In the news | Espace | Andrew Adessky | The Landlord’s Plight – The Financially-Troubled Tenant

It is inevitable that landlords will, at some point in time (and in many cases quite often), encounter commercial tenants who are unable to pay their rent. The purpose of this article is to provide an overview of the situations a landlord can be faced with; an overview of the landlord’s rights as related to the payment of rent; and those initial steps a landlord should be taking once they have been notified that a tenant of theirs (the “Debtor”) has filed for formal protection under either the Bankruptcy and Insolvency Act (“BIA”) or the Companies Creditors Arrangement Act (“CCAA”), hereafter referred to as the “Insolvency Event”.

1. Determine what has occurred and understand the difference

Typically a landlord will be faced with one of several scenarios*:

a) Bankruptcy – the Debtor has filed an assignment in bankruptcy. In this case, a Trustee in bankruptcy is vested with the assets of the bankrupt and it is the Trustee who will now be dealing directly with the landlord. The Trustee will in most cases take possession of the leased premises (although it may in certain instances elect not to) while it proceeds to a realization of the assets.

b) Notice of Intention to Make a Proposal (“NOI”) – the Debtor seeks protection from its creditors by filing an NOI. In this case, the NOI Trustee is charged to monitor the business but does not take possession or control of the assets – the Debtor remains in control of its assets. Within 10 days of filing the NOI, the company must file a cash flow with the relevant authorities. This cash flow, which will be reviewed by the NOI Trustee, must show that the company can continue to operate while it is under protection. The landlord will continue to deal with the company although the Trustee will be there to assist all stakeholders through the process. The duties of a Trustee are set out in the BIA.

c) CCAA – the Debtor (although it can also be a Creditor) applies to the court for an order granting a stay of protection from its creditors. A Trustee is appointed to act as a Monitor. The duties of the Monitor will be set out in the initial order from the court. Similarly to an NOI Trustee, a Monitor typically does not take possession or control of the assets of the company but rather monitors the Debtor’s restructuring process. In certain instances, a Monitor can be given enhanced powers and duties.

*In all cases above, the Trustee or Monitor is an officer of the court and is there to assist all stakeholders – including landlords – during the restructuring process.

d) Receivership – in this instance, a creditor of the Debtor will seek court permission to appoint a receiver to realize upon the assets of the tenant.

2. Stay of protection

Whether it is a bankruptcy, an NOI or a CCAA, the impact on creditors including landlords is essentially the same.

A stay of protection exists which prohibits creditors from continuing or taking action over amounts due prior to the day of the Insolvency Event. For landlords, this means that any arrears of rent for periods prior to the Insolvency Event and any enforcement action being taken in connection with the arrears are frozen pending the outcome of the insolvency filing (which may include in the case of an NOI or a CCAA, a proposal or plan). The exception being where a court has authorized the lifting of the stay of protection to allow a creditor to proceed with a specific action.

3. Timing / Payment of Occupation Rent

a) Bankruptcy – typically, a Trustee will take possession of the premises and is allowed a reasonable period of time to use the premises (historically, the courts have considered three (3) months to be reasonable) to realize upon the assets and perform its statutory duties. If the Trustee takes possession of the premises, it will start paying rent from and after the date of the first meeting of creditors, which is required to be within twenty-one (21) days of the bankruptcy. Typically, the landlord is not entitled to demand rent from the Trustee for the 21-day period. However, in certain instances the Trustee will negotiate to pay rent in exchange for services it may require from the landlord.

b) NOI – the Debtor is required to pay rent from the date of the NOI filing according to the terms and conditions of the lease absent an alternative agreement with the landlord. Rent payments will be provided for in the cash flows the Debtor must file. The Debtor is granted an initial thirty (30) day stay of protection but can request further stays of protection to a maximum of six (6) months. The Debtor must seek court approval for each extension.

c) CCAA – similarly to the NOI, the Debtor is required to pay rent from the date of the CCAA filing according to the terms and conditions of the lease absent an alternative agreement with the landlord. Occasionally a CCAA order may contain a provision to alter the timing of payment, but this will usually only be done upon notice to the landlords so they can respond to any such request by the Debtor. Payment of rent will be provided for in the cash flows the Debtor must file. There is no specific time limit to the overall length of a CCAA proceeding. The Debtor will seek extensions of the stay as required.

The treatment of security deposits that a landlord may hold has been the subject of many court cases over the years. It is beyond the scope of this article to delve into this area, but landlords should be aware that their ability to retain security deposits may be challenged in an insolvency and the courts will look at the wording of any agreement related to security deposits and the intent of the parties.

4. Landlord Steps

There are many steps a landlord should take to protect its rights in an insolvency event involving a tenant. The following comments are not meant to be exhaustive but rather an outline of common steps to take. Each situation is unique, and a landlord’s response should be adjusted accordingly:

a) Consider engaging legal counsel (if no internal counsel exists) to monitor and represent the landlord’s interest at the appropriate time. A failure to act and/or respond to actions/motions filed by the Debtor may be seen as an agreement to the relief being sought by the Debtor. For example, a landlord has the right to contest a lease disclaimer notice. It may be that the landlord does not care to, but a failure to act by the prescribed date in the notice will mean the landlord cannot contest the disclaimer notice.

b) Monitor the process closely. The Trustee or Monitor will post documents on their website including motions filed by the Debtor or other parties; reports prepared by the Trustee/Monitor; and court orders issued – this may include store guidelines/procedures relating to the liquidation of inventory (in the context of a retail store liquidation).

• Landlords will want to properly understand how store guidelines affect them, as they relate to signage inside and outside of the location, removal of fixtures, etc.
• Seek to obtain a copy of the cash flow filed by the Debtor as this will also provide information in terms of the Debtor’s intentions and restructuring initiatives.

c) Communicate directly with the Trustee/Monitor to ensure you have a clear understanding of the insolvency. Is there a sale process going on and are the leases included? Is the Debtor being liquidated? Does the Debtor intend to close some or all locations and cherry pick the locations that are profitable and sustainable? The answers to these and other questions may not be evident at the commencement of the restructuring proceedings, but should become clear as time progresses.

d) Engage with the Debtor. If the Debtor is attempting to restructure, is it in the landlord’s interest to consider restructuring the lease? There are many factors that go into this, but the earlier the landlord engages the Debtor, the greater the chances it can influence decisions before they are taken and potentially avoid losing a tenant they wish to keep.

e) Debtor In Possession (DIP) Financing. Understand the implications of DIP financing that may be provided and the impact on the Debtor’s collateral position. While DIP financing may be necessary to see the Debtor through the restructuring, it may impose charges on assets that will rank ahead of existing creditors including landlords – it is important to understand the implications or impact this could have.

f) Consider, with the assistance of a tax counsel, the implications of agreeing to reduced or deferred rent as these options can create significant sales tax complexities.

g) Determine if there are any lease guarantees that were provided, (for example by a parent company) and what steps should be taken to preserve the value of the guarantee. File a proof of claim when requested to do so. Simply being included on a creditor’s list is not sufficient enough to ensure that the landlord will receive its pro-rata share of a distribution (if any) in the context of a distribution pursuant to a proposal, plan or by a Trustee in bankruptcy. A proof of claim must be properly completed and filed.

This brief overview is intended to provide landlords with some basic information but is not intended to answer all questions and issues that may arise pursuant to a restructuring. This article is not intended to be taken as legal advice.