CCAA Debtor Must Pay Post-Filing Rent for the “Use” of Leased Premises

Since the beginning of the COVID-19 pandemic, insolvent companies have sought court intervention relating to the payment of rent during lockdown periods. In the most recent decision on this issue, the Quebec Superior Court (Court) ruled that a debtor undergoing a restructuring under the Companies’ Creditors Arrangement Act (Canada) (CCAA) should not be relieved of its obligation to pay post-filing rent, even in circumstances where its ability to use the leased premises is constrained by governmental orders.

In the restructuring proceedings of Groupe Dynamite Inc. (Dynamite), Justice Kalichman found that a declaration that no post-filing rent would be due and payable for leased premises in the event of a government-ordered lockdown violated the CCAA which provides that no order can be made prohibiting a person from requiring immediate payment for the supply of goods or services or the “use of leased property” to a CCAA debtor.

In reaching the conclusion that the Court did not have discretion to relieve the debtor from payment of post-filing rent, the Court relied on the objective of the CCAA, focusing specifically on the meaning of “use of leased property” included therein.

BACKGROUND

Dynamite — a Quebec-based fashion retailer that operates 322 retail stores in Canada and the U.S. under the brands Garage and Dynamite — and certain of its U.S. affiliates obtained CCAA protection on September 8, 2020.

Since then, Dynamite has sent disclaimer notices regarding certain of its leases in accordance with the CCAA. Dynamite has either renegotiated or is in the process of renegotiating its other leases. Among the leases that Dynamite did not disclaim were leases for Manitoba and Ontario stores for which Dynamite was seeking to be relieved of the obligation to pay post-filing rent where its ability to use the leased premises was impeded by government decree in connection with COVID-19.

DECISION

Despite acknowledging that Dynamite’s ability to operate the Manitoba and Ontario stores was severely limited by the provincial orders in place, the Court rejected Dynamite’s position that “use” of property within the meaning of the CCAA must necessarily involve carrying on the activity for which the property was leased. Canadian courts have recognized that the mere possession or occupation of leased property can constitute “use” within the meaning of the CCAA.

While it is precedent-setting, the Dynamite judgment is not the first time a Court has interpreted the obligation to pay post-filing rent under the CCAA in the context of COVID-19. Justice Kalichman relied on the Supreme Court of British Columbia’s decision in the Quest University proceedings, in which Justice Fitzpatrick refused the debtors’ request to defer post-filing rent due for its student residences notwithstanding that its ability to use the leased property was limited by government decree.

Justice Kalichman determined that Dynamite’s choice not to disclaim the Manitoba and Ontario leases shows that these stores are an integral part of its restructuring and are therefore not meant to be surrendered. According to the Court, that is enough to trigger the application of the CCAA and the landlords cannot be prevented from demanding immediate payment of rent.

Finally, Justice Kalichman added in obiter that, even if the Court had the discretion to issue the order sought by Dynamite, it would refuse to do so because it is commonly considered “fair” that a person allowing an insolvent debtor to continue using its property during the restructuring should be compensated for that use. In other words, even though Dynamite’s financial situation would be improved if it was relieved from its obligation to pay post-filing rent, this would be achieved in a manner that is unfair to the landlords, which would not strike the balance sought when advancing the remedial purpose of the CCAA.

CONCLUSION

This decision sends a clear message to Canadian retailers under CCAA protection that rent is due and payable for the post-filing “use” of leased premises even during government-ordered closures. Lease disclaimers should be issued if retailers wish to bring their payment obligations under their leases to an end.

For further information, please contact:

Sébastien Guy                                     514-982-4020
Géraldine Côté-Hébert                        514-982-5042

or any other member of our Restructuring & Insolvency group.