Is a tenant bound to pay rent for the period during the restructuring for which it cannot use the premises as a result of a COVID-19 lockdown order?
In the matter of the Companies’ Creditors Arrangement Act (the “CCAA”) of North American retailer Groupe Dynamite, Justice Kalichman of the Superior Court of Québec rendered a judgment on the obligation of a debtor to pay post-filing rent in a context where it cannot use leased premises as a result of COVID-19 government decrees. Based on subsection 11.01(a) of the CCAA, the Court held that the debtors are under no obligation to pay such rent during any lockdown period during which they cannot use the leased premises.
Background: Groupe Dynamite can’t use leased premises as the results of COVID-19 government decrees
Groupe Dynamite, a Montreal-based fashion retailer operating over 300 stores across North America, including 86 in the United States, has obtained an initial order under the CCAA to restructure its operations and present a compromise or arrangement to its creditors. Since the beginning of the proceedings, four of its stores are located in leased premises in shopping malls that are shuttered as a result of government decrees. Groupe Dynamite asked the Superior Court of Québec to declare that it was not obliged to pay post-filing rent in respect of those stores.
The stay of proceedings and its exception regarding the use of leased property
Justice Kalichman had to interpret to scope of the stay of proceedings and one of its exception provided for at subsection 11.01(a) of the CCAA. The governing principle is that the CCAA includes a broad range of claims to ensure fairness between creditors and finality in the insolvency proceeding for the debtor, as the Supreme Court of Canada expressed in Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67. During insolvency proceedings, those claims are stayed to promote the reorganization and restructuring of the debtor, and preserving the debtor’s assets for the benefit of all of the creditors and other stakeholders.
Subsection 11.01(a) of the CCAA provides for an exception to the broad stay of proceedings concerning claims for valuable consideration provided to the debtor after the initial order, known as “post-filing claims”. According to the provision, no stay order has the effect of “prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made”. This exception counterbalances the obligation of suppliers to continue to supply an insolvent business during its restructuring and is part of the diligent conduct expected of CCAA debtors. According to the Court, subsection 11.01(a) of the CCAA is however “to be narrowly interpreted” as it is an exception to a stay order.
Justice Kalichman noted that leased property does not in itself give rise to a post-filing claim. There must be “use of leased […] property”, as it was previously held in Smith Brothers Contracting Ltd, Re (1998), 53 BCLR (3d) 264 (SC) at para 19. Given that the four leased premises at issue were all located in shopping malls that are shuttered as a result of government decrees in connection with COVID-19, the Court found that Groupe Dynamite made no use of the leased property. The Court consequently declared that no post-filing rent was due or payable with respect to those leased premises for the lockdown period.
Re Groupe Dynamite Inc (18 September 2020), Que SC, Montréal 500-11-058763-208