Where a tenant becomes insolvent, landlords are often faced with a courtappointed Receiver inserted in place of the insolvent debtor who wishes to operate the tenant’s business or conduct a sale of assets on site. While the landlord may be able to successfully negotiate payment of occupation rent, a common issue that arises is who is responsible for any damages to the leased premises? A recent decision of the Ontario Court of Appeal in General Motors Corporation v. Tiercon Industries Inc.1 has answered that question by confirming the limited occupation obligations of a Receiver to the debtor company’s landlord.
The context of the case was a receivership where the court-appointed Receiver operated the manufacturing business of the debtor for approximately 6 months and, following the operational phase, the Receiver conducted a sale and asset removal process with respect to equipment located at the debtor’s leased premises.
In Tiercon2, the Court confirmed the following aspects of a Receiver’s limited liability to a landlord in such circumstances:
- For a Receiver occupying a leased premises, the Receiver does not assume the debtor’s obligations but, instead, is in place for a limited period of time as an officer of the court to take possession of and secure assets, and to assist with the exercise of stakeholders’ rights including asset liquidation.
- The Receiver pays rent only for its actual occupation and use of the property. The usual measure of occupation rent is the lease, unless it can be shown that the lease does not represent market rent. Examples of leases where rent may not represent market rent include leases where lengthy rent-free periods may distort the later rent amounts.
- The Receiver does not pay rent (including tax or other obligations of the tenant) for the period before it occupies the premises or after it ceases occupying the premises. Payment of such claims are subject to the relative priorities of all of the creditors of the debtor’s estate.
- If a Receiver damages the leased premises while in occupation, it may be liable for such damages. However, it is not responsible for damage done by the debtor prior to the Receiver’s occupation of the premises, or for obligations which arise after it occupies.
- The Receiver is not responsible for the end of term obligations of the tenant.
- Where a Receiver elects to remove fixtures, then, in Tiercon, it was found that the Receiver would be responsible for the restoration obligation under the terms of the lease. However, in Tiercon, the claims officer found (and the Courts upheld on appeal) that all of the assets sold and removed were chattels (and not fixtures). As a result, the Receiver was only responsible for the repair costs as opposed to restoration costs.
Although landlord disputes in such situations are common, the resolution of these disputes will be dependent upon the specific circumstances. Fortunately, the Tiercon decision provides receivers and landlords with a helpful framework which they can use to work through these types of issues.