COURT OF APPEAL FOR ONTARIO

CITATION: Curriculum Services
    Canada/Services Des Programmes DÉtudes Canada (Re), 2020 ONCA 267

DATE: 20200427

DOCKET: C66626

Hoy A.C.J.O., van Rensburg and
    Roberts JJ.A.

IN THE
    MATTER OF THE BANKRUPTCY OF

Curriculum
    Services Canada/Services Des Programmes DÉtudes Canada

of the
    City of Toronto

in the
    Province of Ontario

Catherine Francis, for the appellant

Alex Ilchenko and Monty Dhaliwal, for the respondent

Heard: October 9, 2019

On appeal from the order of Justice Victoria
    R. Chiappetta of the Superior Court of Justice, dated February 15, 2019, with
    reasons reported at 2019 ONSC 1114.

van Rensburg J.A.:

I.

OVERVIEW

[1]

The appellant is Medallion Corporation, as
    authorized agent for the landlord, 280 Richmond Street West Limited (the
    Landlord). The respondent, RSM Canada Ltd. (the Trustee), is the trustee in
    bankruptcy of Curriculum Services Canada/Services des Programmes dÉtudes
    Canada (Curriculum or the Tenant). Curriculum was a tenant of the Landlord.

[2]

This is the second appeal of the partial
    disallowance of the Landlords claim in the bankruptcy of the Tenant. The first
    appeal, from the decision of the Trustee, was to Chiappetta J. of the Superior
    Court of Justice (the bankruptcy judge).

[3]

Broadly, this appeal is about the rights of a commercial
    landlord as a creditor in the bankruptcy of its tenant following the disclaimer
    of the lease by the trustee in bankruptcy. Specifically, the issue is whether a
    landlord has a claim arising from the disclaimer of its lease for any amount in
    relation to the unexpired term of the lease, other than its preferred claim for
    three months accelerated rent under s. 136(1) of the
Bankruptcy and
    Insolvency Act
, R.S.C. 1985, c. B-3 (the BIA). In other words, can a
    landlord claim as an unsecured creditor for the disclaimer of its lease, calculated
    in accordance with its contractual rights under the lease?
[1]

[4]

In Ontario, the law on this question was settled
    many years ago in
Re Mussens Ltd.
, [1933] O.W.N. 459 (H.C.).
[2]

As between the landlord and tenant, the disclaimer of a
    commercial lease by the tenants trustee in bankruptcy brings to an end the
    future or ongoing obligations of the tenant under the lease. The landlord has
    no right of compensation or claim as an unsecured creditor for damages in
    respect of the unexpired term of the lease in relation to the loss of the
    tenancy as a result of the disclaimer; the landlord is limited to its preferred
    claim for up to three months accelerated rent. The Landlord contends that this
    principle has been overtaken by more recent developments in the law.

[5]

In this case, the Landlord claims the repayment
    of the value of certain tenant inducements ($203,442.37) according to a formula
    provided for in the lease. The Landlord asserts that it is entitled to claim this
    amount as an unsecured creditor in the bankruptcy of its former tenant, upon
    and notwithstanding the Trustees disclaimer of the lease. The Landlord also claims
    the unpaid balance of its preferred claim for accelerated rent, pursuant to the
    lease, as an unsecured creditor under s. 136(3) of the BIA, which amounts
    to $50,289.28.

[6]

For the reasons that follow, I would allow the
    appeal, but only to permit the Landlord to rank as an unsecured creditor for
    the unpaid balance of its preferred claim. Subsection 136(3) of the BIA
    expressly authorizes a landlord to claim the unrecovered balance of its
    preferred claim as an unsecured creditor in the bankruptcy of its tenant.

[7]

As for the Landlords claim to rank as an
    unsecured creditor to recover unpaid tenant inducements, the obligations under
    the lease between the Tenant and Landlord came to an end once the Trustee
    disclaimed the lease. As I will explain, the long-accepted rule articulated in
Re
    Mussens
has not been attenuated by the decision of the Supreme Court in
Highway
    Properties Ltd. v. Kelly, Douglas & Co. Ltd.
, [1971] S.C.R. 562, nor
    has it been overruled by the Supreme Courts decision in
Crystalline Investments
    Ltd. v. Domgroup Ltd.,
2004 SCC 3, [2004] 1 S.C.R. 60. The Landlord is not
    entitled to claim as an unsecured creditor in the bankrupt Tenants estate for
    damages relating to the unexpired term of the lease, except to recover the
    balance of its preferred claim for three months accelerated rent, which is specifically
    provided for by statute.

II.

