On October 26, 2010, the British Columbia Court of Appeal (the Court) released its decision in Canadian Petcetera Limited Partnership v. 2876 R Holdings Ltd., 2010 BCCA 469 (Petcetera), an important case that addresses the rights of landlords when a tenant has filed a Notice of Intention to make a proposal (NOI) under the Bankruptcy and Insolvency Act (the BIA). In its decision, the Court interprets sections 65.1 and 69(1) of the BIA and concludes that these provisions do not prevent a landlord from terminating a lease for non-payment of rent due after the filing of an NOI.
Section 69(1) of the BIA stays creditors from pursuing a remedy or proceeding against a creditor for the recovery of a “claim provable in bankruptcy” once an NOI has been filed. Where the debtor is a tenant, section 65.1 of the BIA prevents the landlord from terminating the lease “by reason only” that the tenant has not paid rent in respect of the period proceeding the filing of the NOI. The Court explains that the purpose of these provisions is to maintain the status quo among creditors at the time of the filing of an NOI and preserve the debtor’s assets during the reorganization process. The Court then proceeds to interpret these provisions in context, in harmony with their purpose, and in their grammatical and ordinary sense.
The Court finds that the language of section 65.1 prevents the termination of a lease in cases where the only default giving rise to the entitlement to terminate is non-payment of rent in respect of the period preceding the filing of the NOI. However, it does not preclude a landlord from terminating a lease for defaults in payment of rent occurring after the date of filing. Similarly, the Court notes that the stay in s.69(1) is limited to remedies for the recovery of “claims provable in bankruptcy.” Therefore, it does not apply to the termination of leases since, while the termination of a lease is an exercise of a remedy, it is not the exercise of a remedy for the recovery of a claim provable in bankruptcy.
The Court’s analysis strongly suggests that other non-financial defaults occurring before or after the date of filing of an NOI will entitle the landlord to terminate the lease and will not be caught by the stays in sections 65.1 and 69(1) of the BIA. The section 65.1 stay seems limited to cases where the landlord wishes to terminate exclusively on the basis of rent arrears at the time of the filing of the NOI. Similarly, the stay in section 69(1) seems to exclude non-financial defaults such as assigning or subletting without leave, changing the use of the premises or breaching a restrictive covenant (among other covenants), since none of these defaults would give rise to a “claim provable in bankruptcy.”
The Court’s decision in this case is significant since it clarifies the scope of the stays set out in sections 65.1 and 69(1) of the BIA, and confirms that in certain circumstances, landlords will retain the right to terminate leases after an NOI has been filed. However, it is important to note that the principles set out in this case are very broad. Any landlord planning to terminate a lease should carefully review the specific provisions of the lease since any steps taken to enforce rights must comply with the provisions of the lease.