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.

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