FACTS

[8]

The Landlord and Tenant were parties to a lease dated
    May 26, 2017 (the Lease). The Lease was for 8,322 square feet of space at 150
    John Street West, Toronto, for a term of ten years and six months, commencing
    on July 1, 2017 and ending on December 31, 2027.

[9]

On March 29, 2018, and without being in default
    of its obligations under the Lease, Curriculum made an assignment in
    bankruptcy. RSM Canada Inc. was appointed trustee. The Trustee occupied the
    leased premises and paid occupation rent of $25,698.31 to the Landlord.

[10]

On April 20, 2018, the Landlord filed a Proof of
    Claim in the bankruptcy. The Landlord claimed $100,558.59 as a preferred claim
    for three months accelerated rent, in accordance with the priority of claims
    prescribed by s. 136(1)(f) of the BIA. Because the realization of property on
    the leased premises yielded an amount that was less than the preferred claim
    ($24,571), the Landlord asserted its right to claim the balance of the
    unrecovered preferred claim ($75,987.59) as an unsecured creditor.

[11]

The Landlord also advanced an unsecured claim in
    the amount of $4,028,111.23. This represented its claim for rent payable for
    the balance of the unexpired portion of the term of the Lease, together with
    amounts for tenant inducements consisting of leasehold improvements provided at
    the Landlords cost under the Lease and free rent for a six-month period. In
    asserting its rights, the Landlord relied on the Tenants obligation under the
    Lease to make certain payments on bankruptcy, including on termination or
    disclaimer of the Lease.

[12]

Section 16.1 of the Lease provides for events of
    default, including the bankruptcy of the Tenant. It also provides for the
    Landlords remedies, including: the payment of three months accelerated rent;
    the right to terminate the Lease (with the right to obtain damages for the
    Landlords deficiency for the balance of the term); and upon any termination,
    including disclaimer, payment of the value of the unpaid amount of any tenant
    inducements calculated over the unexpired term of the Lease. The relevant
    portions of s. 16.1 read as follows:

16.1. If any of the following shall occur:

(f) Tenant, any assignee or a
    subtenant of all or substantially all of the Premises makes an assignment for
    the benefit of creditors or becomes bankrupt or insolvent or takes the benefit
    of any statute for bankrupt or insolvent debtors or makes any proposal,
    assignment, arrangement or compromise with its creditors or Tenant sells all or
    substantially all of its personal property at the Premises other than in the
    ordinary course of business (and other than in connection with a Transfer requiring
    Landlords consent and approved in writing by Landlord), or steps are taken or
    action or proceedings commenced by any person for the dissolution, winding up
    or other termination of Tenants existence or liquidation of its assets
    (collectively called a Bankruptcy);

(g) a trustee, receiver,
    receiver-manager, manager, agent or other like person shall be appointed in
    respect of the assets or business of Tenant or any other occupant of the
    Premises;

then, without prejudice to and in addition to any other rights
    or remedies to which Landlord is entitled hereunder or at law, the then current
    and the next three (3) months Rent shall be forthwith due and payable and
    Landlord shall have the following rights and remedies, all of which are
    cumulative and not alternative, namely:

(v)     to obtain damages from Tenant including, without
    limitation, if this Lease is terminated by Landlord, all deficiencies between
    all amounts which would have been payable by Tenant for what would have been
    the balance of the Term, but for such termination, and all net amounts actually
    received by Landlord for such period of time;

(vii)    to obtain the Termination Payment from Tenant;
[3]

(viii)
if this Lease
is terminated due to the default
    of Tenant, or if it
is disclaimed, repudiated or terminated in any
    insolvency proceedings related to Tenant (collectively Termination), to
    obtain payment from Tenant of the value of all tenant inducements which were
    received by Tenant pursuant to the terms of this Lease, the agreement to enter
    into this Lease or otherwise, including, without limitation, the amount equal
    to the value of any leasehold improvement allowance, tenant inducement payment,
    rent free periods, lease takeover, Leasehold Improvements or any other work for
    Tenants benefit completed at Landlords cost or any moving allowance, which
    value shall be multiplied by a fraction, the numerator of which shall be the
    number of months from the date of Termination to the date which would have been
    the natural expiry of this Lease but for such Termination, and the denominator
    of which shall be the total number of months of the Term as originally agreed
    upon.
[4]
[Emphasis added.]

[13]

On April 23, 2018, the Trustee issued a Notice
    of Disclaimer of the Lease. Following the disclaimer, the Landlord found a new
    tenant for the leased premises, effectively mitigating its claim for future
    rent.

