Commercial leases in the context of insolvency and bankruptcy

Since the advent of COVID-19, many companies have been faced with concerns about the future conduct of their business. Some, caught up in excessive operating expenses, will unfortunately have no choice but to consider restructuring or bankruptcy.

The following statements summarize the consequences of insolvency and bankruptcy on commercial leases.

The Bankruptcy and Insolvency Act (the “BIA“) allows companies in financial difficulty to restructure their operations, notably through a notice of intention to make a proposal to their creditors (the “Notice of Intention“), in order to avoid a possible bankruptcy.

Following the filing of the Notice of Intention with the Official Receiver and the Court, the debtor company (which has a debt) has an initial 30-day stay of proceedings to enable it to prepare a proposal for the benefit of its creditors. It should be noted that this period may be extended at the request of the debtor company, if it can be demonstrated that such an extension would not be prejudicial to the general body of creditors.

During this period, the debtor company’s financial burden with regard to its commercial lease is not alleviated. It remains obliged to pay the rent, but in proportion to the monthly rent stipulated in the lease, from the day after the Notice of Intention. In the event of non-payment, the lessor may oppose the debtor’s request for an extension of the deadline for filing a proposal, or request that the deadline no longer apply.

To ensure the viability of its proposal, the debtor company may decide to terminate its commercial lease(s). To do so, the debtor company must send a 30-day written notice to its lessor in the manner prescribed by the BIA. Any lessor wishing to contest the debtor company’s termination must do so within 15 days of receiving this notice. The chances of success of such a challenge are generally slim, since the very purpose of the termination is to enable the debtor company to present a viable proposal to all its creditors. Nevertheless, a lessor could base his grounds for contestation on the fact that reasonable alternative solutions exist, should the case arise.

On the other hand, in the event that the lease remains in force, but no proposal has been filed by the end of the period, the trustee appointed to administer the debtor company’s bankruptcy may occupy the leased premises rent-free until the first meeting of creditors. Following this first meeting of creditors, the trustee could be held liable for the payment of rent, since he is placed in the same position as the bankrupt tenant. He has the same rights and obligations.

In this bankruptcy context, the lessor could also decide to terminate the lease due to the lessee’s bankruptcy, if a clause in the lease grants him this option. Such clauses have already been recognized as valid by Quebec courts.

Consulting a legal advisor will enable lessors faced with an insolvent or bankrupt tenant to weigh up the various options available to them.

By Mathieu Tremblay

Share this publication