Retail landlords may have a powerful statutory remedy against defaulting retail tenants who sell all or substantially all of their goods and merchandise.
The Ontario Bulk Sales Act (BSA) applies to the sale of all (or substantially all) of the “stock”1 (goods, wares, merchandise or chattels) of a business out of the usual course of business of the trade or the seller. As articulated by the Supreme Court of Canada in National Trust Co. v. H&R Block Canada Inc.2, the BSA’s primary purpose is to protect the interests of all creditors, secured and unsecured, where a debtor disposes of its assets outside the ordinary course of business.
What is a bulk sale?
Not every sale of goods constitutes a bulk sale for the purposes of the BSA. First, the sale must be for all (or substantially all) of the vendor’s stock, and must be outside of the vendor’s ordinary course of business. For example, if a retail clothing store sells its entire supply of sweaters, then no bulk sale has necessarily been conducted for the purposes of the BSA, because the retailer sells sweaters as part of its ordinary business. If, however, the retail clothing store sells all (or mostly all) of the equipment, cash registers, racks and hangers from its store, that sale may be considered a bulk sale.
When a vendor and purchaser wish to complete a bulk sale, the BSA requires the purchaser to obtain a court order or written consent of the vendor’s creditors prior to purchasing the assets. Ontario courts typically take a dim view of parties who do not comply with the BSA when transacting a bulk sale of assets. The Court has acknowledged the difficulty for modern commercial trade posed by the BSA, and has a wide discretion in terms of whether to void a bulk sale. While the BSA is not intended to be punitive, it is generally viewed by the business community as an unnecessary formality, or an added and baseless transaction cost in the sale of goods between two parties.
Consequences for failure to comply
Failure to comply, intentionally or unintentionally, with the BSA is largely the purchaser’s problem. If no notice to the vendor’s creditors is given or court approval is not sought and obtained, the vendor’s creditors may apply to the court to void or unwind the purchase transaction, or seek to have amounts owed to it paid for by the purchaser personally.3
The BSA has no mechanism for the parties to waive compliance, as the creditors of a vendor would have no seat at the table in a negotiation for the sale to a buyer. Commonly, vendors and purchasers will agree to an indemnity as part of the sale, such that if any of the vendor’s creditors take issue with the sale, the purchaser will bear the risk going forward.
For the purposes of the BSA,4 a landlord is a secured trade creditor, thereby allowing a landlord to leverage the BSA if a tenant sells its equipment, goods, inventory or other assets, and defaults on its rent (usually while simultaneously departing the premises). If the landlord did not receive notice of the sale and a court order was not obtained (which often is not), the landlord can commence proceedings for accounting of the value of the goods purchased and personal judgment against the buyer for debts owed by the vendor tenant under the lease.5 While the vendor tenant may be cash and/or asset poor, the purchaser is a healthier prospect from which the landlord may recover.
Before a landlord can seek any remedy against the tenant or purchaser, it must learn of a sale of all (or substantially all) of the tenant’s stock. Landlords should consider the following proactive measures to be well-positioned to satisfy the monies it is owed:
- Request that property management alert the landlord of any suspicious movement of items from the tenant’s premises;
- Review any bankruptcy or CCAA protection notices issued in respect of tenants; and
- Monitor auction postings and any online marketplaces (such as Kijiji) for the sale of the tenant’s stock.
If a landlord believes it has a remedy under the BSA, it may commence an action without delay. In Novacrete Construction Ltd. v. Profile Building Supplies Inc.6, a tenant transferred all of its inventory and assets to a new corporation, notwithstanding amounts owed to its creditors, including the landlord. The landlord sought a remedy under the BSA to void the transaction and for repayment of the amount placed “out of the reach” of the landlord. While the Court did not rule on whether a bulk sale was a legitimate claim, as the landlord waited six years after its action commenced to seek such relief.