When a tenant becomes insolvent or goes bankrupt, the consequences on their commercial lease depend in particular on their financial situation, the applicable insolvency procedure, the provisions of the lease and the rules provided for by federal and Quebec legislation.
The tenant's bankruptcy or insolvency does not necessarily lead to the automatic termination of a commercial lease. It is important to distinguish between bankruptcy, a proposal for a composition agreement, and a restructuring, as the rights and obligations of the parties may vary depending on the applicable procedure.
When a tenant becomes insolvent or goes bankrupt, several questions may arise:
In bankruptcy proceedings, the trustee may be called upon to make certain decisions regarding the rights and obligations related to the commercial lease. However, the possibilities for termination or assignment of the lease must be examined in accordance with the applicable procedure and relevant legal rules.
The landlord may, in particular, hold a claim for unpaid rent. However, their recovery rights, the priority of certain claims, and the possibility of exercising remedies may be limited or regulated by federal insolvency legislation.
In certain restructuring proceedings, federal law may also prevent a party from terminating a contract solely due to the debtor's insolvency or the commencement of proceedings. Applicable conditions and exceptions should be reviewed.
The lease may contain clauses concerning the tenant's bankruptcy, insolvency, or defaults. However, these clauses must be interpreted in light of the applicable mandatory rules, including those of the Bankruptcy and Insolvency Act and, where that Act applies, the Companies' Creditors Arrangement Act .
It is therefore important to verify the nature of the insolvency proceedings, the lease provisions and the rights granted to the various parties before determining whether the lease can be maintained, assigned or terminated and what remedies can be exercised.