Landlord rights in bankruptcy: Trustee’s disclaimer of lease eliminates claim for unsecured damages

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Where a tenant is in breach of a commercial lease, a landlord generally has the option to sue the breaching tenant for the unexpired portion of the lease (subject to the landlord’s duty to mitigate). However, where a tenant goes bankrupt, the bankruptcy trustee has the power to disclaim the lease under section 30(1)(k) of the Bankruptcy and Insolvency Act (“BIA”). To the surprise of some landlords, this disclaimer will extinguish any right of the landlord to the unexpired term of the lease, save for a preferred three months’ accelerated rent claim pursuant to section 136(1)(f).

An example is the recent Ontario decision of Curriculum Services Canada, Re2019 ONSC 1114. In that case, a tenant went bankrupt. Soon after, the landlord filed a proof of claim in the bankruptcy, asserting a preferred claim of just over $100,000 for accelerated rent under section 136(1)(f) of the BIA, along with an unsecured claim of just over $4,000,000, for the unexpired portion of the lease.

Soon after, the trustee disclaimed the lease. The trustee then proceeded to disallow the landlords claim for the unexpired portion of the lease, doing so on the basis that the trustee’s disclaimer of the lease has the same effect of a mutual surrender of the lease.

The Landlord appealed the disallowance, but the Court confirmed the trustee’s right to disclaim, and that the effect of the disclaimer was to extinguish the landlord’s claim for damages for the unexpired term, and so the disallowance was upheld. The Court considered a number of decisions that have determined that a guarantee of a tenant’s obligations under a lease are not extinguished by a trustee’s disclaimer, but were determined to be of no impact. The inability of a landlord to claim for the unexpired portion of a lease has been a principle of long standing, both in Ontario where the decision was considered, and in BC where section 29(7) of the Commercial Tenancies Act purports to limit the rights of landlords to make such claims in bankruptcy.

The intersection of commercial tenancies and insolvency can be complex, and both landlords and tenants would be wise to seek the advice and input of experienced insolvency counsel where any sort of insolvency proceedings are contemplated. 

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