COURT FILE NO.: CV-31-2122306-00CL
DATE: 20180302
SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
RE: IN THE MATTER OF THE NOTICE OF INTENTION TO MAKE A PROPOSAL OF AÉROPOSTALE CANADA CORP., A CORPORATION INCORPORATED PURSUANT TO THE LAWS OF THE PROVINCE OF NOVA SCOTIA, WITH A HEAD OFFICE IN THE CITY OF NEW YORK, IN THE STATE OF NEW YORK,
BEFORE: S.F. Dunphy J.
COUNSEL: Steven L. Graff and Miranda Spence, for the Moving Party Arden Holdings Inc.
A. Kauffman and Dylan Chochla, for the Responding Party Ivanhoe Cambridge Inc.
HEARD at Toronto: February 15, 2018
REASONS FOR DECISION
[1] When a court orders an assignment of all of the rights and obligations of a bankrupt under a lease pursuant to s. 84.1 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B.3, are there any rights or obligations of the bankrupt under the lease that are incapable of transmission? In this case, the landlord’s standard form lease contained a number of additional, negotiated provisions. Among them was a provision permitting a reduction in the bankrupt’s obligation to pay rent that applied only for so long as the bankrupt was tenant. The issue before me is whether the court-ordered assignee’s rent obligations under a lease agreement are the same as those of the bankrupt or may be different if, as claimed, the right to a lower rent was one that was personal to the bankrupt and incapable of assignment.
[2] For the reasons that follow, I have concluded that an assignee under s. 84.1 of the BIA steps into the shoes of the bankrupt and acquires all the rights and obligations of the bankrupt under the agreement assigned. If there are rights and obligations within an agreement that are properly considered personal and thus non-assignable, that is an objection to be made under s. 84.1(3) of the BIA prior to court approval. At all events, the rent obligations of the bankrupt were not personal rights and the bankrupt’s rights and obligations under the entire agreement were assigned and properly assigned under s. 84.1 of the BIA
Background facts
[3] In May 2016, Aeropostale Canada Corp., operator of the retail chain “Aeropostale”, filed a Notice of Intention under the BIA and a sales process was initiated with court approval to seek buyers for its various leasehold interests.
[4] Aeropostale had a lease at the Conestoga Mall in Waterloo, Ontario. Arden Holdings Inc., who had already acquired some of Aeropostale’s leased locations in a first round of sales in early June, 2016, expressed an interest in buying this lease too.
[5] A further sale agreement was negotiated subject to court approval. The Arden Sale Agreement of June 18, 2016 that resulted applied to “all of the Vendor’s right, title and interest as lessee/tenant”. The Conestoga Lease, in common with many commercial leases, contains prohibitions on assignment without the landlord’s consent. For this reason, the Arden Sale Agreement gave the Vendor (i.e. Aeropostale) the option of conveying the Conestoga Lease by way of landlord consent or by way of court order. In either event, the consent or court order were required to confirm Arden’s right to occupy the premises and benefit from the Conestoga Lease “as lessee/tenant in the place of the Vendor”.
[6] Negotiations were opened with the landlord, Ivanhoe Cambridge Inc. The landlord expressed its displeasure with the proposed assignment because Arden already had a store in the same mall. While the landlord would not formally consent to the assignment, it did indicate that it would not oppose a forced sale pursuant to s. 84.1 of the BIA provided the form of order approving it was the same as had been granted in the prior round of lease sales.
[7] On June 28, 2016, Newbould J. granted an order (identified as the “Second Arden Sale Approval and Assignment Order”) pursuant to s. 66(1) and s. 84.1 of the BIA approving the Arden Sale Agreement. The order was in the form Ivanhoe had indicated it would not oppose. Ivanhoe neither consented nor offered any opposition.
[8] The transaction was completed on a relatively accelerated time frame as is often the case in transactions of this nature.
[9] The Conestoga Lease contains a feature that none of the landlord, purchaser or vendor had turned their minds to as far as can now be told. This feature, found in Article 21.17 of the Conestoga Lease, was described by the parties as the “Co-Tenancy Provision”. It entitles Aeropostale to the benefit of a lower rent under certain conditions if an anchor tenant’s premises remains vacant. The Co-Tenancy Provision applies “notwithstanding anything to the contrary contained in this Lease; so long as the Tenant is Aeropostale Canada Inc.” (Aeropostale Canada Inc. is the former name of Aeropostale Canada Corp.).
[10] According to Ivanhoe, there are five other provisions in the Conestoga Lease that employ language similar to the Co-Tenancy Provision in that each of them applies “so long as the Tenant is Aeropostale Canada Inc.” Ivanhoe takes the position that all six such provisions are personal to Aeropostale and thus non-assignable.
