Commercial landlord appealed an order limiting its entitlement to draw on a $2.5 million standby letter of credit posted by a bankrupt tenant as security for a lease.
The motion judge held that, following the trustee’s disclaimer of the lease, the landlord could draw only the statutory preferred claim for three months’ accelerated rent under the Bankruptcy and Insolvency Act.
The Court of Appeal held that the autonomy principle governing letters of credit meant the issuing bank’s obligation to honour complying presentations was independent of the underlying lease and not limited by insolvency law absent fraud.
The court also found the motion judge erred in interpreting the lease to require a reduction in the letter of credit because the tenant had not “promptly” paid rent at all times as required.
The landlord was therefore entitled to draw the full amount of the letter of credit.
