The commercial lease in the context of insolvency and bankruptcy

Gaston Litige Mediation Litigation Arbitration

Since the beginning of the COVID-19 pandemic, many companies have faced concerns about the future conduct of their business. Some, faced with excessive operational expenses, will, unfortunately, have no choice but to consider restructuring or bankruptcy.

The information below is intended to provide a brief reminder of the impacts on the commercial lease in the context of insolvency and bankruptcy.

The Bankruptcy and Insolvency Act (the “BIA”) allows businesses in financial difficulty to restructure their activities in order to avoid possible bankruptcy, more specifically by means of a notice of intention to make a proposal to its creditors (the “Notice of Intent”).

Following the filing of the Notice of Intent with the official receiver and the court, the debtor corporation (a company who is in debt) has an initial period of 30 days of stay of proceedings to allow it to prepare a proposal for the benefit of its creditors. This period can be extended at the request of the debtor corporation if it is demonstrated that the extension would not be detrimental to the creditors.

During this period, the financial burden of the debtor corporation with regard to its commercial lease is not eased. It remains liable for the payment of the rent, which is, however, prorated according to the monthly rent provided for in the lease, and this, as of the day after the Notice of Intent. In the event of default of payment of the rent, the landlord may challenge a request for an extension of the time limit to file a proposal made by the debtor corporation or request that the time limit no longer is enforceable.

In order to ensure the viability of its proposal, the debtor corporation may decide to terminate its commercial lease or leases, by transmitting a 30-day written notice to its landlord in the manner prescribed by the BIA. The landlord wishing to contest the termination by the debtor corporation must do so within 15 days of receipt of this notice. The chances of success of such a measure are generally low since the purpose of the termination of the lease is to allow the debtor corporation to present a viable proposal to all of its creditors. A landlord could nonetheless base its grounds for a challenge on the fact that reasonable alternatives exist if any.

Moreover, in the event that the lease has remained in force, but no proposal has been filed at the end of the period mentioned above, the trustee appointed to administer the bankruptcy of the debtor corporation may occupy the leased premises without paying any rent until the first meeting of creditors. Following this first meeting of creditors, the trustee could be held responsible for the payment of the rent, since he is placed in the same position as the tenant who failed. He has the same rights and obligations.

In this bankruptcy context, the landlord could decide to terminate the lease, due to the tenant’s bankruptcy if a clause in the lease grants him this option. These clauses have been recognized as valid by the Quebec courts.

Consulting legal advice will allow the landlords to weigh the various options available when faced with an insolvent or bankrupt tenant.

By Mathieu Tremblay