[11] The commercial reasons why a tenant might wish to negotiate for the Co-Tenancy Provision are as easy to imagine as are the commercial reasons why a landlord might be reluctant to concede it. For the tenant, a vacant anchor tenant means reduced traffic coming to the mall and thus potentially lower sales. For the landlord, such clauses would serve to multiply the already painful economic losses associated with loss of an anchor tenant in a mall. From just such conflicting economic interests are bargains struck.
[12] The landlord’s evidence is that the Co-Tenancy Provision is a concession that it was not easily persuaded to grant. Only some of its tenants had the market clout to negotiate a rent discount clause of this nature. During better times, Aeropostale had clearly been a more desirable tenant with the clout to negotiate for this clause. Ivanhoe consented to the inclusion of the Co-Tenancy Provision in the Conestoga Lease but did so on terms that – at least on the face of the document – limited its application to Aeropostale only. Further, any assignment of the Conestoga Lease would require Ivanhoe’s consent under Article 11.01 of the Conestoga Lease, giving it two points of bargaining leverage should Aeropostale seek to monetize this negotiated advantage down the road.
[13] As it turned out, an anchor tenant in the Conestoga Mall had already vacated its premises in connection with its own insolvency proceedings some time prior to Aeropostale’s BIA filing. There is no evidence before me to explain why Aeropostale did not take advantage of the Co-Tenancy Provision, although the circumstances of its own descent into bankruptcy may well provide all the explanation needed. It was not until almost one year after purchasing the Conestoga Lease that Arden noticed the Co-Tenancy Provision and tumbled to its possible application in light of the still-vacant anchor tenant space at the mall. Arden sought to apply Article 21.17 of the Conestoga Lease in its favour while Ivanhoe rather hotly disputed Arden’s right to claim that benefit. Both parties were convinced of the justice of their cause and their communications reflected that passion but are of no relevance to the issues before me.
[14] The issue between the parties is not so much the interpretation of the Conestoga Lease (the terms of which, while dense, appear clear enough) but the legal question of the status of an assignee under s. 84.1 of the BIA in relation to provisions of an assigned agreement that appear, on their face at least, to be non-assignable. As the parties were unable to resolve their differences, Arden brought this application under paragraph 18 of the Second Arden Sale Approval and Assignment Order to seek the court’s advice and directions to interpret and implement such Order.
Issues to be argued
[15] The simple issue before me is whether Arden has acquired all the rights and obligations of Aeropostale under the Conestoga Lease or whether it has only acquired the rights and obligations of a “Tenant” under the Conestoga Lease excluding any rights or obligations that are expressed to apply to Aeropostale only for so long as Aeropostale is a tenant.
Position of the parties
[16] For the landlord Ivanhoe, the case is clear.
[17] The landlord was persuaded in lease negotiations to make a number of concessions that were incorporated into the Conestoga Lease. By the express terms of the Conestoga Lease, these concessions were clearly expressed to be personal to Aeropostale and were thus non-assignable.
[18] Article 21.17 of the Conestoga Lease is applicable only to Aeropostale and only for so long as Aeropostale is tenant. A court in bankruptcy cannot re-write the contract between the parties when assigning an agreement under s. 84.1 of the BIA. By seeking to apply for its benefit Article 21.17 that expressly applies only to Aeropostale while it is Tenant, Ivanhoe submits that Arden is attempting to amend the Conestoga Lease unilaterally and this it cannot do.
[19] Ivanhoe also submits that Arden is seeking what amounts to a windfall that it did not pay for. Arden did negotiate certain amendments to the “use” clause in the lease with Ivanhoe prior to court approval and in anticipation of receiving that approval. Arden did not raise the Co-Tenancy Provision at that time nor did it seek to amend the Conestoga Lease in any way to address its rights as assignee under any of the six clauses that applied on their face to Aeropostale only. Had Arden believed that it was entitled to the benefit of any of those clearly personal clauses, it ought to have brought that question up at the time the assignment was being approved by the court.
[20] For Arden, the case is also clear, although it draws the opposite conclusion from the same facts.
[21] From Arden’s perspective, the court has already approved the assignment of all Aeropostale’s rights and obligations under the Conestoga Lease pursuant to s. 84.1 of the BIA. No objection was made at the time that the agreement or any part of it was by its nature not assignable pursuant to s. 84.1(3) of the BIA. The purpose of s. 84.1 of the BIA has been described as permitting the an assignee to be placed “in the same legal position vis-à-vis the landlord under the lease as held by the bankrupt lessee immediately before bankruptcy”: Richter & Partners Inc. v. Westwood Mall (Mississauga) Ltd., 2001 28290 (ON SC) at para. 28.
