of a five day period.

Lock Change

This action will be taken when there is risk that the chattels will be removed from the premises by employees or other creditors. This is done with the tenant’s consent and affords the tenant sufficient time to arrange for payment of the rent arrears without incurring removal costs. If the tenant fails to pay the rent arrears, the goods can be sold from the premises. The tenant must consent to this and be provided with full access to the premises during the period; otherwise it may be construed as termination of the lease.

Removal of Chattels

This action is taken when no agreement can be reached between the tenant and the landlord for payment of the rent arrears. This is the most expensive method of realization. When using a bailiff be certain that the bailiff’s actions do not expose you to unnecessary liability.

For additional information, please contact us.

Tenant Insolvency: What Happens When the Wrong Goods are Sold?

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.

Tenant Insolvency: Proposals

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.

Tenant Insolvency: Property on the Premises

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.

Tenant Insolvency: Right to Retain, Assign or Disclaim Lease

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.

Tenant Insolvency: Distress vs. Termination

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.