2015 ONSC 5026

COURT FILE NO.: CV-13-10285-00CL

DATE: 20150812

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Business Development Bank, Applicant

AND:

Adventura II Properties Inc., Pavilion Sports Clubs Inc., Pavilion Sports Ice Inc., Pavillion Sports Food and Beverage Inc. and Pavilion Acquatic Club Inc., Respondent

BEFORE: Penny J.

COUNSEL: Anton M. Katz for Kendal Aquatics Swim Program Ltd.

W. Alfred Apps for the Kartelle Corporation and Kartelle 130 Racco GP Inc.

Kelli Preston for the Receiver/Trustee, Pollard & Associates Inc.

HEARD: August 6, 2015

ENDORSEMENT

[1] This is a motion under s. 37 of the Bankruptcy and Insolvency Act to reverse the decision of the bankruptcy trustee to disclaim a lease. By way of collateral relief, the moving party also seeks an interlocutory injunction prohibiting the termination of the lease by the new landlord prior to the expiry of the lease on December 31, 2015.

[2] The respondent debtors, Pavilion Aquatic Club Inc. et al., were the owner/landlords of a sportsplex which included an indoor pool facility. Pavilion entered into a five year lease of the pool facility with the moving party, Kendal Aquatics Swim Program Ltd. The lease runs from January 1, 2011 to December 31, 2015. Kendal runs a swim school out of this pool facility, servicing up to 1,000 families.

[3] Pavilion ran into financial trouble. Pollard & Associates Inc. was ultimately appointed Receiver of the debtors’ assets, including the pool facility and the Kendal lease. On May 29, 2015, Pollard filed an assignment in bankruptcy for each of the Debtors. As a result, Pollard also became the trustee in bankruptcy of the Debtors.

[4] The respondent on the motion, Kartelle, entered into negotiations with the Receiver for the acquisition of the debtors’ assets, including the pool facility and the Kendal lease.

[5] An agreement was reached and Kartelle and the Receiver entered into an agreement of purchase and sale.

[6] The Receiver’s motion to approval the agreement of purchase and sale was heard by Conway J. on June 15, 2015. In her Order, Conway J. made an order vesting in Kartelle all of the debtor’s right, title and interest in and to the assets described in the agreement (and attached to the Order). This included leases, tenants and rent rolls.

[7] The agreement of purchase and sale approved by Conway J., therefore, includes a Schedule B containing a rent roll as at February 1, 2015 showing the name of each tenant, the maturity date of each tenancy and the monthly rent for each tenancy. It is common ground that the relevant particulars of the Kendal lease are listed in Schedule B to the agreement of purchase and sale approved by Conway J.

[8] After the agreement of purchase and sale with the Receiver had been approved by the Court, Kartelle claims it became aware of additional information which caused it to conclude that the Kendal lease of the pool facility was uneconomic. Kartelle took the position with the Receiver that it would not close the transaction unless: a) the Receiver, qua trustee, disclaimed the Kendal lease under s. 30(1)(k) of the BIA; or b) Kartelle received a substantial reduction in the purchase price.

[9] The Receiver ultimately acquiesced to this request. In the afternoon of June 15, 2015 (that is, some hours after Conway J. approved the sale agreement which included the Kendal lease), counsel for the Receiver took the position that the Receiver was under no obligation but, on a without prejudice basis, was prepared to “provide on closing a Notice of Termination addressed to Kendal which your client can deliver to the tenant after closing.”

[10] It is also common ground that Kendal was given no prior notice of the motion to approve the sale or of the trustee’s consideration of Kartelle’s threat that it would not close the transaction unless the trustee disclaimed the Kendal lease or substantially reduced the purchase price.

[11] The evidence is that the Receiver verbally advised Kendal on June 17, 2015 that a Notice of Termination of Lease had been issued and would be served on Kendal the following day.

