Crystalline Investments Ltd. v. Domgroup Ltd., (2004) 316 N.R. 1 (SCC)

• Judge: McLachlin, C.J.C., Iacobucci, Major, Binnie, LeBel, Deschamps and Fish, JJ.
• Court: Supreme Court (Canada)
• Case Date: November 07, 2003
• Jurisdiction: Canada (Federal)
• Citations: (2004), 316 N.R. 1 (SCC);2004 SCC 3;46 CBR (4th) 35;43 BLR (3d) 1;JE 2004-335;128 ACWS (3d) 380;[2004] SCJ No 3 (QL);316 NR 1;70 OR (3d) 254;234 DLR (4th) 513;[2004] 1 SCR 60;16 RPR (4th) 1;184 OAC 33

Crystalline Inv. Ltd. v. Domgroup Ltd. (2004), 316 N.R. 1 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2004] N.R. TBEd. JA.032

Domgroup Limited (appellant) v. Crystalline Investments Limited and Burnac Leaseholds Limited (respondents)

(29196; 2004 SCC 3; 2004 CSC 3)

Indexed As: Crystalline Investments Ltd. v. Domgroup Ltd.

Supreme Court of Canada

McLachlin, C.J.C., Iacobucci, Major, Binnie, LeBel, Deschamps and Fish, JJ.

January 29, 2004.

Summary:

A tenant assigned two commercial leases. The assignee went bankrupt. The trustee in bankruptcy delivered notices of repudiation to the landlords pursuant to s. 65.2 of the Bankruptcy and Insolvency Act. The land­lords received and accepted payment respect­ing the compensation payable under s. 65.2(3). The landlords each sued the original tenant, alleging that it was in default of the leases. The tenant moved for summary judg­ment in both actions.

The Ontario Supreme Court, in a decision reported at [2001] O.T.C. 142, allowed the motions. The landlords appealed.

The Ontario Court of Appeal, in a decision reported at 156 O.A.C. 392, allowed the appeal and set aside the summary judgments. The tenant appealed.

The Supreme Court of Canada dismissed the appeal.

Bankruptcy - Topic 2314

Proposals - Effect of proposal - Insolvent person may disclaim commercial lease - Section 65.2 of the Bankruptcy and Insol­vency Act permitted an insolvent person to disclaim a commercial lease - The Su­preme Court of Canada stated that "s. 65.2 should be read narrowly. The plain pur­poses of the section are to free an insolvent from the obligations under a commercial lease that have become too onerous, to compensate the landlord for the early determination of the lease, and to allow the insolvent to resume viable oper­ations as best it can. Nothing in s. 65.2, or any part of the Act, protects third parties (i.e., guarantors, assignors or others) from the consequences of an insolvent's repudi­ation of a commercial lease. That is to say that they remain liable when the party on whose behalf they acted becomes insol­vent." - See paragraph 28.

Bankruptcy - Topic 2314

Proposals - Effect of proposal - Insolvent person may disclaim commercial lease - An assignee of commercial leases became insolvent - At issue was whether the terms of the reorganization by the assignee through its trustee where it purported to repudiate the leases under s. 65.2 of the Bankruptcy and Insolvency Act, affected the obligations between the landlords and the original tenant - The Supreme Court of Canada stated that "From the time a lease is completed, the original tenant is bound by all the conditions, including the term. Despite the hardship that may later devel­op, the covenant is fully enforceable even if it has been assigned. In England, how­ever, public concern over the continuing liability of original tenants in post-assign­ment bankruptcy situations resulted in the enactment of the Landlord and Tenant (Covenants) Act 1995 (U.K.), 1995, c. 30. As a result, when a tenant in England lawfully assigns a lease, that tenant will have no further obligations with respect to the covenant. To effect the same result in Canada, similar legislation is needed." - See paragraph 31.

Bankruptcy - Topic 2314

Proposals - Effect of proposal - Insolvent person may disclaim commercial lease - An assignee of two commercial leases went bankrupt - The assignee made a court approved proposal for reorganization in which it repudiated the leases under s. 65.2 of Bankruptcy and Insolvency Act - The landlords sued the original tenant, alleging that it was in default of the leases - The Supreme Court of Canada affirmed that the rights as between the landlords and the orig­inal tenant were unaffected by the pro­ceedings under s. 65.2 - The possibility of an original tenant having a right of indem­nity against an insolvent assignee and being able to make a claim to partici­pate in the proposal proceedings as an unse­cured creditor was not inconsistent with the Act - On the contrary, it was consistent with the circumstances appli­cable to other alternative covenantors, and did not affect or alter the nature of the original tenant's contractual relationship and obligations - More importantly, it did not require that the original tenant be discharged from lia­bility - Further, post-disclaimer, assig­nors and guarantors ought to be treated the same respecting liability - The disclaimer alone should not relieve either from their contractual obligations - See paragraphs 26 to 42.

Bankruptcy - Topic 2314

Proposals - Effect of proposal - Insolvent person may disclaim commercial lease - An assignee of commercial leases became insolvent - At issue was whether the terms of the reorganization by the assignee through its trustee where it purported to repudiate the leases under s. 65.2 of the Bankruptcy and Insolvency Act, affected the obligations between the landlords and the original tenant - The original tenant asserted that, unlike the English bankruptcy statute applied in a decision of the House of Lords, s. 65.2 did not have specific words providing that disclaimer would not affect the rights or liabilities of any other person - The Supreme Court of Canada stated that the English wording affirmed the ordinary construction of the statute - Explicit statutory language was required to divest persons of rights that they otherwise enjoyed at law - The lease might have real value to the original tenant and, on the wording of s. 65.2, could not be eliminated in the absence of the original tenant's agreement - In any event, so long as the doctrine of paramountcy was not triggered, federally regulated bankruptcy and insol­vency proceedings could not be used to subvert provincially regulated property and civil rights - See paragraph 43.