[14]

On September 19, 2018, the Trustee issued a
    Notice of Partial Disallowance of Claim, allowing only the Landlords preferred
    claim in the amount of $24,571 (limited to the actual value of the property on
    the leased premises), and disallowing the Landlords unsecured claims.

[15]

The Landlord appealed the disallowance of its unsecured
    claim to the Superior Court of Justice. It confined its appeal to its claims
    under s. 16.1 of the Lease for tenant inducements in the amount of $203,442.37,
    including leasehold improvements and free rent, and the balance of the three
    months accelerated rent of $50,289.28
[5]
, for a total unsecured claim of $253,731.65.

III.

RELEVANT STATUTORY PROVISIONS

[16]

The relevant statutory provisions are found in
    the BIA and the
Commercial Tenancies Act
, R.S.O. 1990, c. L.7 (the
    CTA).

[17]

Section 71 of the BIA provides that a bankrupts
    capacity to deal with its property ends on its bankruptcy, and that its
    property vests in the trustee in bankruptcy. The section reads:

71. On a bankruptcy order being made or an
    assignment being filed with an official receiver, a bankrupt ceases to have any
    capacity to dispose of or otherwise deal with their property, which shall,
    subject to this Act and to the rights of secured creditors, immediately pass to
    and vest in the trustee named in the bankruptcy order or assignment, and in any
    case of change of trustee the property shall pass from trustee to trustee
    without any assignment or transfer.

[18]

Subsection 30(1)(k) of the BIA provides that a trustee, with the
    approval of inspectors, may elect to retain for the whole or part of 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.

[19]

Section 136 of the BIA provides for the priority
    of certain unsecured claims, including, under s. 136(1)(f), priority for a
    landlords claim for three months arrears of rent and three months accelerated
    rent. This claim ranks after: (a) a deceased bankrupts funeral and
    testamentary expenses; (b) the costs of administration of the bankrupts estate;
    (c) the Superintendents levy; (d) certain claims for wages, alimony and
    support payments; and (e) municipal taxes. A landlords preferred claim is
    limited to the value of the realization from the property located on the leased
    premises, and is to be credited against the amount payable by the trustee for
    occupation rent.

[20]

Subsection 136(1)(f) specifically provides:

136. (1) Subject to the rights of secured creditors,
    the proceeds realized from the property of a bankrupt shall be applied in
    priority of payment as follows:

(f) the lessor for arrears
    of rent for a period of three months immediately preceding the bankruptcy and
    accelerated rent for a period not exceeding three months following the
    bankruptcy if entitled to accelerated rent under the lease, but the total
    amount so payable shall not exceed the realization from the property on the
    premises under lease, and any payment made on account of accelerated rent shall
    be credited against the amount payable by the trustee for occupation rent;

[21]

Under s. 136(3) of the BIA, where the
    realization is less than the amount of the preferred claim, a landlord may
    claim the unrecovered balance as an unsecured creditor. Subsection 136(3) reads
    as follows: A creditor whose rights are restricted by this section is entitled
    to rank as an unsecured creditor for any balance of claim due him.

[22]

While s. 136 of the BIA sets out a scheme of
    payment priorities, the landlords rights on a tenants bankruptcy are
    established under provincial law. Canadas first bankruptcy legislation, the
Bankruptcy
    Act, 1919
, S.C. 1919, c. 36, prescribed, at s. 52, the remedies available
    to landlords on a tenants bankruptcy. After part of s. 52(5) was held to be
ultra
    vires
in
Re Stober
(1923), 4 C.B.R. 34 (Que. S.C.), the section
    was repealed and replaced with what is now s. 146 of the BIA, which provides:

146. Subject to priority of ranking as provided by section 136
    and subject to subsection 73(4) and section 84.1 [these sections are not
    relevant to this appeal], the rights of lessors are to be determined according
    to the law of the province in which the leased premises are situated.

[23]

The Ontario law that defines a commercial landlords
    rights on a tenants bankruptcy is found in the
CTA. The
    landlords preferential lien for rent, and the trustees right to retain and to
    assign the lease, exercisable within three months of the bankruptcy and before
    the trustee has disclaimed the lease, are set out in s. 38. Section 39
    provides for the right of the trustee in bankruptcy, at any time before
    electing to retain the leased premises, to surrender or disclaim the lease.
    Sections 38 and 39 read as follows:

38. (1) In case of an assignment for the general benefit of
    creditors, or an order being made for the winding up of an incorporated
    company, or where a receiving order in bankruptcy or authorized assignment has
    been made by or against a tenant,
the preferential lien of the landlord for
    rent is restricted to the arrears of rent due during the period of three months
    next preceding, and for three months following the execution of the assignment,
    and from thence so long as the assignee retains possession of the premises, but
    any payment to be made to the landlord in respect of accelerated rent shall be
    credited against the amount payable by the person who is assignee, liquidator
    or trustee for the period of the persons occupation.