[22] Arden submits that Ivanhoe cannot insulate the lease from the effects of s. 84.1 of the BIA simply by including clauses purporting to create personal obligations where the contract is in fact a commercial one able to be performed by many others. The Conestoga Lease is a commercial lease and is not in substance one creating personal rights.
Analysis and discussion
[23] In my view, s. 84.1 of the BIA and the Second Arden Sale Approval and Assignment Order provide a complete answer to this question.
[24] Section 84.1 of the BIA provides:
84.1 (1) On application by a trustee and on notice to every party to an agreement, a court may make an order assigning the rights and obligations of a bankrupt under the agreement to any person who is specified by the court and agrees to the assignment.
(3) Subsection (1) does not apply in respect of rights and obligations that are not assignable by reason of their nature …
[25] Paragraph 5 of the Second Arden Sale Approval and Assignment Order tracks the language of s. 84.1 of the BIA and provides in its relevant parts as follows:
THIS COURT ORDERS that upon delivery of the Proposal Trustee's Certificate …, all of the rights and obligations of the Vendor under the … Assigned Leases … shall be assigned to the Purchaser pursuant to sections 66(1) and 84.1 of the …BIA (emphasis added).
[26] As I have noted, no objection was made to the form of order by Ivanhoe nor was any objection raised that some of the rights and obligations of Aeropostale as Vendor under the Conestoga Lease were by their nature not capable of assignment as provided by s. 84.1(3).
[27] The order and the statute both are to the same effect. All of the “rights and obligations” of the bankrupt Aeropostale have been assigned to Arden, the person specified in the court order. No reservation in respect of the Co-Tenancy provision was sought or included.
[28] Whether the Co-Tenancy Provision is described as a right or as an obligation[^1], it was an existing right or obligation of Aeropostale in its capacity as tenant/lessee at the time the Arden Sale Agreement was approved by the court. All such rights and obligations were included in the Arden Sale Agreement approved by the court and all were expressly assigned to Arden under the Second Arden Sale Approval and Assignment Order without objection being raised or appeal lodged.
[29] Ivanhoe objects that the six provisions of the Conestoga Lease that apply only for so long as Aeropostale is tenant are personal to Aeropostale and are thus by their nature non-assignable. That argument has two flaws: the Co-Tenancy Provision is not by its nature non-assignable and the objection is at all events out of time.
(i) Co-Tenancy Provision not non-assignable by nature
[30] The Arden Sale Agreement approved by the Second Arden Sale Approval and Assignment Order applied to “all of the Vendor’s right, title and interest as lessee/tenant” in the Conestoga Lease. It was not restricted to those rights and obligations that Aeropostale had a contractual right to assign. Article 21.17 of the Conestoga Lease is clearly a right of Aeropostale in its capacity “as lessee/tenant” to modify its rent obligations under that lease agreement. While the provision applies only for “so long as the Tenant is Aeropostale”, the rights and obligations thereby created apply to the “Tenant” in that capacity and not to Aeropostale in some other capacity.
[31] In Ford Motor Company of Canada, Limited v. Welcome Ford Sales Ltd., 2011 ABCA 158 the Alberta Court of Appeal adopted the following definition of rights or obligations that by their nature are non-assignable (at para. 55):
Agreements are said to be personal in this sense when they are based on confidences, or considerations applicable to special personal characteristics, and so cannot be usefully performed to or by another.
[32] While the contractual intent to make Article 21.17 non-assignable is reasonably clear, the rights and obligations created thereby are not themselves by their nature personal or non-assignable.
[33] The intent of the parties as to assignability does not define the nature of the right or obligation itself. Section 84.1 of the BIA reflects a public policy determination of Parliament and is not something that the bankrupt can contract out of before bankruptcy. Section 84.1(3) of the BIA excludes from the ambit of s. 84.1(1) rights and obligations that are by their nature not assignable. It is the nature of the right or obligation and not its form that is to be examined.
[34] There are few obligations more central (and less personal) to the relationship of landlord and tenant than the obligations of the tenant to pay rent. The rent to be paid is paid in entirely fungible currency of the realm and not, in this case at least, in personal services of a unique or irreplaceable value. This is not a case of rent to be paid in the form of a certain number of unique and personal paintings by a particular artist, for example.
[35] While I have sympathy for Ivanhoe’s objections that it only agreed to the creation of a relatively limited and non-assignable right in Article 21.17 after tough, arm’s length bargaining, the simple fact is that s. 84.1 of the BIA is not a provision that Aeropostale was in a position to waive.
