When negotiating a commercial lease, the lessor has every interest in demanding guarantees from his future tenant to protect himself in case of non-fulfillment of his obligations. A common cause of the tenant's breach of his obligations is his insolvency or financial hardship. However, it is important for any lessor to know that a tenant's bankruptcy or filing of a notice of intention or a proposal under the Bankruptcy and Insolvency Act (" LFI ") may have the effect of annihilating the protection offered by certain guarantees.

The purpose of this article is more specifically the guarantee frequently required by lessors, namely the surrender by the tenant of a sum of money that may amount to one or more monthly payments of rent, sometimes designated in the leases or as a "deposit in guarantee" or "security deposit" as "prepaid rent". We will see that in the event of a bankruptcy, a notice of intention or a proposal under the BIA, depending on how the clause of the lease providing for such surrender is drafted, the lessor could be obliged to divest itself the amount received to give it to the trustee, even if the lessee owes him a debt.

The problem arises from the fact that, in a bankruptcy, notice of intention or proposal under the BIA, hypothecs granted by the lessee in favor of his commercial lessor are not opposable to the trustee.

Indeed, in Ocean Drive 1 , the Quebec Court of Appeal concluded that the lessor, who is granted preferred creditor status under section 136 (1) (f) of the BIA, must necessarily be to the rank provided by this provision, without being able to benefit from the order of collocation provided for in the Civil Code of Québec ("CCQ"), and this, taking into account the principle according to which the provincial law must give way to the federal law in bankruptcy case:

"... it must be concluded that the secured creditor status claimed by the lessor under its conventional movable hypothec would directly alter the collocation order under s. 136 (1) BIA by increasing the rank of a claim. priority under section 136 (1) (f) of the Bankruptcy Act. It follows that the priority and mortgage provisions of the Civil Codethat modify the priority order of the Bankruptcy Act by giving the landlord "  secured creditor  " status are inapplicable in the matter of bankruptcy. " 2

As a result, in a bankruptcy, notice of intention, or proposal by a tenant under the BIA, the lessor will not be able to make any mortgages it holds on the assets of its insolvent tenant, having to settle for privilege conferred by section 136 (1) (f), which privilege, however, is subject to the rights of secured creditors and limited to the amount realized on property on the premises under lease.

In Quebec, the deposit made by the lessee to secure the performance of his obligations under the lease constitutes a movable hypothec with delivery, also called "pledge".

To be effective against third parties, it is not necessary that the pledge be published in the Register of Personal and Movable Real Rights. The pledge is constituted by the physical delivery of the property or title to the creditor or, if the property is already in the hands of the creditor, by the maintenance of the physical possession, the consent of the grantor, in order to guarantee his claim 3 . It is therefore appropriate to say that the physical delivery of the property to the creditor and the continued detention by it enough to ensure publicity and the pledge against third parties 4 .

We note, however, that there is uncertainty surrounding the pledge of intangible property under section 2702 of the CCQ since it was amended in 2009. This section now requires the "physical" surrender of the property encumbered by a mortgage. movable property with delivery. Since a debt security is an intangible asset, can it be the object of a physical discount? The Court of Appeal noted this uncertainty in 2014 in the Basille 5 case , stating that some authors believe that since the amendment to section 2702 of the CCQ in 2009, the pledge concerning a sum of money would not be possible, given the intangible nature of money 6 . However, it applies the judgment Brouillette-Paradis 7, a case of substitution of security by the deposit in the registry of a sum of money, in which the Court of Appeal accepted that "  the judicial offer to assign as security the title of debt relating to the sum recorded in The substitution of a legal hypothec actually involves the constitution of a movable hypothec with delivery in favor of the holder of the legal hypothec " 8 .

