The Ontario Court of Appeal recently confirmed that a landlord’s preferred claim in a bankruptcy is limited to three months of arrears and three months of accelerated rent if the trustee disclaims the lease.
When a tenant goes bankrupt, the trustee-in-bankruptcy steps into their shoes and can choose to keep the lease in force, or assign, surrender, disclaim, or resile from the lease. The landlord will usually want to claim all the arrears and accelerated rent for the rest of the lease term.
Landlords have a “preferred claim” in a bankruptcy, ranking ahead of other unsecured creditors, for three months of arrears and three months of accelerated rent. The landlord’s claim is subject to higher ranking creditors, including the trustee for their fees and expenses. The claim is also capped at the amount realized from the property on the leased premises (e.g. if the trustee sells the inventory or leasehold fit-ups).
In many cases, the amount owing to the landlord will exceed their preferred claim in a bankruptcy, especially for long-term leases. Is the landlord entitled to claim the balance of rent for the unexpired term as a regular unsecured creditor?
In Curriculum Services Canada/Services Des Programmes D’Études Canada (Re), 2020 ONCA 267, the Court of Appeal held that if the trustee disclaims the lease, the landlord is limited only to their preferred claim. In other words, the landlord cannot claim accelerated rent for the balance of the term.
There were two important caveats. First, the Court confirmed that the landlord ranks as an unsecured creditor for the unpaid balance of its preferred claim. This is important because the preferred claim is subject to higher-ranking creditors and limited to the amount realized from the property on the leased premises. Second, the Court confirmed that the landlord may still sue a guarantor. For example, if the principal of a tenant corporation personally guaranteed the lease, the guarantee will usually survive the trustee’s disclaimer. As a general rule, a disclaimer only benefits the insolvent party, not the guarantor.