[36] Freedom of contract is indeed central to our economic and legal order. However, there are a number of ways that Parliament has chosen to interfere with that freedom in cases where it has judged there to be a compelling social case to do so. Minimum employment standards are an obvious example. Bankruptcy and insolvency is another and for reasons that are not hard to comprehend. In arm’s length bi-lateral bargaining, there are essentially only two interests at the table. Neither side is particularly concerned to look after the interests of their creditors should they become bankrupt in future. These contingent future interests are vulnerable to compromise because neither side has a reason to see to them. However, where bankruptcy or insolvency intervenes, the interest of creditors and indeed social interests acquire a greater weight and collectively can displace the interest of the bankrupt wholly or in large part depending upon the circumstances. It is in such cases that Parliament has elected to compromise – carefully and subject to the court’s discretion - the principle of freedom of contract. As the Alberta Court of Appeal noted in Ford (at para. 38-39):
[38] The estate of a bankrupt may include various forms of property. Sometimes the most valuable property in an estate will be the contractual rights possessed by the bankrupt as of the date of bankruptcy. Those rights may be embodied in, for example, a franchise agreement, a purchase agreement, a license agreement, a lease, a supply agreement or an auto dealership agreement.
[39] The clear intent of Parliament in enacting s. 84.1 of the BIA was to address this vulnerability; it made a policy decision that a court ought to have the discretion to authorize a trustee to assign (sell) the rights and obligations of a bankrupt under such an agreement notwithstanding the objections of the counter-party.
[37] Ivanhoe submits that Arden is effectively asserting a claim to a higher right than Aeropostale could have assigned to it by the express terms of the Conestoga Lease itself. In this, Ivanhoe submits that Arden is effectively seeking to amend a written agreement after the fact. The answer to that objection is that Arden is not a voluntary assignee of Aeropostale – at least not an assignee pursuant to the terms of the Conestoga Lease itself. Arden’s right to step in the shoes of Aeropostale arises not by the terms of the Conestoga Lease itself but by statute and by court order. Its rights and obligations are those of the bankrupt even if prior to bankruptcy, the bankrupt could only have assigned a lesser bundle of rights.
[38] There is nothing unfair in this outcome which is entirely consistent with the policy underlying s. 84.1 of the BIA. Were it otherwise, it would be child’s play for a lawyer to contrive myriad ways to contract out of s. 84.1 of the BIA, a provision that has never been in any commercial landlord’s top ten list of favourite pieces of legislation. To name but one obvious technique, an agreement to pay rent of $50 might find itself as expressed as base rent of $100 but “discounted” to the agreed $50 level only for so long as X is the tenant.
(ii) Objection is out of time
[39] With s. 84.1 of the BIA, Parliament has conferred the right upon the bankruptcy court to put Arden in the shoes of Aeropostale. It is not a unilateral right of the bankrupt but a discretionary one vested in the court that can only be exercised after a hearing to consider and if necessary balance any relevant objections. Section 84.3 provides the opportunity to a contractual counterparty to demonstrate that an agreement, or some part of it If, is by its nature not assignable. There are other limitations contained in s. 84.1, including a consideration of the fitness of the assignee (s. 84.1(4)). All of these issues can be raised and enter into the court’s consideration.
[40] The time to raise these objections is before and not after the order is made under s. 84.1(1) of the BIA. The reason for this is plain from the wording of the Second Arden Sale Approval and Assignment Order. That Order approved the sale and assignment of all rights and obligations of the bankrupt. Implicit in an order that that all rights and obligations should be assigned is a finding that all rights and obligations – including the one now in question – can be assigned. That finding, once made, is final and binding.
[41] While I have found the against the objection that the rights and obligations arising under s. 21.17 are not by their nature assignable, that question has in fact already been decided on June 28, 2106 at a hearing where Ivanhoe raised no objection.
Dispostion
[42] The motion of Arden for advice and direction pursuant to the order of June 28, 2016 is allowed.
[43] This court advises and directs that pursuant to the Second Arden Sale Approval and Assignment Order, the Sale Agreement dated June 18, 2016 and the Proposal Trustee’s Certificate referenced in such order:
a. Arden has acquired all of the rights and obligations of Aeropostale under the Conestoga Lease;
b. Those rights and obligations include, without limitation, all of the rights and obligations expressed to apply “so long as Aeropostale is Tenant” pursuant to article 21.17 thereof.
[44] Arden has been successful on this motion. If the parties are unable to resolve questions in relation to costs, I will receive short (maximum five pages) written submissions within 45 days. I leave the parties to work out their own timetable for deliveries to each other within that limit. If further time is required, the parties may revise the schedule on their joint consent without more than notifying me of that fact. Submissions if any should be in electronic form delivered together to my assistant.
[45] I should like to congratulate both sides on a well-researched and presented argument.
S.F. Dunphy J.
Date: March 2, 2018
[^1]: Article 21.17 of the Conestoga Lease has elements of both a right and an obligation since it provides the tenant with the right to modify the obligation to pay rent.