The Impact of Insolvency Proceedings on your Lease
With the fall-out of the COVID pandemic for many being either job loss or business closures, the possibility of needing to find shelter under the provisions of the Insolvency Act, is all too real.
What happens, however, to your lease? As the tenant who needs rescue, are you likely to be kicked out of the premises because you are insolvent or if your landlord is?
The Insolvency Act gives some assurance to the tenant in these situations.
If you, as the tenant, are the one who is seeking insolvency protection by filing a proposal or a notice that you intend to file a proposal, the Insolvency Act provides that the lease cannot be terminated simply because you are insolvent or because you have not paid your rent. The Act also prohibits a public utility service from discontinuing your service just because you are insolvent or have not paid for the services before the filing of the proposal.
You do not, however, get to just have a free ride. The landlord or the public utility service can require you to pay immediately for the services for the period after the filing of the proposal for you to continue to receive the service. If you do not, your services can then be disconnected. The landlord can also ask the court for an Order enabling him to terminate the contract for failure to pay the outstanding sums. If the landlord can show that it would cause him significant financial hardship if he were prevented from terminating the lease, the court may grant the Order.
If you are the tenant and you have been declared bankrupt, the Insolvency Act also provides that notwithstanding anything to the contrary in the lease, your trustee in bankruptcy will have the right to hold and retain the leased premises until the expiration of the tenancy on the same terms and conditions as you held it under the lease.
The landlord can make a claim in the bankruptcy as a general creditor for all rent accrued and due at the date of bankruptcy plus any accelerated rent, not exceeding three months, that may be claimed under the terms of the lease. The landlord cannot, however, claim in the bankruptcy for the rest of the unexpired term of the lease. So that if you entered into a lease for five years on April 1, 2019, and have not paid rent since April 1, 2020 and you were declared a bankrupt on April 1, 2021, the trustee can hold and retain the lease for the remaining 3 years left unexpired on the lease. The landlord can claim in the bankruptcy for the 1 year’s rent that was outstanding at the date of bankruptcy but cannot claim rent for the 3 years left unexpired on the lease. The trustee must, however, pay the rent going forward in accordance with the terms of the lease for the actual period during which he remains in possession of the leased premises.
If the terms of the lease are burdensome, the Insolvency Act may also provide you with a way out of this situation. The trustee in bankruptcy, with the permission of the persons appointed by the creditors, (the inspectors) may "disclaim" burdensome property. They could therefore seek to terminate the lease and get you out of it early.
The trustee in bankruptcy may also assign, sublet or otherwise dispose of the lease for the unexpired term, even if the lease provides that no assignment or sublease is possible without the consent of the landlord. That prohibition will be of no effect if the Court approves the assignment or sublease, on the application of the trustee in bankruptcy, after notice of the application to the landlord.
So what if your landlord declares bankruptcy? What does that mean for you, the tenant? Can the trustee in bankruptcy of the landlord's estate simply disclaim the lease, terminate it early and kick you out?
Although the Insolvency Act does not expressly say that he cannot, the cases make it clear that disclaimer of leases is not open to the trustee of the landlord's estate. All the property of the bankrupt landlord will vest in the trustee, but he will take that property subject to all the equities and liabilities to which the bankrupt was subject before the bankruptcy. In other words, he takes it subject to the lease and cannot simply get rid of the tenants.
So if you or your landlord had sought protection under the Insolvency Act, you may not need to fear what it may mean for your lease. Just know your rights and seek help if you need it!
Hilary Reid is a Partner at Myers, Fletcher and Gordon, and is a member of the firm's Commercial Department. She may be contacted at email@example.com or through the firm's website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.