Tenant Insolvency: Protection from the Landlord

This is likely the most common situation for insolvency practitioners to encounter.

Tenants generally try to keep their payments to their landlord up to date, due to the rights and remedies available to landlords.  Landlords generally have either a statutory, contractual and common law remedy available to them to enforce payment of rent including the right to either terminate the lease or to distrain on the tenant’s property for rental arrears.

The remedies available to a landlord will be stayedby any of the following:

• Assignment in Bankruptcy;
• Proposal;
• Notice of Intention to File a Proposal;
• Receiving Order.

Any property under seizure for rent at the time any of the above events takes place must be turned over to the Trustee.  The BIA provides that the costs of distress rank as a first charge against the property.   If the bailiff has sold the property and the sale proceeds have not been turned over to the landlord, the funds, less the costs of distress, must be paid to the Trustee.

In the case where a Receiver or Receiver Manager is appointed by a Court Order, often the Court Order contains stay provisions as well.  However, instrument appointed Receivers have no greater rights than the tenant and can only stop a distress by remedying the default under the lease (i.e. paying the rent).  Accordingly, landlords may enforce their rights against an instrument appointed Receiver.

In the event the debtor is in arrears with its rent and there is no stay of proceedings, the Receiver, in consultation with the secured creditor, will have to make a quick decision regarding its position.  Based upon the amount of rent arrears it may be in the secured creditors’ best interest to pay the arrears.  However, if the arrears are significant, or ongoing use of the premises is required, the Receiver must consider paying the arrears and coming to terms with the landlord for the ongoing use of the premises or consider having the tenant placed into bankruptcy to avail itself of the stay provisions of the BIA.

A bankruptcy may be advantageous for the orderly administration of the estate as the Receiver will not have the issue of the rental arrears being an impediment to the sale of assets.  As well, there will be a realigning of the statutory creditors and the secured creditor will benefit as well.