(2)
Despite any provision, stipulation or agreement in any
    lease
or agreement or the legal effect thereof, in case of an assignment
    for the general benefit of creditors, or an order being made for the winding up
    of an incorporated company, or where a receiving order in bankruptcy or
    authorized assignment has been made by or against a tenant,
the
person
    who is assignee, liquidator or
trustee may at any time within three months
    thereafter for the purposes of the trust estate and before the person has given
    notice of intention to surrender possession or disclaim, by notice in writing
    elect to retain the leased premises
for the whole or any portion of the
    unexpired term and any renewal thereof, upon the terms of the lease and subject
    to the payment of the rent as provided by the lease or agreement, and the
    person may, upon payment to the landlord of all arrears of rent, assign the
    lease with rights of renewal, if any, to any person who will covenant to
    observe and perform its terms and agree to conduct upon the demised premises a
    trade or business which is not reasonably of a more objectionable or hazardous
    nature than that which was thereon conducted by the debtor, and who on
    application of the assignee, liquidator or trustee, is approved by a judge of
    the Superior Court of Justice as a person fit and proper to be put in
    possession of the leased premises.

39. (1)
The person who is assignee, liquidator or trustee
    has the further right, at any time before so electing, by notice in writing to
    the landlord, to surrender possession or disclaim any such lease
, and the
    persons entry into possession of the leased premises and their occupation by
    the person, while required for the purposes of the trust estate, shall not be
    deemed to be evidence of an intention on the persons part to elect to retain
    possession under section 38. [Emphasis added.]

[24]

These provisions have been in place relatively
    unchanged since 1924: see
Commercial Tenancies Act
, S.O. 1924, c. 42.
    As I will explain, they have been consistently interpreted to limit an Ontario
    landlords rights once a lease has been disclaimed by a bankrupt tenants
    trustee in respect of claims for damages relating to the unexpired term of the
    lease; a landlords claim is limited to up to three months accelerated rent
    (where the lease so provides).

[25]

Before the bankruptcy judge and this court, the Landlord
    advanced a different interpretation of these provisions that would permit it to
    claim, as an unsecured creditor in the bankruptcy of its tenant, the specific
    amounts it bargained for under the Lease, which are payable on bankruptcy and
    specifically in the event of a disclaimer. I turn now to the reasons of the
    bankruptcy judge.

IV.

THE REASONS OF THE BANKRUPTCY JUDGE

[26]

The bankruptcy judge identified the issue as whether
    it remains the law in Ontario that the disclaimer of a lease by a trustee in
    bankruptcy prevents a landlord from claiming unsecured damages. She dismissed
    the Landlords appeal of the partial disallowance of its claim on the basis of a
    long-established legal precedent.

[27]

The bankruptcy judge referred to and followed
    the analysis of the Registrar in Bankruptcy in
Re Linens N Things Canada
    Corp.
(2009), 53 C.B.R. (5th) 232 (Ont. S.C.). In that case, the Registrar
    upheld a trustees disallowance of amounts claimed under a lease, including the
    costs of building a structure expressly for the tenant, the tenant allowance,
    and the leasing commission. The Registrar relied on
Re Mussens
as
    authority that, after a disclaimer, there is no right in Ontario for a landlord
    to claim damages in respect of the unexpired portion of the lease. The
    bankruptcy judge noted that the Registrar in
Re Linens N Things
rejected
    the argument, based on
Highway Properties
, that the landlord could recover
    contractual damages as
Highway Properties
did not involve an
    insolvency. She endorsed para. 21 of
Re Linens N Things
where the
    Registrar stated that the CTA and its predecessors has been found  to have
    the effect of a consensual ending of the lease, and  this is a statutorily
    permitted breach for which there is no damage remedy, beyond the s. 38 CTA and
    s. 136 BIA preferred claim.

[28]

The bankruptcy judge also considered and
    rejected the Landlords argument that
Crystalline Investments
had
    effectively overruled
Re Mussens
.

After a close examination
    of each of these cases, as well as
Cummer-Yonge Investments Ltd. v. Fagot
    et al.
(1965), 50 D.L.R. (2d) 25 (Ont. H.C.), affd without reasons (1965),
    50 D.L.R. (2d) 30n (Ont. C.A.) (a case that was overruled in
obiter
in
Crystalline Investments
),

the bankruptcy judge concluded that
Crystalline Investments
had not addressed whether a landlord can claim
    unsecured damages in the bankruptcy proceedings of its tenant upon the disclaimer
    of a lease by the trustee, and that the principle in
Re Mussens
remained
    the law on this issue in Ontario, as correctly applied in
Re Linens N
    Things.

