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Crystalline Investments Ltd. v. Domgroup
Ltd. - Here's What it Means

By Roy Nieuwenburg                                     February 5, 2004 

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  
 

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