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COVID and rent: Can debtor be relieved of obligation?

Monday, January 18, 2021 @ 2:24 PM | By Daniel Urbas

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Daniel Urbas
In Groupe Dynamite Inc. v. Deloitte Restructuring Inc. 2021 QCCS 3, Justice Peter Kalichman held he lacked authority under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (CCAA) to relieve a debtor from paying rent for retail premises which the debtor had not disclaimed but had been subsequently ordered closed by COVID-19 related government decree.

Groupe Dynamite Inc. operates retail stores in Canada and the U.S. under the “Dynamite” and “Garage” banners. Impacted by COVID-19 and following related government restrictions, Groupe Dynamite and its U.S. affiliates (Dynamite) applied under the CCAA for orders enabling it to pursue restructuring. Justice Kalichman had issued an initial order on Sep. 8, 2020, and an amended and restated initial order (ARIO) on Sept. 18, 2020. See the annex to Groupe Dynamite Inc. v. Deloitte Restructuring Inc., 2020 QCCS 3086 for the ARIO’s full text.

Dynamite sent disclaimer notices in regard to leases, following which Dynamite sought then to renegotiate certain of them. In November 2020, the governments of Manitoba and Ontario issued orders closing non-essential business to the public in their respective jurisdictions as part of their COVID-19 measures (COVID Restrictions), affecting three stores in Manitoba and nine in Ontario (Premises).

Dynamite applied under s. 11 of the CCAA to modify the ARIO. Dynamite argued that it was not “using” the Premises for the period in which the COVID Restrictions have effect and that rent due post-filing its CCAA proceedings was neither due nor payable. The Premises’ landlords (Landlords) contested.

Section 11 authorizes a court on application and with notice to other persons to “make any order that it considers appropriate in the circumstances.” Section 11.001 limits the scope of such orders to “relief that is reasonably necessary for the continued operations of the debtor company in the ordinary course of the business during that period,” while s. 11.01(a) provides that such orders cannot have the effect of prohibiting landlords from requiring immediate payment for use of leased property.

Justice Kalichman recorded the parties’ acknowledgement that a court cannot circumvent s. 11.01(a) and he identified the key issue as turning on the interpretation to be given to “use of leased premises” in the ARIO. The judge outlined Dynamite’s arguments at paras 15-30 and the Landlords’ at paras 31-36.

Dynamite argued that its “use” of the Premises included providing a “personal shopping experience” and served the broader purpose of marketing. The COVID Restrictions affected both components, limiting consumers to the “unappealing” option of “buy online, pickup in store.” Despite being located in malls still open in part, the limited use of the Premises was not the purpose for which Dynamite leased them.

The Landlords submitted that, as long as the leases were in effect and not disclaimed, Dynamite occupying the leases qualified as “using” the Premises.

Justice Kalichman held that granting Dynamite’s application would violate the prohibition in s. 11.01(a) and that he lacked the authority to do so.

“[38] While extraordinary circumstances, such as those at issue here, may be a factor for the Court to consider in deciding whether or not to exercise its discretion, they are not a factor in determining whether or not it has such discretion. For that, the Court must interpret section 11.01 (a) of the CCAA and its interpretation must apply in all circumstances, extraordinary or not.”

He disagreed that “that for a debtor to be making ‘use’ of property within the meaning of section 11.01 (a) of the CCAA, it must necessarily be carrying on the activity for which the property was leased.”

Dynamite had not disclaimed the Premises, thereby asserting its right to “sole possession,” its appreciation of their importance to its restructuring efforts and its unwillingness to surrender them. Despite acknowledging that the COVID Restrictions “severely limited” Dynamite’s ability to operate the Premises, Justice Kalichman held that Dynamite “is still using those premises within the meaning of the CCAA and the ARIO.”

The judge acknowledged that s. 11.01(a) should be “narrowly construed,” referring to Sproule v. Nortel Networks Corporation 2009 ONCA 833 but also that section 11.01(a) was also “clearly drafted.” Relying on the recent Quest University Canada (Re) 2020 BCSC 921, he added that s. 11.01(a) is intended to protect the Landlords as post-filing suppliers and to counterbalance Dynamite’s rights. “In this light, it is clear that where leased premises are occupied by a debtor and cannot be leased to anyone else, the landlord is not prevented from demanding immediate payment of rent regardless of whether or not the debtor is carrying on business.”

In apparent obiter, Justice Kalichman commented on whether the Landlords could claim the rent under the terms of the leases.

“While such an analysis may not be strictly necessary to rule on the application, the Court agrees with the Landlords that under the terms of the leases, Dynamite is not relieved of the obligation to pay rent even if a government regulation or a situation of force majeure prevents one of the parties from fulfilling its obligations.”

Justice Kalichman also added that, if he had the jurisdiction to issue the order sought by Dynamite, he would refuse to do so. See paras 53-58.

Daniel Urbas is an arbitrator at Urbas Arbitral in Montreal, focusing on international and domestic commercial arbitration. With 25 years of dispute resolution experience, he has handled trial and appellate advocacy, as well as urgent and extraordinary applications, appearing before the provincial and federal courts, including the Supreme Court of Canada. He is a member of the bars of Quebec, Ontario, British Columbia and Newfoundland and Labrador.

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