Bankruptcy & Insolvency

Commercial tenant rights trump landlord rights

A recent decision has reaffirmed and clarified a half century of jurisprudence that holds that a trustee in bankruptcy cannot disclaim a commercial landlord’s interest in a lease of premises, says Toronto business lawyer Anton Katz.

He says Justice Michael A. Penny's decision in Business Development Bank of Canada v. Adventura II Properties Inc, et al. [2015 ONSC 5026] brings “clarity” to the insolvency bar.

Katz represented Kendal Aquatics Swim Program Ltd. in a motion brought under s. 37 of the Bankruptcy and Insolvency Act to reverse the decision of a bankruptcy trustee to disclaim a lease.

Kendal had a five-year lease on the pool facilities from the Pavilion Aquatic Club, which in turn were owners and landlords of a sportsplex. Pavilion encountered financial difficulties and a receiver was appointed.

On May 29, the receiver filed bankruptcy assignments and a buyer was found for the assets.

The receiver/trustee obtained court approval for the sale, which order included a reference to Kendal’s lease as part of the “assets” being transferred.

However, at the 11th hour, the prospective buyer balked, noting Kendal was a tenant and demanded the lease be terminated on the basis that the costs associated with the lease were prohibitive.

Subsequently, two days after the sale was approved on June 15, the trustee disclaimed the lease and Kendal was given notice of termination demanding they quit the premises by June 30.

“This would have been devastating to the business if not the community,” Katz tells, noting his client had built up a business that, in 4.5 years, had served some 1,000 people.

He was able to quickly get a court order preserving the status quo until the matter could be heard Aug. 6.

“We made the point that there is some 50 years of authority on this,” Katz says.

“The rights of a commercial tenant are different than the rights of a commercial landlord. To disclaim the lease was cavalier, high-handed and even callous," he says. "If you are a bankrupt tenant you can give notice to disclaim the lease and shed the payment on terms set out in the Commercial Tenancies Act but a bankrupt landlord has to honour the lease.”

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