[12] The sale of the pool facility and the lease closed about 9 a.m. on June 18, 2015. The Notice of Termination was first delivered to Kendal by the new owner, Kartelle, in the afternoon of June 18, 2015.

[13] Among other things, the recitals to the Notice make reference to s. 30(1)(k) of the BIA, stating, “Whereas pursuant to Section 30(1)(k) of the BIA the trustee may elect to disclaim or resiliate any lease or property of the Debtors...” The Notice goes on to provide that the trustee “hereby disclaims the lease, effective as of the 30th day of June 2015.” Thus, the lease was purportedly terminated on 12 days’ notice.

[14] Kartelle took the position that the lease had been terminated and that, as of June 30, 2015, Kendal had to vacate the premises. During an attendance before Wilton-Siegel J., however, an order was made on consent that the “status quo” would be preserved pending the return of Kendal’s motion.

[15] A number of issues were raised on the motion but, in view of my disposition of the main issue, most of the remaining collateral issues need not be resolved.

[16] The main issue is whether the trustee had the power under s. 30(1)(k) of the BIA to disclaim the Kendal lease on behalf of the bankrupt, Pavilion, as an incident of the sale of Pavilion’s assets to Kartelle.

[17] Section 30(1)(k) of the BIA provides:

The trustee may, with the permission of the inspectors, do all or any of the following things:

(k) elect to retain for the whole part of in its unexpired term, or to assign, surrender, disclaim or resiliate any lease of, or other temporary interest or right in, any property of the bankrupt.

In this case, no one attended the first meeting of creditors. As a result, there were no inspectors appointed.

[18] In Palais des Sport de Montreal Ltee., 1960 CarswellQue 25, a five judge panel of the Québec Superior Court, sitting on appeal, held that what is now s. 30(1)(k) applies to a case where the bankrupt is a lessee but not where the bankrupt is a lessor. Thus, the court in Palais des Sport held that a trustee standing in the shoes of a landlord does not have the right to terminate a lease.

[19] In the concurring judgment of Montgomery J., he wrote that the words “assign, surrender or disclaim” used in what was then s. 10(1)(k) “are appropriate to an action to be taken by or on behalf of the lessee rather than the lessor.” He relied on Duncan and Reilley, Bankruptcy in Canada 2nd ed. (1933), in which the authors wrote:

A disclaimer amounts to a renunciation or denial by a tenant of his landlord's title, and is committed where the tenant does any act which is tantamount to a direct repudiation of the relation of landlord and tenant. A surrender, on the other hand, not denying the landlord's title but on the contrary acknowledging it, is simply restoring or yielding up an estate, and is the term usually applied to giving up a lease before its expiration.

[20] Montgomery J. also reasoned that, “to determine the effect of bankruptcy on the relations between lessor and lessee, we should rather look to s. 105 [now s.146] of the Act” which provides that the rights of landlords are determined by the laws of the province in which the property is located. Section 146 now provides:

Subject to priority of ranking as provided by section 136 and subject to subsection 73(4) and section 84.1, the rights of lessors are to be determined according to the law of the province in which the leased premises are situated.

[21] Section 39 of Ontario’s Commercial Tenancies Act deals only with the right of trustees of bankrupt tenants to disclaim a lease. It confers no right upon trustees of bankrupt landlords to do so.

[22] It is notable that in a case comment written by The Honourable Lloyd W. Houlden when the case was first reported in 1960, Mr. Houlden wrote that the decision in Palais des Sport “appears to be entirely contrary to the position in the common law provinces.” He expressed the view that s. 10(1)(k) could only be referring to leases in which the bankrupt is the landlord and went on to say that what is now s. 146 “must surely mean the rights of landlord's of bankrupt tenants and cannot refer to cases in which the bankrupt is the landlord.” “The purpose,” he wrote, of s. 10(1((k), “is to permit a trustee to terminate leases of premises owned by a bankrupt so that the premises may be sold and the assets realized within a reasonable time.”

