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Resiliation of commercial leases with a notice of intention or settlement proposal

The Bankruptcy and Insolvency Act (BIA) allows a company being restructured to resiliate one or several leases. (Subsection 65.2(1) BIA) The request for resiliation must be made between the time the notice of intention is filed and the settlement proposal is submitted.

A company with several places of business can therefore resiliate leases and close non-profitable establishments that are the cause, in whole or in part, of its financial difficulties.

Said requests for resiliation must be done with 30 days advance notice to the lessor and the latter can contest this request in the 15 days following the advance notice. If the lessor contests the resiliation request, the debtor (the company) must demonstrate to the Court that the resiliation is necessary to ensure the viability of the settlement proposal. If no challenge is made, the lease is resiliated.

When a lessor challenges resiliation of a commercial lease

In the case of a challenge, relevant jurisprudence demonstrates that the Court tends to reject the request by the lessor if the debtor succeeds in proving, with supporting evidence, that restructuring is not viable without resiliation of the lease. Unless other alternatives exist, the Court usually accepts this decision to allow a company in financial difficulty to avoid bankruptcy.

Compensation for lessors

Possible compensation for lessors that can be included in the proposal conditions are found in Subsection 65.2(4).

Note that lessors cannot claim for accelerated rent.

The proposing party can offer the lessor to provide a proof of claim for a compensation corresponding to the real damage incurred by the resiliation or for the lesser of the following amounts:

  • 100% of the rent stipulated for the first year that remains on the lease, increased by 15% of the rent after that first year
  • Three years’ rent

If the tenant offers nothing specific to the lessor, the latter may produce an ordinary proof of claim and participate in the distribution like the other creditors (paragraph 65.2 (4) (c) BIA).

The lessor can vote in the category of ordinary creditors or can be classified in a category specially created for all lessors, if the interests of the lessors are the same and if the proposal so provides. If the lessor is considered to be an ordinary creditor, it will have the right to the same dividends of the other creditors of this category. If a special class is created, the lessor will receive the dividend provided for in the clause.

It is possible, after submittal of the notice of intention, to ask the Court to determine the categories to which they belong.

Resiliation of other contracts

It is also possible, at the time of submittal of a notice of intention or a proposal for a legal or natural person operating a company, to resiliate other contracts such as supply contracts, equipment sales contracts, and supplier contracts.

Indeed, the Act allows debtor companies to be released from contracts that contribute to their insolvency if:

  • The contracts are the result of poor negotiations
  • Unanticipated situations have arisen
  • This resiliation will provide additional chance for the company to survive

If the trustee does not oppose, the debtor sends 30 days’ prior notice of resiliation to its co-contractors. The adverse party then has 15 days to contest said request for resiliation. If no opposition is raised, the contract is automatically resiliated.

In this way, the Legislator has lightened the process so as to permit the Court to intervene only if a party opposes. In such circumstances, the contract may be resiliated if the Court considers it to be questionable, disadvantageous, or again if without this resiliation, restructuring will be compromised.

As with any resiliation, it can be accompanied by the imposition of damages. Subsection 65.11(8) stipulates that this claim constitutes a provable claim.

Finally, Subsection 65.11(10) contains certain exceptions such as certain financial contracts, collective agreements, financing agreements for which the debtor is the borrower, etc.

Ginsberg Gingras is a leader in the field of commercial insolvency in Quebec and Eastern Ontario. For any additional questions about commercial lease resiliation or other matters related to insolvency, please contact a Ginsberg Gingras licensed insolvency trustee.

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