Canada: CCAA Court Decides Tenant Still "using" Leased Premises Despite COVID-19 Lockdowns

After a series of court cases in Quebec relating to the payment of rent in light of government-imposed restrictions resulting from the COVID-19 pandemic (COVID restrictions), the Superior Court of Québec rendered a decision of interest on January 5 in the context of the restructuring proceedings commenced by Groupe Dynamite Inc. and certain affiliates under the Companies' Creditors Arrangement Act (CCAA). 

Background 

Dynamite, a clothing retailer with over 300 stores in Canada and the US, is pursuing a plan of arrangement under the CCAA. Pursuant to the initial order governing the proceedings and the CCAA, Dynamite is generally required to make immediate payment for leased premises it is using during the restructuring process. 

In November 2020, COVID restrictions were implemented in Manitoba and Ontario that affected certain of Dynamite's retail locations in those provinces (the affected stores). Dynamite then sought to amend the initial order to include a declaration it was not using the affected stores and no rent was due or payable for them as long as the COVID restrictions remained in force. Dynamite's application was contested by the landlords of the affected stores (the landlords), which resulted in a debate before the court, centered around whether Dynamite was making "use" of the affected stores within the meaning of the CCAA. 

Positions of the parties

Dynamite argued that "use" requires more than an existing lease or mere occupation of leased premises. Rather, to be using the affected stores, Dynamite has to be enjoying the economic benefit it bargained for, namely access to retail locations in first-class shopping centers that generated significant revenue. As this type of "use" of the affected stores was prevented by the applicable COVID restrictions, Dynamite submitted that the court should exercise its broad discretion under section 11 CCAA to effectively relieve it of its obligation to pay rent during the lockdown period. 

The landlords argued that, since the leases were "true leases" that had not been disclaimed by Dynamite and the latter continues to occupy and enjoy limited access to the affected stores, such premises are being used within the meaning of the CCAA. The landlords therefore submitted that the court was precluded from granting the relief sought by, inter alia, section 11.01 (a) CCAA and added that even if the court was empowered to grant such relief, it should decline to do so in the circumstances of this case. 

Decision

Justice Kalichman retained the landlords' position, holding that the requested amendments to the initial order would violate the prohibition set out at section 11.01 (a) CCAA. In his view, the "use" of a leased premises under the CCAA does not necessarily require that the tenant be "carrying on the activity for which the property was leased." In the circumstances, he concluded Dynamite was indeed using the affected stores within the meaning of the initial order and the CCAA, notwithstanding that its ability to operate at those locations was limited by the COVID restrictions. 

The court considered that Dynamite had chosen not to disclaim the leases relating to the affected stores, that the company was asserting its right of "sole possession" of such premises and that section 11.01 (a) was intended to protect suppliers in CCAA proceedings. It also referred to various CCAA decisions, including a recent BC case decided in the context of the pandemic (Quest University), where it was recognized that mere possession or occupation of leased property can constitute use within the meaning of section 11 CCAA. 

Justice Kalichman determined his conclusion was not inconsistent with previous orders rendered in the CCAA proceedings. In that regard, he found the express inclusion of the term "use" in certain provisions of the initial order simply reflected CCAA requirements and that an earlier decision where he granted relief similar to that now sought by Dynamite for certain premises in California was not binding upon him and could be distinguished.  

Ultimately, the court decided that, given the application of section 11.01 (a) CCAA, it lacked the power to render the order sought by Dynamite and to prevent the landlords from requiring immediate payment of rent for the affected stores. The court further noted that, even if it were empowered to grant the relief sought, it would have refused to do so because, while such relief would strengthen Dynamite's financial position, "It would achieve that result in a manner that is unfair to the Landlords." 

As the pandemic continues to accelerate in many parts of the country and the number of leased premises affected by COVID restrictions continues to rise, this decision will likely interest many legal professionals, particularly those specializing in commercial real estate and insolvency. 

While Justice Kalichman noted in his decision that analyzing the landlords' right to claim rent under the applicable leases may not be strictly necessary to adjudicate the application before him, he agreed with the landlords that, under the terms of such leases, "Dynamite is not relieved of the obligation to pay rent even if a government regulation or situation of force majeure prevents one of the parties from fulfilling its obligations." It will be interesting to see how much weight this statement, made in obiter, will have upon future decisions made regarding the non-payment of rent due to COVID restrictions.

Norton Rose Fulbright represents the court-appointed monitor in the Dynamite's proceedings under the CCAA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.