[29]

The bankruptcy judge dismissed the appeal of the
    partial disallowance of the Landlords claim, without addressing the balance of
    the Landlords claim for three months accelerated rent.

V.

ISSUES ON APPEAL

[30]

Two issues are raised in this appeal:

1.

Is the Landlord entitled to assert a claim for unpaid tenant inducements
    under the Lease as an unsecured creditor in Curriculums bankruptcy?

2.

Is the Landlord entitled to assert the balance of its preferred claim
    for three months accelerated rent as an unsecured creditor in Curriculums
    bankruptcy?

[31]

The bulk of these reasons will address the first
    question, which involves the Landlords challenge to the ongoing authority of
Re
    Mussens
and the Landlords interpretation of the relevant provisions of
    the BIA and CTA
.
With respect to the second issue, I will briefly
    explain that, on a plain reading of s. 38 of the CTA, together with s. 136(3)
    of the BIA, the Landlord is entitled to claim as an unsecured creditor for the
    balance of its preferred claim for three months accelerated rent.

VI.

ANALYSIS

(1)

Is the landlord entitled to assert a claim for unpaid tenant inducements
    under the lease as an unsecured creditor in Curriculums bankruptcy?

[32]

The Landlord contends that it should be able to
    claim in Curriculums bankruptcy for unpaid tenant inducements under the Lease
    in the same way that other unsecured creditors can assert claims for
    contractual damages. It argues that the principle in
Re Mussens
was overruled
    by the Supreme Courts decision in
Crystalline Investments
. Further, the
    Landlord suggests that, while other provinces have specifically prohibited
    landlords from claiming damages for the unexpired portion of a lease, the CTA
    contains no such restriction and does not prohibit such a claim. In effect, the
    Landlord proposes an interpretation of ss. 38 and 39 of the CTA that, upon
    disclaimer, would give priority to its claim for up to three months
    accelerated rent, while permitting it to claim damages in respect of the
    unexpired term of the Lease in accordance with the terms of the Lease.

[33]

The Landlord relies on the principle stated in
Highway
    Properties
, that a lease both creates an interest in land and gives rise
    to contractual rights, and its recognition of a landlords right to accept a tenants
    termination of a lease and to sue for damages for its breach. The Landlord argues
    that there is nothing in the BIA or the CTA to prevent a landlord from filing
    an unsecured claim for damages in the estate of a bankrupt tenant, nor is there
    any principled reason why a landlord should be treated differently from other
    creditors in a bankruptcy. The Landlord points to the terms of the Lease that
    expressly contemplate and provide for the situation of a bankruptcy or
    disclaimer and set out the contractual damages to which the Landlord is
    entitled.

[34]

In the discussion that follows, I begin with a
    brief summary of
Re Mussens
and the way that this authority has been
    interpreted by the courts. I will specifically address a line of cases dealing
    with the obligations of guarantors, assignors, and others following the disclaimer
    of a commercial lease, including the leading case from Ontario,
Cummer-Yonge
    Investments.

[35]

Turning to
Crystalline Investments
,

I will explain that, while overturning the principle in
Cummer-Yonge Investments
that a trustees disclaimer can release a guarantor from its obligations under
    the lease,
Crystalline Investments
did not address, and left intact,
    the rule articulated in
Re Mussens
and later cases, that on disclaimer
    of a commercial lease by its trustee, an Ontario landlord has no claim against
    a bankrupt tenant arising out of the disclaimer for damages in respect of the
    unexpired term of the lease; the landlord has only what is specifically
    provided for  its preferred claim for three months accelerated rent.

[36]

I will then turn to the Landlords argument
    based on
Highway Properties.
As I will explain, the argument that
Highway
    Properties
alters the principle stated in
Re Mussens
, and affords
    additional remedies to a landlord post-disclaimer, has been rejected in other
    cases, and for good reason.
Highway Properties
recognized that a lease
    is also a contract, and provided for a landlords fourth option after a
    tenants repudiation, that of accepting the repudiation, and suing for prospective
    damages. The case, however, did not address a situation of bankruptcy or insolvency.
    The remedies for a tenants repudiation do not apply once a trustee has
    disclaimed the lease. The Landlords argument fails to recognize the
    fundamental distinction between a disclaimer and a repudiation of a lease.

