Lockdown and end to holidays will spell end for many in bricks-and-mortar retail
The first quarter of 2021 will see a bankruptcy spree in the retail sector and many commercial landlords losing tenants, but thanks to a Court of Appeal decision from back in October, some landlords will have more relief on their losses than otherwise available under the Bankruptcy and Insolvency Act, says Darrell Gold, partner at Robins Appleby LLP.
From Black Friday though to Christmas and Boxing Day, bricks-and-mortar retail enjoys a busy season, even despite Ontario’s COVID lockdown, says Gold. Now in January, with the lockdown to continue for an undetermined period and shoppers apprehensive of venturing out for curb-side pickup, many will finally call it quits.
“I expect that there'll be a lot of action in the bankruptcy and insolvency practice areas over the next three or four months, given that the holiday gift buying period has ended and we're still in lockdowns,” he says.
With a flood of bankrupted tenants, landlords want to know whether the security the tenant provided under the lease agreement will survive the bankruptcy, says Gold.
The securities landlords typically require from tenants can take many forms, including a security deposit or letter of credit. What happens to the security when the tenant goes bankrupt is unclear, as there have been conflicting court decisions on the issue, said Gold in a recent article.
But with 7636156 Canada Inc. (Re), 2020 ONCA 681, those landlords with properly worded leases and letters of credit can take comfort, he said.
If a tenant signs on to a 10-year lease, goes bankrupt after three and the bankrupt tenant’s trustee then disclaims the lease, the tenant walks away while the landlord loses seven years of rental income. It will cost the landlord money to hire a broker, re-let the property and get a new tenant, for – given the market – a lower rental price. If there is a letter of credit which secures the tenant’s liability obligations under the lease, it will secure the landlord if the tenant bankrupts and the lease is disclaimed, says Gold. Provided there is no fraud involved with the lease, the landlord can go to the bank with which the tenant arranged the letter of credit and get more money than the landlord would otherwise be entitled to under the Bankruptcy and Insolvency Act, he says.
“That’s the result of this case,” says Gold.
“You won't recover every dollar of your loss from the prior tenant. But you will, at least, make up the difference in terms of in terms of whatever you were able to achieve by re-renting the premises to a new tenant.”
“The bank is going to have to pay the landlord an amount under the letter of credit that is over and above what the landlord would otherwise be entitled to under the bankruptcy and insolvency Act, which I said the maximum would be six month’s [rent],” says Gold. “And that doesn't mean they'll get it either. It depends on what's left in the bankrupt’s estate.”
After dealing with the landlord, the bank then claims reimbursement from the tenant, its customer, who would have had some form of security protecting the bank in offering the letter of credit, he says.
The decision in 7636156 Canada Inc. (Re), 2020 ONCA 681 stands for the fact that the letter of credit “is autonomous” and whatever happens with the lease, it is a separate agreement between the bank, tenant and landlord, says Gold.