We're Leaving - What to do when an Insolvent Tenant Repudiates its Commercial Lease
Joel D. Henderson, January 2012
This is a scenario that most commercial landlords, particularly those with start-up and small-business tenants, have probably heard of or are worried about. A tenant informs the landlord that it no longer intends to be bound by its lease: “We’re leaving, and we’re not paying our rent.” In law, this is called “repudiation” and it means the landlord has three options.
First, the landlord can do nothing and treat the lease as continuing. The second option is to give the tenant a notice of termination, accepting the repudiation. Then the landlord and tenant become, instead, creditor and debtor for the amount of any unpaid rent or damages up to the date of termination. The third option is to lease the property to someone else, so that the landlord’s lost income is reduced, but still hold the tenant responsible for the balance of the lease that can’t be made up.
When the tenant has money, the landlord is choosing between enforcing the lease against the current tenant and seeking a new tenant at a higher rent. When the tenant may be in financial trouble—going broke, insolvent, possibly even bankrupt—the math can change.
In the recent decision of the Court of Appeal for Ontario Re TNG Acquisition Inc.,1 the tenant was insolvent (but not yet bankrupt) and had obtained protection from its creditors under the Companies’ Creditors Arrangement Act (CCAA). The tenant told the landlord it was going to leave the property and stop paying rent in a months’ time. The landlord did nothing, and continued to accept rent. The tenant abandoned the premises as promised, and within a couple of weeks was bankrupt.
Four months later, the landlord submitted a claim to the tenant’s trustee in bankruptcy for “unrecoverable expenses” of more than $3.3 million. The trustee did something that the tenant never had the power to do, it “disclaimed” the lease and denied the landlord’s claim. Canada’s bankruptcy laws grant the trustee special powers to terminate leases.
When the landlord sued to have its claim accepted, the Court refused. The landlord, by remaining silent, had preserved the lease. Had the landlord given the tenant a notice of termination before the tenant became bankrupt, the landlord would have been a creditor of the tenant with a provable unsecured claim for damages. In this case, the landlord failed to take that extra step.
The important message for landlords or tenants is to seek legal advice early in respect of repudiation.
Note that CCAA protection is for companies with debts exceeding $5M, but the same legal reasoning would apply to a smaller insolvent tenant who had obtained protection from its creditors under the Bankruptcy and Insolvency Act.
Disclaimer: This publication provides information only and is not intended to confer legal advice or opinion. If you have any further questions please consult a lawyer. Please note as well that many of the statements herein are general principles which may vary on a case by case basis.