Landlords’ claims in insolvency proceedings

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Insolvent commercial tenants may disclaim their leases as part of restructuring efforts under the Bankruptcy and Insolvency Act. If this happens, the landlord may file a claim for the losses caused by the disclaimer. What losses can the landlord claim? This question was dealt with in the recent BC decision of Bryant, Fulton & Shee Advertising Inc. (Re).

In Bryant, the landlord had in the interim found a new tenant for the premises, and their proof of claim included amounts for legal fees, tenant improvement allowance, landlord work, realtor commission, a rent-free fixturing period and actual vacancy costs. The trustee disallowed the claims for legal fees, tenant improvement allowance, and landlord work, and allowed the other claims.

The court noted that the Bankruptcy and Insolvency Act limits the landlord’s claim to “actual losses” flowing from the disclaimer. (Normally a landlord’s claim against a tenant may include prospective losses not yet incurred.) So, regarding the claim for legal fees, the court held that anticipated future legal fees could not be included, although legal fees already incurred could be. The court allowed the tenant improvement allowance in full, finding that these inducements were commercially reasonable and necessary to induce the tenant to enter into the lease. Even though such an allowance did not involve money being paid out by the landlord, it was nevertheless a “loss” which was properly part of the landlord’s proof of claim.

Finally, the court also allowed a portion of the landlord work. Oddly, although there was evidence that the landlord had been forced to agree to carry out general work to the building to induce the tenant, the court allowed only the work that directly related to the actual leased premises.

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