When a tenant goes bankrupt, the treatment of a security deposit paid under a commercial lease depends in particular on the nature of the deposit, the lease provisions, the secured obligations and the applicable bankruptcy and insolvency rules.
The landlord cannot necessarily retain or automatically apply the entire security deposit to the amounts owed. It must be determined whether the deposit constitutes a sum held as security, an advance payment of rent, or another form of security.
The landlord's rights may also depend on the terms of the lease, the date on which the obligations became due, and the rights of the trustee or other creditors in the bankruptcy proceedings.
When the tenant's obligations are guaranteed by a surety bond from a shareholder, manager, or third party, the tenant's bankruptcy does not necessarily release the surety from their obligations.
The guarantor's liability depends in particular on:
The tenant's bankruptcy may also have consequences for other guarantees given to the landlord, including a bank guarantee or a security interest in certain of the tenant's assets.
The provisions of the Civil Code of Quebec relating to suretyship must be examined in conjunction with those of the Bankruptcy and Insolvency Act , in particular to determine the rights of the lessor with respect to a surety or guarantee.
It is therefore important to check the lease provisions, the nature of the guarantees given and the rules applicable to bankruptcy proceedings before determining whether the landlord can keep a security deposit or take action against a surety.