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COMMERCIAL TENANCIES - Contractual remedies - Recovery of losses from third parties

Wednesday, December 02, 2020 @ 6:04 AM  


Lexis Advance® Quicklaw®
Appeal by the landlord from a decision of a motions judge limiting the landlord’s entitlement to draw on a letter of credit posted as security by the commercial tenant after the disclaimer of the lease by the tenant’s trustee in bankruptcy. The landlord made draws on the letter of credit after the tenant’s bankruptcy, both before and after the trustee’s disclaimer of the lease, for the full amount of the credit of $2.5 million. On a motion brought by the Trustee, the motion judge determined that the landlord was only entitled to draw on the letter of credit to recover the amount of its preferred claim for three months’ accelerated rent under s. 136(1)(f) of the Bankruptcy and Insolvency Act. In the alternative, the motion judge concluded that, in accordance with the terms of the lease, the letter of credit should have been reduced to $1.35 million in May 2017, just under a year prior to the date of bankruptcy, based on his interpretation of the letter of credit reduction provisions in the lease, with the landlord’s draws limited to the reduced amount. The lease provided the letter of credit could be reduced in the 37th month if the tenant had always promptly paid all rent through the Term. The tenant failed to pay rent twice on the due date prior to May 2017. The motion judge interpreted prompt to mean within a reasonable time.

HELD: Appeal allowed. Despite the Trustee’s disclaimer of the lease, the landlord was entitled to draw on the full amount of the letter of credit. The bank treated the landlord’s drafts on the letter of credit as complying presentations, thereby triggering its obligation to pay. The landlord’s conduct in drawing on the letter of credit did not engage the fraud exception to the principle of the autonomy of letters of credit. In the lease, the parties agreed that the letter of credit would continue to stand as security in the event the tenant became bankrupt and the lease was disclaimed in the bankruptcy proceeding. The terms of the lease and letter of credit clearly gave the landlord the right to draw on the letter of credit for losses arising from the disclaimer of the lease in the tenant’s bankruptcy proceeding. There was no evidence that the landlord acted with impropriety, dishonesty, or deceit. Under the legal principles governing letters of credit, the landlord was entitled to draw on the letter of credit to the amount available. The principles of insolvency law did not override the autonomy of letters of credit to limit the right of a landlord to draw on a letter of credit to a claim for three months’ accelerated rent. The motion judge also erred in interpreting the lease to require a reduction of the amount of letter of credit in May 2017. The tenant did not satisfy the pre-conditions for a reduction in the value of the letter of credit under the lease. The motion judge did not consider several provisions of the lease that were relevant to the interpretation of the word promptly and did not support the motion judge’s interpretation of the word promptly to mean within a reasonable time rather than on the actual date the rent was due. When considering the whole lease, promptly meant payment of rent when due. As the tenant failed to pay rent when due on two occasions, the pre-conditions for a reduction in the value of the letter of credit were not met.

7636156 Canada Inc. (Re), [2020] O.J. No. 4627, Ontario Court of Appeal, D.M. Brown, D. Paciocco and I.V.B. Nordheimer JJ.A., October 28, 2020. Digest No. TLD-November302020005