The Crystalline Investments Ltd. v. Domgroup Ltd. judgment of the Supreme Court of Canada was released on January 29, 2004 and here's what it means...
Suppose you are a landlord
and your tenant goes bankrupt. If you have a guarantee (or indemnity
or co-covenant agreement), you can recover against the guarantor /
co-covenantor, right? One would think so, but a long line of cases,
going back to the Cummer-Yonge case in 1965, applied the reasoning
that when a tenant becomes bankrupt, if the trustee in bankruptcy
"disclaims" the lease under section 65.2 of the Bankruptcy and
Insolvency Act, then the tenant’s lease obligation vanishes, and
therefore there is no liability for the guarantor / co-covenantor
to perform, with the result that the guarantor / co-covenantor is
off the hook.
As landlord, you might well
ask - "why do you think we took the guarantee in the first place"? It
was politely observed in one of the cases that the result is
"counter-intuitive". For many years, this scenario was a trap for
the unwary, and landlords (or their lawyers) had to resort to
additional clauses to achieve the intended result.
The good news for landlords
is that the Cummer-Yonge line of cases was recently overruled by the
Supreme Court of Canada in Crystalline Investments Ltd. v. Domgroup
Ltd., 2004 SCC 3, which held:
"... the distinction between guarantors as
having secondary obligations that disappear when a lease is disclaimed
by a trustee in bankruptcy, and assignors as having primary
obligations that survive a disclaimer, thrives in Canadian case law.
Not surprisingly, Stacey v. Hill, led to a similar
situation in England. …The House of Lords went on to overrule
Stacey v. Hill. In my opinion, Cummer-Yonge should meet the same
fate. Post-disclaimer, assignors and guarantors ought to be treated
the same with respect to liability. The disclaimer alone should not
relieve either from their contractual obligations.
... 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."
- Roy Nieuwenburg