Bankruptcy - Topic 3642

Creditors - Priorities - Precedence of Bank­ruptcy and Insolvency Act over provincial legislation - [See fourth Bankruptcy - Topic 2314 ].

Landlord and Tenant - Topic 5003

Assignment of lease - General principles - Effect of assignment - The Supreme Court of Canada stated that "When a lease is finalized, the landlord and tenant then have privity of contract and privity of estate. ... When the lease is assigned, the landlord's privity of estate with the original tenant comes to an end, but the privity of contract continues and the original tenant remains liable upon its covenant. The estate or interest in the tenancy is transferred to the assignee, who, by being entitled to pos­session, is obliged to make payment of rent, but, subject to the terms of the lease and the agreement of the parties, the orig­inal tenant remains liable should his assignee not pay the rent." - See paragraph 28.

Landlord and Tenant - Topic 6000

Surrender and abandonment - Surrender - General - An assignee of commercial leases went bankrupt - The assignee made a court approved proposal for reorganiz­ation in which it repudiated the leases under s. 65.2 of Bankruptcy and Insol­vency Act - The landlords sued the orig­inal tenant, alleging that it was in default of the leases - The tenant obtained sum­mary judgments - The Court of Appeal allowed the landlords' appeal and set aside the summary judgments - The tenant appealed - The tenant advanced the defence of surrender which had been nei­ther pleaded nor raised before the motions judge or the Court of Appeal - The Supreme Court of Canada refused to con­sider the defence - Surrender had to be pleaded - See paragraph 9.

Landlord and Tenant - Topic 6530

Termination, forfeiture and reentry - Ter­mination - Effect of tenant's bankruptcy - [See all Bankruptcy - Topic 2314 ].

Practice - Topic 9012

Appeals - Restrictions on argument on appeal - Issues or points not previously raised - [See Landlord and Tenant - Topic 6000 ].

Cases Noticed:

Guarantee Co. of North America v. Gor­don Capital Corp., [1999] 3 S.C.R. 423; 247 N.R. 97; 126 O.A.C. 1, refd to. [para. 6].

Cummer-Yonge Investments Ltd. v. Fagot et al., [1965] 2 O.R. 152 (H.C.), over­ruled [para. 7].

McNeil v. Train (1848), 5 U.C.Q.B. 91, refd to. [para. 9].

Wotherspoon v. Canadian Pacific Ltd. (1979), 22 O.R.(2d) 385 (H.C.), refd to. [para. 9].

Francini v. Canuck Properties Ltd. (1982), 35 O.R.(2d) 321 (C.A.), refd to. [para. 29].

Transco Mills Ltd. et al. v. Percan Enter­prises Ltd. et al. (1993), 23 B.C.A.C. 181; 39 W.A.C. 181; 100 D.L.R.(4th) 359 (C.A.), refd to. [para. 30].

Warnford Investments Ltd. v. Duckworth, [1978] 2 All E.R. 517 (Ch. D.), refd to. [para. 30].

Peterborough Hydraulic Power Co. v. McAl­lister (1908), 17 O.L.R. 145 (C.A.), refd to. [para. 32].

Stacey v. Hill, [1901] 1 Q.B. 660, affd. [1965] 2 O.R. 157 (C.A.), refd to. [para. 38].

Hindcastle Ltd. v. Attenborough (Barbara) Associates Ltd. et al., [1996] 1 All E.R. 737; 194 N.R. 297 (H.L.), refd to. [para. 41].

Husky Oil Operations Ltd. v. Minister of National Revenue et al., [1995] 3 S.C.R. 453; 188 N.R. 1; 137 Sask.R. 81; 107 W.A.C. 81, refd to. [para. 43].

Giffen (Bankrupt), Re, [1998] 1 S.C.R. 91; 222 N.R. 29; 101 B.C.A.C. 161; 164 W.A.C. 161, refd to. [para. 43].

Statutes Noticed:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, sect. 65.2 [para. 21].

Authors and Works Noticed:

Goldfarb, Clifford S., The Rights and Obligations of the Original Tenant and Subsequent Tenants after an Assignment of Lease, in Haber, H.M., Assignment, Subletting and Change of Control in a Commercial Lease (2002), p. 157 [para. 29].

Haber, H.M., Assignment, Subletting and Change of Control in a Commercial Lease (2002), p. 157 [para. 29].

Lem, Jeffrey W., and Proniuk, Stefan T., Goodbye, Cummer-Yonge: A Review of Modern Developments in the Law Relat­ing to the Liability of Guarantors of Bankrupt Tenants (1993), 1 D.R.P.L. 419, p. 436 [para. 39].

Counsel:

Fred D. Cass, Lawrence J. Crozier and David Stevens, for the appellant;

Peter-Paul E. DuVernet, for the respon­dents.

Solicitors of Record:

Aird & Berlis, Toronto, Ontario, for the appellant;

Glaholt & Associates, Toronto, Ontario, for the respondents.

This appeal was heard on November 7, 2003, by McLachlin, C.J.C., Iacobucci, Major, Binnie, LeBel, Deschamps and Fish, JJ., of the Supreme Court of Canada. Major, J., delivered the following judgment in both official languages for the court on January 29, 2004.