Three Tips for Commercial Landlords Managing Tenant Insolvency Issues

As a commercial landlord, the effects of the COVID-19 pandemic may have left you facing a number of difficult challenges – including how to address tenant insolvency. Here are three strategies for you to consider in these uncertain times.

1. Do not assume you can automatically rely on the insolvency clause in your lease as grounds to terminate the lease in the event of tenant insolvency.

Most commercial leases contain clauses giving the landlord the right to terminate the lease if the tenant becomes bankrupt or insolvent or initiates proceedings under certain insolvency statutes.

Unfortunately for landlords, tenants who initiate restructuring proceedings under the Companies’ Creditors Arrangement Act (the CCAA) or Division I of Part III of the Bankruptcy and Insolvency Act (the BIA) are protected against landlords being able to reply on those insolvency clauses to terminate leases by reason only of tenant insolvency.

2. If your tenant files for creditor protection under the BIA or CCAA, you are entitled to be paid post-filing occupation rent.

If your tenant obtains creditor protection under the BIA or CCAA, you as a landlord are prohibited from terminating the lease by reason of: (a) the tenant’s insolvency alone and/or (b) the tenant’s failure to pay pre-filing arrears of rent.

However, the tenant is required to pay you post-filing occupation rent for its occupancy of the premises while under creditor protection – and failure to pay such post-filing occupation rent is grounds for you to terminate the lease.

3. As a commercial landlord, your best protection against tenant default is a properly worded letter of credit.

Recent case law has confirmed that a landlord who obtains a letter of credit (an LOC) as security for a tenant’s performance of its obligations under a lease is entitled to draw on the LOC to secure payment or performance of all of the tenant’s obligations under the lease up to the date of insolvency.

The LOC is regarded as an autonomous obligation owed by the issuing bank to the landlord. The LOC does not form part of the tenant’s bankruptcy estate and is unaffected by a purported disclaimer of the lease by the tenant’s trustee in bankruptcy.

This recent case law underscores the value of properly drafted letters of credit as the most effective type of security available to commercial landlords to protect against losses occasioned by tenant default.

The MLT Aikins insolvency & restructuring group comprises 18 lawyers practicing in six offices across all four western Canadian provinces. Our insolvency and restructuring experience helps our clients preserve value, capture business opportunities and resolve disputes across various sectors of the western Canadian economy.

Curious how our insolvency & restructuring lawyers can help your business achieve the outcomes you require? Book a consultation today.

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Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.