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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Canada | Publication | May 28, 2020 - 2 PM ET
The coronavirus pandemic is having a devastating impact on the global economy and has caused economic activity to grind to a halt. The ongoing global crisis will unfortunately push many businesses into bankruptcy. There are significant implications for commercial landlords and tenants from the resulting financial crisis.
When tenant insolvencies arise, commercial landlords are often faced with precarious situations. If a bankruptcy order is granted by the court, this order will stay all proceedings and actions against the tenant. This precludes the landlord from exercising its rights of distress and terminating the commercial lease. The following paragraphs will assess a commercial landlord’s remaining rights and remedies and will provide our recommendations for commercial landlords.
Tenant bankruptcy under a commercial lease is governed by federal and provincial legislation that impose strict limitations in relation to recovering rental arrears, accelerated rent and rent for the unexpired portion of the commercial lease. The federal legislation applicable to tenant bankruptcy is the Bankruptcy and Insolvency Act1 (BIA), which sets out a distributive scheme relating to the bankrupt tenant’s estate. Applicable provincial legislation is the Alberta Landlord’s Rights on Bankruptcy Act2 (LRBA).
The federal BIA describes the preferential claim of a commercial landlord where a tenant goes bankrupt and prescribes a scheme of distribution of the proceeds realized from the bankrupt’s property. Moreover, a stay of proceedings is automatically imposed by a bankruptcy order. The provincial LRBA further limits a commercial landlord’s remedies.
Section 136(1)(f) of the BIA limits a landlord’s preferred claim to three months of arrears immediately preceding the bankruptcy and three months of accelerated rent, if the commercial lease provides for accelerated rent. The landlord’s claim ranks subsequent to a secured creditor’s claim. Under sections 3 and 4 of the LRBA, a landlord has no right to claim as debt any money due to the landlord from the lessee for any portion of the unexpired term of the commercial lease (beyond the landlord’s preferred claim to three months of arrears and three months of accelerated rent referred to above).
Generally speaking, there are five types of security a landlord can take under a commercial lease: (a) cash deposit from a tenant; (b) irrevocable letter of credit issued by the tenant’s lender; (c) guarantee or indemnity from a third party unsecured or secured by a letter of credit or other security; (d) a loan from a related company to the commercial landlord to the tenant; or (e) other forms of collateral security such as a collateral charge on personal property or real property granted by the tenant or a third party.
Security deposits are vulnerable to being challenged in court, as demonstrated in the Alberta Court of Appeal decision Surefire.3 This case dealt with a landlord holding a large cash deposit from a bankrupt tenant, and the court held that such deposit was a security deposit rather than prepaid rent. Consequently, the court determined the deposit was not the landlord’s property but rather formed part of the bankrupt tenant’s estate and had to be returned to the tenant.
Given the case law and the court’s classification of deposits, it is likely that a better solution than relying on a security deposit is to seek a surety from a third party in the form of a guarantee or indemnity either unsecured or secured by a letter of credit or other security or requiring a letter of credit from the tenant’s lender. Pursuant to obiter dicta by the Supreme Court of Canada in the Crystalline decision,4 landlords may be able to claim against a third-party guarantor or indemnifier after a commercial lease has been disclaimed by a trustee in bankruptcy, as the guarantee or indemnity will not be discharged by the termination or disclaimer of the commercial lease. The same reasoning should apply to a letter of credit.
This reasoning, however, has been cast into doubt by the OMERS decision,5 which resurrected what is commonly known as the Cummer-Yonge6 line of cases and limited the recovery by the landlord under a letter of credit from a third-party bank to the three months’ accelerated rent due under the commercial lease.7 Given the OMERS decision, commercial landlords may want to consider obtaining an indemnity from a third party secured by a letter of credit from the indemnifier’s lender, instead of seeking a letter of credit from the tenant’s lender. A further alternative would be for the landlord to have another company make a loan to the tenant and for the loaning company to collaterally secure this amount by way of security agreement or other security.
Given the foregoing, our conclusions are:
The authors would like to thank Oliver Zachmann, articling student, for his contribution to this legal update.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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