Chapte r : Executory Contracts
The class of claims covered by [these words] includes cases of contract where the trustee
either disclaims or ceases to perform the contract. In such cases, the creditor may prove
against the estate for the damages occasioned by the breach of the contract, and this is
his only remedy.
B. Lessor and Tenant Agreements
BIA, section ()(k), provides that the trustee may, with the permission of the inspectors,
elect to retain or to assign or disclaim any lease of any property of the bankrupt. This pro-
vision is supplemented by BIA, section, which incorporates by reference the provisions
in provincial lessor and tenant statutes relating to the disclaimer, armation, and assign-
ment of commercial tenancy agreements. Sections and of the Commercial Tenancies
Act, RSO , cL., reproduced below, are reasonably representative. Section () gives
a trustee the right by notice in writing to surrender or disclaim a lease. This more or less
restates the common-law position. But assume the trustee makes no election either to dis-
claim or arm the lease: at common law, the default rule is that the trustee is deemed to
have disclaimed. Does the statute, by requiring notice in writing of disclaimer, displace the
common-law default rule?
BIA, section()(f ), limits the amount of the lessor’s claim following disclaimer of a
lease: it gives the lessor a claim for three months’ arrears of rent and three months’ accel-
erated rent. In Re Vrablik (), CBR (d) (Ont Ct J (Gen Div)) (Re Vrablik), extracted
below, the court held that the claim for three months’ accelerated rent was in substitution
for loss of bargain damages. In other words, lessors cannot claim loss of bargain damages
on top of the claim that section()(f) gives them.
The lessor’s claim under section ()(f) is a preferred claim. This means the trustee
must pay the lessor’s claim in full ahead of the ordinary unsecured creditors. On the other
hand, section () is “subject to the rights of secured creditors.” This means the lessor’s
preferred claim ranks behind the right of a secured creditor to enforce its security interest.
The preferred claim is for three months’ arrears of rent and three months’ accelerated rent.
Assume the tenant is more than three months in arrears of rent. Can the lessor le a proof
of claim for the balance? The answer is yes: section () provides that creditors whose
rights are restricted by section () are entitled to rank as unsecured creditors for any bal-
ance of claim due to them. Consequently, the lessor ranks as a preferred creditor for three
months’ arrears of rent and an ordinary unsecured creditor for any arrears of rent beyond
The preferred claim, under section ()f, shall not exceed the “realization from the
property on the premises under lease.” The reference is to the value of the tenant’s goods.
The Commercial Tenancies Act gives a commercial lessor a right of distress for non-payment
of rent. This means that, outside bankruptcy, the lessor can seize the tenant’s goods and sell
them, using the sale proceeds to pay o the rent. BIA, section (), takes away the lessor’s
right of distress when the tenant becomes bankrupt. The section ()(f) preferred claim
is meant to compensate the lessor for loss of the right of distress, hence the limitation.
Assume the value of the tenant’s goods is less than the three months’ arrears of rent. Can
the lessor claim the dierence? The answer is yes: again, section () applies.
Lewis Duncan, The Law and Practice of Bankruptcy in Canada (Toronto: The Carswell Company Limited,
) at –. See Roderick J Wood & David J Bryan, “Creeping Statutory Obsolescence in Bankruptcy
Law” () Journal of the Insolvency Institute of Canada .