New Caselaw Protects Some Landlords As 2021 Ushers In Steep Rise In Retail Bankruptcies: Lawyer

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Originally published in Law Times,
7th January 2021.

The first quarter of 2021 will see a bankruptcy spree in the
retail sector and many commercial landlords losing tenants, but
thanks to a Court of Appeal decision from back in October, some
landlords will have more relief on their losses than otherwise
available under the Bankruptcy and Insolvency Act, says Darrell
Gold, partner at Robins Appleby LLP.

From Black Friday though to Christmas and Boxing Day,
bricks-and-mortar retail enjoys a busy season, even despite
Ontario’s COVID lockdown, says Gold. Now in January, with the
lockdown to continue for an undetermined period and shoppers
apprehensive of venturing out for curb-side pickup, many will
finally call it quits.

“I expect that there’ll be a lot of action in the
bankruptcy and insolvency practice areas over the next three or
four months, given that the holiday gift buying period has ended
and we’re still in lockdowns,” he says.

With a flood of bankrupted tenants, landlords want to know
whether the security the tenant provided under the lease agreement
will survive the bankruptcy, says Gold.

The securities landlords typically require from tenants can take
many forms, including a security deposit or letter of credit. What
happens to the security when the tenant goes bankrupt is unclear,
as there have been conflicting court decisions on the issue, said Gold in a recent article.

But with 7636156 Canada Inc. (Re), 2020 ONCA 681,
those landlords with properly worded leases and letters of credit
can take comfort, he said.

If a tenant signs on to a 10-year lease, goes bankrupt after
three and the bankrupt tenant’s trustee then disclaims the
lease, the tenant walks away while the landlord loses seven years
of rental income. It will cost the landlord money to hire a broker,
re-let the property and get a new tenant, for – given the
market – a lower rental price. If there is a letter of credit
which secures the tenant’s liability obligations under the
lease, it will secure the landlord if the tenant bankrupts and the
lease is disclaimed, says Gold. Provided there is no fraud involved
with the lease, the landlord can go to the bank with which the
tenant arranged the letter of credit and get more money than the
landlord would otherwise be entitled to under the Bankruptcy and
Insolvency Act, he says.

“That’s the result of this case,” says Gold.

“You won’t recover every dollar of your loss from the
prior tenant. But you will, at least, make up the difference in
terms of in terms of whatever you were able to achieve by
re-renting the premises to a new tenant.”

“The bank is going to have to pay the landlord an amount
under the letter of credit that is over and above what the landlord
would otherwise be entitled to under the bankruptcy and insolvency
Act, which I said the maximum would be six month’s
[rent],” says Gold. “And that doesn’t mean
they’ll get it either. It depends on what’s left in the
bankrupt’s estate.”

After dealing with the landlord, the bank then claims
reimbursement from the tenant, its customer, who would have had
some form of security protecting the bank in offering the letter of
credit, he says.

The decision in 7636156 Canada Inc. (Re), 2020 ONCA 681
stands for the fact that the letter of credit “is
autonomous” and whatever happens with the lease, it is a
separate agreement between the bank, tenant and landlord, says

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