Bankruptcy Trustee Successfully Asserts Extension of Subsection 38(2) Commercial Tenancies Act Rights After Landlord Argues Lease was Surrendered

In a recent decision, the Ontario Superior Court not only granted a bankruptcy trustee access to a premises and the right to assign a lease, despite the landlord’s claim that the same trustee, acting as receiver had previously surrendered the lease to the landlord, but it also extended the trustee’s time period within which to exercise those rights.

In Cerberus Business Financial, LLC v. B & W Heat Treating Canada, ULC, 2020 ONSC 3781, an entity acted as both receiver and trustee in bankruptcy. As receiver, it advised the landlord that it would no longer occupy the premises and delivered the keys to the landlord. As trustee, it then attempted to access the premises and assign the lease. The landlord refused to grant the entity access to the premises. It denied the trustee’s rights under Subsection 38(2) of the Commercial Tenancies Act (the “CTA”) (which sets out a 90 day period within which a trustee must elect to disclaim, retain or assign a lease), on the basis that the entity’s prior acts as receiver worked as a surrender.

In response the trustee brought a motion, asking the court to confirm that it had the right to access the premises and assign the lease and furthermore, asking the court to extend the time period it had as trustee to exercise its rights under Subsection 38(2). The trustee also attempted to rely on O. Reg 73/20, promulgated under the Emergency Management and Civil Protection Act (the “Suspension Order”), which was passed by the Ontario legislature in response to the COVID-19 pandemic.

The Facts

In September, 2019, A. Farber & Partners Inc. (“Farber”) was appointed as receiver over all of the assets, undertakings and properties of B&W Heat Treating Canada, ULC (“B&W”).

Pursuant to the receivership order, Farber was permitted to file an assignment in bankruptcy on behalf of B&W. On March 31, 2020, Farber filed an assignment in bankruptcy on behalf of B&W and appointed Farber as the trustee. On the same day, the lawyer for Farber, as receiver, wrote to the landlord stating that Farber, as receiver, would no longer occupy the premises or pay rent. The keys to the premises were delivered to the landlord. Concurrently, Farber, as trustee, sent a separate letter to the landlord informing the landlord of the first meeting of creditors on April 21, 2020.

Farber, as trustee, took the position that, pursuant to Subsection 38(2) of the CTA, it was entitled to retain, disclaim or assign the lease at any time within 90 days of the assignment in bankruptcy.

Thereafter, Farber, through its real estate agent, sought to assign the lease to a new tenant. It also sought to access the premises. The landlord refused access, arguing that Farber surrendered the lease as receiver on March 31, 2020.

Farber brought a motion, asking the court to: (1) confirm that Farber had the right to access the premises and assign the lease; and (2) grant an extension of the 90 day period under Subsection 38(2) of the CTA.

Access and Assignment

The landlord argued that Farber did not have the right to access the premises and assign the lease. The landlord noted that Farber, as receiver, could have surrendered the keys to the premises to Farber, as trustee, instead of surrendering them to the landlord. Since it did not, the landlord argued that the trustee had knowledge of the receiver’s purported surrender and “at least” tacitly acquiesced to the surrender of possession.

The court did not accept the landlord’s position. The court held that Farber, as receiver, and Farber, as trustee, were two distinct entities, and pointed to the fact that Farber had sent two separate letters to the landlord in each of its distinct capacities.

The court further noted that Subsection 38(2) of the CTA provides the trustee with specific rights to assign the lease. The court held that Farber, as receiver, could not prejudice the rights of Farber, as trustee under the CTA. The court stated that the landlord would not make this argument if there were two separate companies acting as receiver and trustee.

Extension

The motion was heard on June 18, 2020. The 90 day period from March 31, 2020 had less than 2 weeks remaining. Farber argued that the court had inherent jurisdiction to extend the 90 day time period set out in Subsection 38(2) of the CTA. Farber reasoned that there was “a gap in the legislation that ought to be filled to allow trustees relief when dealing with the landlord that wrongfully denies access”. Farber pointed to case law that it argued stood for the general proposition that the court’s jurisdiction in insolvency proceedings includes the ability to direct a trustee to do what is practical.

The court did not accept Farber’s position that the court had the jurisdiction to extend the time period prescribed in Subsection 38(2) of the CTA. It noted that previous decisions have explained that an argument of “inherent jurisdiction” cannot be used to contradict a statute. The court held that there was no functional gap in Subsection 38(2) of the CTA and that the three-month period is clearly set out.

Nonetheless, the court granted the extension, explaining that the Suspension Order (responding to the COVID-19 pandemic) gave the court the jurisdiction to extend the time period set out in Subsection 38(2) of the CTA. The court held that it was within its reasonable discretion under the Suspension Order to provide Farber with a 3 month extension of the 90 day time period contained in Subsection 38(2) of the CTA following its expiry on Jun 29, 2020. The court noted that it was not prepared to grant the alternative relief sought by Farber (which was to declare that the 90 day period under Subsection 38(2) of the CTA would be suspended indefinitely for the duration of the COVID-19 emergency), as it would be unfair to the landlord to leave it in an unduly vulnerable position for an unknown, extended period of time.

The court therefore extended the period by which Farber had to elect to disclaim, retain or assign the lease by 3 months (to September 29, 2020) and granted Farber access to the premises. The court also held that, given the landlord’s past refusal to provide access, Farber was not obligated to pay occupation rent for the first 30 days of the extension, but that it was required to do so for the balance. Lastly, it held that if the trustee elected, within the remaining 60 days, to assign the lease, it would be required to give the landlord 7 days’ prior notice.  

The Takeaway

In this case, the landlord lost control of the premises in September, 2019 and became impatient after the receivership became a bankruptcy. It was unsuccessful in asserting that the lease had been surrendered by Farber, as receiver. The court used a nuanced approach to problem solving by relying on a temporary tool (the Suspension Order passed by the Ontario government in response to COVID-19). This case illustrates that the courts may be willing to be somewhat creative in light of the COVID-19 pandemic, but are not willing to extend time periods indefinitely, nor to re-write the law.