[23] However, in a paper given at the LSUC Special Lectures on bankruptcy and insolvency in 1965, Mr. Houlden changed his position. In that paper, after summarizing the Palais des Sport decision, Mr. Houlden wrote:

Although I have indicated a contrary view [citing his case comment], on more careful thought I now believe that the decision of the Québec Court of Appeal is correct, and there is no power in a trustee in bankruptcy to terminate leases given by a bankrupt prior to his bankruptcy.

[24] The Palais des Sport case and the observations of Mr. Houlden were cited and relied on by Morse J. in Clarkson Co. v. Miller, 1984 CarswellMan 22 (Q.B.) where the right of a trustee of a bankrupt landlord to terminate a lease came before the court. In Clarkson, Morse J. held that s. 30(1)(k) did not give the trustee of a bankrupt landlord the power to terminate a lease. He said:

Section [30(1)(k)] is, I think, a difficult section. However, with respect, I have come to the conclusion, for the reasons given by the Québec Court of Appeal in Palais des Sport, that it does not give the trustee of a bankrupt landlord the right to terminate the lease of or other temporary interest in property owned by the bankrupt and entered into prior to the bankruptcy. The right to terminate is, in my view, governed by provincial law.

[25] Favourable reference to the Palais des Sport decision was also made by the B.C.C.A. in Re Giffen, 1996 CarswellBC 56 at para. 17, where the court said:

In Palais des Sport de Montreal, [1960] Que. Q.B. 1012, 1 C.B.R. (N.S.) 260, the Quebec Court of Appeal held that s. 30(1)(k) applies only where the bankrupt is the lessee, not where he is the lessor. I think that is clear from the language of s. 30(1)(k).

[26] The settled authority, since 1960, on this point has consistently been that the authority granted to a trustee under s. 30(1)(k) does not extend to the disclaimer of a lease on behalf of the landlord, unless such authority is specifically granted by provincial law. In other words, the landlord’s trustee in Ontario cannot terminate a lease and, in effect, kick the tenant out, by virtue of section 30(1)(k). The authority of a landlord (or its trustee, who must stand in the shoes of the landlord) to terminate a commercial lease must, in Ontario, be found in the Commercial Tenancies Act. A landlord in Ontario has no authority to unilaterally terminate a lease of a tenant who is in compliance with his or her obligations under the lease. Nor does provincial law grant the landlord’s trustee any such power.

[27] Kartelle argues that these decisions are simply wrong on the plain wording of the BIA. I am unable to agree. Kartelle has been unable to advance one single authority, in the 45 years since Palais des Sport was decided, to support the proposition it advances in this case. A tenancy is the right to exclusive possession within the terms of the contract of lease. Where the tenant is not in breach, neither the landlord, nor his trustee in bankruptcy, has the power to terminate the lease.

[28] This conclusion appears to be consistent with the policy underlying s. 65.2(1) of the BIA (governing proposals) which provides that an insolvent person who is a commercial lessee under a lease may disclaim the lease on 30 days’ notice. No such opportunity is afforded to an insolvent landlord.

[29] To similar effect are the provisions of s. 32 of the Companies’ Creditors Arrangement Act. A debtor may, with the approval of the monitor, and on proper notice, disclaim “any agreement” but there are a number of factors to be considered by the court before any order approving the order is made. These factors include whether the disclaimer would likely cause significant financial hardship to a party to the agreement. The CCAA, therefore, permits the disclaimer of agreements but only when approved by the court in a context where the financial interests of both parties must be considered.

[30] Section 37 of the BIA confers on the court a broad discretion to reverse or modify any decision of a trustee on any grounds justice may require. Even if I disagreed with the legal conclusions in Palais des Sport and Clarkson, therefore, I would nevertheless have reversed the trustee’s decision to terminate the lease on 12 days’ notice on the basis that, among other things, it would cause serious financial hardship to the tenant, Kendal.

