Québec court rules: insolvent tenants are using premises and must pay rent even during lockdown periods

In the proceedings of Groupe Dynamite under the Companies’ Creditors Arrangement Act (Canada) (CCAA), the Québec Superior Court was called upon to consider a pressing question during these pandemic times: should an insolvent tenant be relieved of the obligation to pay post-filing rent in circumstances where its ability to use leased premises is impeded by government decree?

What you need to know

• The tenant in this case operates over 300 retail stores in Canada and the U.S. under the names Dynamite and Garage. Like so many other businesses, it was severely impacted by the COVID-19 pandemic and the government-imposed restrictions that followed.
• The company commenced CCAA proceedings. Due to government closures of non-essential businesses in Ontario and Manitoba, the tenant argued that it was not using those premises and was therefore not required to pay ongoing rent. It sought an order from the Court permitting the non-payment of post-filing rent. Its landlords objected.
• The Court considered section 11.01 of the CCAA, which permits a supplier of goods or services to require immediate payment for the use of leased premises. The Court accepted that the tenant was using the premises for the purpose of the CCAA despite the closure of the stores.
• Key findings made by the Court include:
  • The existence of extraordinary circumstances such as the pandemic is not a factor to consider in deciding whether a court has jurisdiction (i.e., it only impacts whether to exercise a discretion, but cannot alter the determination of whether the discretion exists in the first place).
  • The Court did not have jurisdiction to permit non-payment of post-filing rent (and even if it had such jurisdiction, it would not have exercised it).
  • In concluding that the tenant was using the premises for the purpose of insolvency law, two key considerations are that the tenant:
    1. has chosen not to disclaim the leased locations—which is its principal remedy under the CCAA should it wish to cease paying rent—and instead evidently wanted to keep those locations; and
    2. has asserted its right to sole possession of the stores—this is sufficient to constitute use such that landlords cannot be prevented from claiming the immediate payment of rent. Mere possession of premises may constitute use within the meaning of section 11 of the CCAA.
  • The Court was mindful of a similar conclusion as to the use of premises by a tenant made recently by the B.C. Supreme Court in the case of Quest University (2020 BCSC 921).
  • The Court also noted that landlords were bearing the costs associated with the stores, including maintenance, utilities, security and insurance.
  • Although not strictly necessarily to rule on the application, the Court also considered that the terms of the leases provide that the tenant is obligated to pay rent even if a situation of government regulation or force majeure prevents one of the parties from fulfilling its obligations under the lease. The Court noted that granting the order sought would effectively result in a redrafting by the Court of the leases, which it did not have jurisdiction to do.
  • The Court rejected the tenant’s assertion that the policy objectives of the CCAA favoured its position. The fact that non-payment of rent would improve the tenant’s financial situation and therefore its prospects of a successful restructuring (which is an objective of the CCAA) was not compelling. The Court noted the Supreme Court of Canada’s position in Century Services (2010 SCC 60) that “[c]ourts should be mindful that chances for successful reorganizations are enhanced where participants achieve common ground and all stakeholders are treated as advantageously and fairly as the circumstances permit.” Fairness requires that tenants pay for post-filing use of premises.

Conclusion

During the pandemic, there have been several incidents of insolvent tenants unilaterally seeking aggressive and confrontational relief against landlords. These efforts have generally not fared well and the courts appear unwilling to endorse them. Insolvency courts have long preferred to send stakeholders “out in the hall” to negotiate consensual commercial solutions to such issues. Tenants may be well-advised to defer confrontational litigation and instead consider proactively engaging landlords in constructive dialogue for negotiated solutions and an equitable sharing of the burdens brought on by the pandemic.