[37]

Finally, on this issue, I will briefly consider
    the Landlords argument that the relevant statutory provisions should be
    interpreted harmoniously with those that apply to a reorganization under the
Companies
    Creditors Arrangements Act
, R.S.C. 1985, c. C-36 (the CCAA). While the
    CCAA contains provisions that permit the disclaimer of any agreement to which
    the company is a party, including leases, and specifically provides for a
    provable claim by a party suffering a loss in relation to the disclaimer, there
    is no comparable provision that applies to leases disclaimed by a trustee on
    bankruptcy.

(a)

The principle stated in
Re Mussens

[38]

Re Mussens
involved
    a landlords claim for damages under the
Winding‑Up Act
, R.S.C.
    1927, c. 213, for breach of its tenants covenant to pay future rent after the
    liquidator had disclaimed the lease. Rose C.J. rejected the landlords claim,
    concluding, at pp. 460-61, that if the liquidator exercised its right under the
Landlord and Tenant Act
, R.S.O. 1927, c. 190 to surrender possession or
    disclaim the lease, then there could be no further liability of the tenant to
    pay rent and no suggestion that, by failing to pay rent, the tenant was
    committing a breach of covenant and was rendering himself liable for liquidated
    or unliquidated damages. Rose C.J. stated, at pp. 460-61:

I think that by his letter of April 21, 1932, confirmed in his
    letter of June 21, 1932, the liquidator exercised his right to surrender
    possession or disclaim the lease, and that when he had exercised that right
    the obligation of the tenant, the insolvent company, to pay rent was at an end.
    It did not require a statute to confer upon the liquidator power to surrender
    possession or disclaim the lease with the consent of the lessor;
the statute
    means I think that whether the lessor is or is not willing the liquidator may
    surrender possession or disclaim the lease, and that if he does so surrender
    possession or disclaim the lease the tenant in liquidation shall be in the same
    position as if the lease had been surrendered with the consent of the lessor.
Of course, if the lease were surrendered with the consent of the lessor, there
    could be no suggestion of any further liability on the part of the lessee to
    pay rent and no suggestion that, by failing to pay rent, the tenant was
    committing a breach of covenant and was rendering himself liable for liquidated
    or unliquidated damages. [Emphasis added.]

[39]

In this passage, Rose C.J. concluded that the
    statutory right to surrender possession or disclaim a lease has the same
    effect as a surrender with the consent of the lessor. As I will explain, this statement,
    equating a disclaimer with a consensual surrender of a lease, was applied in
    subsequent cases, such as
Cummer-Yonge Investments
, to release
    derivative obligations such as those of a guarantor, after a lease had been
    disclaimed by a tenants trustee.

[40]

More important to the present analysis, however,
    is the courts interpretation in
Re Mussens
of the relevant statutory
    provisions, and whether they permit a landlord to make a claim for damages for
    the surrender or disclaimer of the lease in the tenants bankruptcy
    proceedings. Contrasting the provisions of the
Landlord and Tenant Act
with the comparable legislation in England that provided specifically for a
    right to compensation following a disclaimer, at p. 461, Rose C.J. concluded
    that, in Ontario, there was no similar saving of the rights of the lessor and
    therefore no equivalent right to compensation. In other words, the silence in
    the Ontario legislation on the question of compensation meant that, after a disclaimer,
    the landlord had no claim for damages against the tenant in relation to the
    ending of the lease, and was limited to what it was specifically afforded by
    statute. Rose C.J. stated, at p. 461:

In England, as is pointed out by the Master in his judgment,
    the statute with which sec. 38 of
The Landlord and Tenant
    Act
more or less corresponds, contains the provision that any
    person injured by the operation of the section (i.e., by the disclaimer or
    surrender) shall be deemed a creditor of the bankrupt to the extent of such
    injury and may accordingly prove the same as a debt under the bankruptcy; but
    the Ontario statute contains no similar saving of the rights of the lessor, and
I think that the result is that in Ontario the liquidator has been given a
    statutory right to commit a breach of the insolvent's covenant, and that no
    right of compensation for the statutory breach having been given to the
    covenantee no damages can be recovered
.

[Emphasis added.]