Considering the foregoing, if the deposit granted to the lessor constitutes a pledge, it is not opposable to the trustee of the lessee who has placed himself under the protection of the BIA. This is what was decided by the Superior Court in the case Expleo Global 9 , in which the lessor pursued the trustee for the occupation rent. In his contestation, the trustee admitted that he owed the rent of occupation, but demanded repayment of a larger sum representing a deposit which lessor had received from the tenant and which, according to the trustee, constituted a pledge. As part of its analysis to characterize the amount remitted to the lessor, the Court takes into account:

  • a certified check has been issued to the lessor to replace the irrevocable and unconditional letter of credit provided for in the lease to ensure that the lessee fulfills its obligations;
  • that several documents in the file, some from the lessor itself, refer to this sum as a deposit or "security deposit";
  • on the date of the bankruptcy, the lessor had not yet applied the deposit to the sums due by the tenant; and
  • moreover, no notice of exercise had been served by the lessor for the realization of the security deposit before the bankruptcy.

Considering this evidence, the Court is of the opinion that the sum remitted can only constitute a movable hypothec with delivery, even if this guarantee is of less value than an irrevocable letter of credit. It adds that it can not be here prepaid rent. Thus, the deposit constituting the guarantee is not opposable to the trustee since the lessor did not prevail before the bankruptcy. The Court therefore finds that the deposit must be returned to the trustee for the benefit of the creditors.

On the other hand, if the deposit is equivalent to prepaid rent payments, it will be opposable to the trustee and the lessor may keep it.

In order to determine the nature of the deposit, the court must seek the intention of the parties to the commercial lease, taking into account the circumstances in which the lease was concluded, the interpretation that the parties have already given it, as well as other clauses of the lease 10 . Thus, particular attention must be paid to the terms of the deposit clause, to the other clauses of the lease that refer to this deposit clause, as well as to the behavior of the parties, as the case may be.

In the Ébénisterie Renouveau 11 case , the Superior Court, bankruptcy division, had to interpret a "security deposit" clause, while the lessor claimed rent from the trustee for his occupation of the leased premises following the tenant's bankruptcy. and that the trustee disputed the claim, alleging compensation between the rents of occupation and the deposit as collateral which was, according to the trustee, to be remitted to him for the benefit of the mass of creditors.

The Court concluded that the parties to the lease had intended to make a non-refundable deposit to be applied on future rent or on any amount owed by the defaulting tenant, despite the fact that the clause was entitled "deposit guarantee. The main criterion on which the Court relied is the non-refundable nature of the deposit. It was in fact a partial prepayment of rent which became the property of the lessor upon payment in May 2005, well before the bankruptcy.

More recently, in Alignvest 12The Court of Queen's Bench of Alberta had to decide whether the lessor was to give the trustee the equivalent of the deposit that had been given to him by the bankrupt tenant, at the request of the Alignvest secured creditor. The clause referred to both a security deposit and a "rent credit", which can be applied to rent only if the tenant is not otherwise in default. Although the clause contains some indication of the intention to treat the amount paid as prepaid rent, the Court concludes rather that it constitutes a security deposit, provided that the amount is held by the lessor as security for the Tenant's performance of its obligations under the lease. The Alberta Court of Appeal upheld the first-instance decision on the qualification of the deposit.

Considering the foregoing decisions and to ensure that the sum remitted to the landlord by the tenant at the signing of the commercial lease can not be considered as a movable hypothec with dispossession and is opposable to the trustee in case of bankruptcy, proposal or notice of the lessee's intention under the BIA, there will be a general requirement that the lease  :

  • that the amount remitted constitutes prepaid rent which becomes the property of the lessor at the time of its delivery to the signature of the lease;
  • the amount will not be refundable in any case to the tenant; And this,
  • without using the terms "security deposit" or "security deposit" or refer to the deposit as security in the event of the tenant's breach of its obligations under the lease.

All in all, there are two opposing concepts: the deposit as collateral and the prepayment of rent. In the event of a dispute, all will be a matter of interpretation of the lease and the clause in question, taking into account the intention of the parties.