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
• 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...