Leasing Bulletin: Good News For Landlords - Letter Of Credit Draws Are Not Limited To A Landlord's Preferred Claim Under The BIA

• Published date: 01 November 2020
• Subject Matter: Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Landlord & Tenant - Leases
• Law Firm: Minden Gross LLP
• Author: Mr Stephen Posen, Catherine Francis, Ian Cantor, Michael S. Horowitz, Christina Kobi, Boris W. Zayachkowski, Benjamin T. Radcliffe, Melodie D. Eng, Steven Birken and Leonidas Mylonopoulos

On October 28, 2020, the Ontario Court of Appeal released its decision in 7636156 Canada Inc. (Re), 2020 ONCA 681 ("OMERS"), on appeal from the decision of the Ontario Superior Court of Justice in 7636156 Canada Inc. v. OMERS Realty Corporation, 2019 ONSC 6106. The case held that the landlord was entitled to draw on the full amount of a letter of credit obtained under its lease with an insolvent tenant instead of just the preferred claim equal to three months' worth of accelerated rent under the insolvency laws.

Background

Law

Upon a tenant's assignment in bankruptcy, a trustee in bankruptcy has the power to disclaim any lease of property (see Bankruptcy and Insolvency Act, s. 30(1)(k) ("BIA") and Commercial Tenancies Act, R.S.O. 1990, c. L.7, s. 39(1)).

Following a tenant's assignment in bankruptcy, the landlord is entitled to a preferred claim for three months' worth of accelerated rent under s. 136(1)(f) of the BIA if such accelerated rent is provided under the lease.

An important legal principle pertains to the autonomy of documentary letters of credit. An issuing bank is obliged to honour a draw or other demand for payment under a letter of credit ("LOC") upon compliance with the conditions specified in the LOC. A fundamental characteristic of such securities is the autonomy from the underlying transaction between the applicant and the beneficiary.

Facts

OMERS Realty Corporation ("Landlord") leased its property to 7636156 Canada Inc. ("Tenant") for a term of 10 years, commencing on May 1, 2014, and expiring on the last day of April 2024 (the "Lease"). In May 2018, the Tenant made an assignment in bankruptcy and in July 2018, the Trustee disclaimed the lease.

Schedule C of the Lease required the Tenant to arrange for a LOC in favour of the Landlord as beneficiary. The Lease stipulated that the LOC stood as security in the event of the Tenant's bankruptcy. The LOC was issued by Bank of Nova Scotia for $2.5 million and was backed by cash collateral supplied by or on behalf of the Tenant. Per its rights under the Lease, the Landlord made draws on the LOC after bankruptcy, before and after the Trustee disclaimed the Lease, to the full amount of the LOC, $2.5 million. The Trustee moved for a determination of the total amount that the Landlord was entitled to draw on the LOC.

Lower Court Decision

The Trustee's Motion - Ontario Superior Court of Justice

The motions judge found in favour of the Trustee and rejected the Landlord's submission that it was...