[31] Kartelle and the trustee both had the benefit of sophisticated legal advice at the time of closing. A cursory examination of the s. 30 notes in Houlden, Morawetz and Sarra’s Annotated Bankruptcy and Insolvency Act, reveals that Palais des Sports and Clarkson are the governing law and that the right of the trustee to disclaim the lease is governed by provincial law.

[32] Accordingly, I can only conclude that Kartelle took a calculated risk that the Notice of Termination might well not be effective and closed the transaction with full knowledge of the pre-bankruptcy proprietary rights of the debtor’s tenants. Kartelle is not a bona fide purchaser for value without notice. Kartelle had full knowledge of the leases associated with the sportsplex and acquired the sportsplex subject to those leases, including Kendal’s. This court approved the sale subject to the leases, including Kendal’s.

[33] For these reasons, Kendal’s motion on appeal from the trustee’s decision to issue a Notice of Termination is granted. The trustee had no authority to issue that Notice. The Notice is void ab initio. The Kendal lease, therefore, remains in full force and effect in accordance with its terms.

[34] Kartelle acquired the sportsplex subject to Kendal’s lease. The trustee’s Notice of Termination is the only basis upon which Kartelle purported to terminate the lease. No other grounds for a right to terminate the Kendal lease were advanced. Kartelle effectively conceded that it had no grounds to terminate the Kendal lease when it insisted that the trustee issue a s. 30(1)(k) Notice of Termination as a condition of Kartelle closing the court-approved agreement of purchase and sale.

[35] Kartelle, therefore, must honour the terms of the lease. If it is economically advantageous to Kartelle to terminate the lease prematurely (i.e., before December 31, 2015) it must bargain for that opportunity and negotiate an appropriate buyout price with Kendal.

[36] As I have disposed of this case on the basis of the s. 30(1)(k) point, it is not necessary for me to deal with the collateral issues except as they relate costs.

[37] Had it been necessary to decide the issue of an injunction, however, I would have found that the property is somewhat unique, the evidence being that there is no ready rental market for pool facilities to run private swim programs. Any termination of the lease with the kind of notice given here would irreparably damage Kendal’s future business. Perhaps more importantly, the kind of termination which Kartelle purported to effect in this case would defeat or hinder Kendal’s commitments to innocent third parties – families who have enrolled their children in Kendal’s swim programs – which constitutes a form of irreparable harm sufficient to grant an injunction prohibiting such termination.

Costs

[38] Kendal argues that Kartelle has breached the status quo order of Wilton-Siegel J. and that, as a result, a punitive order of costs should be made against Kartelle.

[39] I have carefully reviewed all of the alleged breaches and the cross examinations relating to this issue. There is no doubt that there have been interruptions which were annoying and frustrating to Kendal. However, in the end, Kendal concedes that most of these problems resulted from a lack of communication and some uncertainty about who the on-site manager for Kartelle was. Kendal also concedes the new owner is entitled to pursue planned reconstruction in other areas of the sportsplex which will, inevitably, have some negative impact on Kendal’s operations. I am unable to find, on the evidence, advertent breach of the status quo order.

[40] Having said that, however, Kartelle played hardball in this case. It sought to manipulate the powers of the trustee to its financial advantage when it knew, or ought to have known, there was a serious question about the likelihood of success of its gambit. It took no steps to advise the Court of any changes in circumstances concerning the sale agreement, when the court had specifically approved the sale subject to the Kendal lease. Kartelle decided “to shoot first and ask questions later.”

[41] In such circumstances, an award of substantial indemnity costs is warranted. Mr. Katz sought $23,000. That is more or less in line with what Mr. Apps would have sought had his client been successful. For these reasons, I fixed costs payable by Kartelle to Kendal in the amount of $23,000 inclusive of all fees, disbursements and applicable taxes.

Penny J.

Date: August 12, 2015