Lessor guarantees in the event of tenant bankruptcy: Part 1 – The mortgage
When entering into a commercial lease, it is customary for a lessor to require certain guarantees from its tenant in order to protect itself in the event of non-performance by the latter. These guarantees may, among other things, take the form of a mortgage, a security deposit, a letter of credit or a bond. However, what happens to these guarantees when the tenant goes bankrupt?
When this happens, it significantly changes the way in which the guarantees taken by the lessor can be exercised. In fact, the Bankruptcy and Insolvency Act 1 (« LFI“) now takes precedence, and this provides for specific mechanisms.
Part 1 – The mortgage
It is quite common for a lessor, when granting a lease to a tenant, to take out a guarantee on the latter’s property to protect himself in the event of non-payment of the rent or non-performance of any other obligation. . Thus, it is common to find in a commercial lease a mortgage, in the vast majority of cases a movable mortgage, on certain assets of the tenant. The common case is a mortgage on the goods located in the premises. The logic behind this guarantee is that if the tenant fails to pay, the lessor can request or require the termination of the lease (depending on the terms of the lease), and exercise a mortgage recourse on the goods in the premises to cover his debt. .
However, in a case of bankruptcy, it is necessary to take into consideration the Bankruptcy and Insolvency Act 2 (« LFI“), which takes precedence given the federal jurisdiction in matters of bankruptcy 3.
Thus, he holds a priority claim for an amount equivalent to three (3) months of rent preceding the bankruptcy. In addition, if the lease provides for rent payable in advance in the event of bankruptcy, the lessor has a priority claim for an amount equivalent to three (3) additional months of rent. However, the total amount which the lessor can claim under this priority claim “cannot exceed the amount realized on the goods located on the premises under lease”.
The mortgage remains an attractive guarantee, but its application is limited, even annihilated, when the tenant takes advantage of the protections of the BIA. Furthermore, even when the tenant is not bankrupt, the exercise of rights related to the mortgage requires certain steps (sending a notice of exercise of a mortgage right, request to the court to order the abandonment, sale of goods, etc.), which other types of guarantees do not require.
In the meantime and as always, do not hesitate to contact a member of the Gascon & Associés real estate law team with any questions on this subject.
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1L.R.C. (1985), c. B-3.
2L.R.C. (1985), c. B-3.
3 Constitution Act of 186730 & 31 Victoria, ch. 3 (R.-U.), par. 91(21).
4Restaurant Ocean Drive inc. c. Sam Levy & Associates Inc., 1997 CanLII 10235 (C.A.).
5Sec. 136(1)(f) BIA.