[41]

Re Mussens
accordingly stands for the principle that, under Ontario law, the trustee of a
    bankrupt tenant is permitted by statute to bring an end to the lease, and all future
    obligations of the tenant thereunder, by surrendering possession of the leased
    premises or disclaiming the lease within three months of the bankruptcy. The
    principle articulated in
Re Mussens
, and the case itself, have been
    referred to in subsequent cases (some of which are referred to later in these
    reasons) and in articles and texts dealing with bankruptcy and insolvency and
    commercial leases. See e.g. L.W. Houlden, Bankruptcy of the Landlord or Tenant
    (1965), 7 C.B.R. (N.S.) 113, at p. 123; Christopher Bentley et al.
, Williams
    & Rhodes Canadian Law of Landlord and Tenant,
6th ed. (Toronto:
    Thomson Reuters Canada Limited, 2019), at c. 12:6:3 (WL); Steven Jeffery,
Cummer-Yonge
- A Post-Mortem:
Crystalline Investments Ltd. v. Domgroup Ltd
. (2006),
    21 B.F.L.R. 263, at p. 285; and David Bish,
Canadian Bankruptcy and
    Insolvency Law for Commercial Tenancies
, (Toronto: LexisNexis Canada Inc.,
    2016), at pp. 225, 394.

[42]

The Landlord notes that four provinces have
    legislation that expressly prohibits the type of claim it advances here (Prince
    Edward Island, Saskatchewan, Alberta and British Columbia), while nine
    provinces and territories have no such prohibition. However, it does not
    follow, as the Landlord argues, that such a claim is permitted where it is not
    expressly prohibited or restricted. Indeed, the Landlord has not cited a single
    case that would interpret the legislation this way, nor any case that is
    contrary to the interpretation provided for in
Re Mussens
. As discussed,
Re Mussens
interpreted the absence of a landlords statutory right of
    compensation for termination of the lease after a disclaimer (other than the
    claim for up to three months accelerated rent) as meaning that there is no
    such right.

(b)

Crystalline Investments
changed the law in Ontario, but not in the way the Landlord contends

[43]

The Landlord argues that recent cases, including
Crystalline Investments
, specifically overruled the
Re Mussens
line
    of cases, such that a disclaimer does not bring an end to all obligations under
    the lease. As a result, the Landlord argues that the obligation to pay the
    tenant inducements, which was specifically contemplated by the Lease as an
    obligation upon any termination of the Lease, bankruptcy of Curriculum, or disclaimer
    by its trustee, must survive.

(i)

The
Cummer-Yonge Investments
line of cases

[44]

Re Mussens
was
    applied in a number of cases as authority that, upon disclaimer by a trustee,
all
obligations in connection with a lease come to an end, not just those of the
    tenant. In particular, courts have relied on the statement in
Re Mussens
equating a disclaimer with a mutual surrender of a lease to conclude that
    the obligations of assignors and guarantors also come to an end with the
    disclaimer of a lease.

[45]

The leading case in Ontario articulating this
    conclusion was
Cummer-Yonge Investments.
In that case, a bankrupt
    tenants lease was disclaimed by a trustee in bankruptcy, leaving the landlord
    with a claim beyond its preferred claim in the bankruptcy. The landlord turned
    to a third-party guarantee securing the due performance by the lessee of all
    of its covenants  including the covenant to pay rent. The landlord accepted
    that the tenants further obligations under the lease had ended, but asserted
    that, upon disclaimer, the rights and obligations under the lease were revested
    in the bankrupt tenant, and so would permit a claim on a guarantee.

[46]

Gale C.J. rejected this argument, citing the
    passage from
Re Mussens
equating a disclaimer to a surrender. He
    concluded that on bankruptcy, all of the tenants rights and obligations under
    the lease irrevocably pass to the trustee and when the trustee subsequently
    disclaimed that interest, all the rights and obligations which he inherited
    from the bankrupt were wholly at an end: at p. 29. For this reason, the
    guarantee was inoperative. Thereafter there could be no covenants in the lease
    which the lessee was required to perform, so that the guarantee of the due
    performance by the lessee of all its covenants in the lease" was thereupon
    extinguished.

[47]

This approach was followed in a number of cases
    that cited and relied on the statement in
Re Mussens
equating the
    statutory surrender of possession or disclaimer by a trustee to a surrender
    with the consent of the landlord. For example, in
Re Salok Hotel Co. Ltd.
(1967), 66 D.L.R. (2d) 5 (Man. Q.B.), affd on other grounds (1967), 66 D.L.R.
    (2d) 5 (Man. C.A.), at p. 14, Wilson J. cited
Re Mussens
as
    authority that, upon the disclaimer of a lease by the trustee, all liability of
    the trustee and of the estate of the bankrupt lessee up to that time was
    extinguished, and that the landlord could not rank against the estate of the
    bankrupt for breach of contract. Citing
Cummer-Yonge Investments
, Wilson
    J. also held that, upon disclaimer of the lease, the liability of guarantors is
    also at an end.

[48]

The decision in
Cummer-Yonge Investments
was
    controversial. It was cited and followed in a number of cases, including
Titan
    Warehouse Club Inc. (Trustee of) v. Glenview Corp.
(1988), 67 C.B.R.
    (N.S.) 204 (Ont. H.C.), affd 75 C.B.R. (N.S.) 206 (Ont. C.A.) and
Peat
    Marwick Thorne Inc. v. Natco Trading Corporation
(1995), 22 O.R. (3d) 727
    (Gen. Div.). It was distinguished in
885676 Ontario Ltd. (Trustee of) v.
    Frasmet Holdings Ltd.
(1993), 99 D.L.R. (4th) 1 (Ont. Gen. Div.). (Each of
    these cases involved claims under letters of credit.) Moreover, in
Andy
    & Phil Investments Ltd. v. Craig
(1991), 5 O.R. (3d) 656 (Gen. Div.)
    and
Sifton Properties Limited v. Dodson
(1994), 28 C.B.R. (3d) 151 (Ont.
    Gen. Div.), the courts accepted that a guarantee could be drafted to secure an
    obligation that would survive bankruptcy.

[49]

In 1993, the British Columbia Court of Appeal,
    without citing
Cummer-Yonge Investments
, concluded that the disclaimer
    of two assigned leases by an assignees trustee in bankruptcy did not end the
    assignors obligations to their landlords:
Transco Mills Ltd. v. Percan
    Enterprises Ltd.
(1993), 100 D.L.R. (4th) 359 (B.C.C.A.). In that case, the
    assignor tenants made the argument accepted in
Cummer-Yonge Investments

    that a disclaimer had the same effect as a mutual surrender of a lease, with
    the result that the obligations of any third party, such as an assignor, would
    be eliminated. The relevant B.C. legislation was comparable to ss. 38 and 39 of
    the CTA.

[50]

Writing for the court in
Transco Mills
,
    Taylor J.A., at pp. 364-65, traced the assertion that a disclaimer can be
    equated to a mutual surrender to s. 23 of the
Bankruptcy Act 1869
(U.K.),
    32 & 33 Vict., c. 71, which had specifically provided that a lease
    disclaimed by a trustee
shall be deemed to have been surrendered
.
[6]

He noted (as did Rose
    C.J. in
Re Mussens
), that the U.K. statute specifically gave to any
    person injured by the operation of the section a right to claim in the
    bankruptcy for such injury. He then referred to later English case law
    restricting the meaning of surrender in this statutory context, including
Hill
    v. East & West India Dock Co.
(1884), 9 App. Cas. 448 (H.L.), where
    Lord Blackburn, at p. 458, stated that the statutory concept of deemed
    surrender was to be taken to apply only so far as is necessary to effectuate
    the purposes of the Act and no further.

[51]

Taylor J.A. observed that, by contrast to the
    U.K. legislation, there was no statutory or other basis in B.C. for equating
    the disclaimer of a lease by a trustee to a surrender. He approved of the way the
English courts had approached the U.K.
    legislation: the effect of a disclaimer should be limited to accomplishing the
    purpose of the bankruptcy scheme only, and, so far as possible, to not
    adversely affect the position of those outside the bankruptcy. As a result, he
    held, at p. 369, that the trustees disclaimer did not end the leases for
all
purposes and that the assignor tenants remained liable for the bankrupt
    assignees failure to pay rent.

[52]

The issue in the cases discussed above was
    not whether the bankrupt tenant was relieved of its ongoing obligations under a
    disclaimed lease (this was either stated directly or assumed), but whether the disclaimer
    also ended the landlords rights against security provided by the tenant, a
    guarantor of the tenants obligations, or an assignor of a lease that was
    subsequently disclaimed.

[53]

Ultimately, the approach in
Transco Mills
was
    followed by this court in
Crystalline Investments
, which sought to
    distinguish
Cummer-Yonge Investments.
This courts decision in
Crystalline
    Investments
was ultimately upheld by the Supreme Court which, in
obiter
,
    overruled the
Cummer-Yonge Investments
holding. I turn to
Crystalline
    Investments
now.

(ii)

The Supreme Court decision in
Crystalline Investments

[54]

In
Crystalline Investments
,

a
    commercial tenant (Domgroup), entered into leases with each of Crystalline
    Investments Limited and Burnac Leaseholds Limited (the landlords). Domgroup subsequently
    assigned the two leases to its subsidiary which was thereafter sold and
    amalgamated to form Food Group Inc. (Food Group). Food Group ultimately
    became insolvent and filed a proposal under s. 65.2 of the pre-1997 version of
    the BIA. The terms of the proposal purported to repudiate the assigned leases
    (s. 65.2 was later amended to use the term disclaim).
[7]
The landlords had a
    right to challenge the repudiation, but did not do so, and were then limited to
    a claim for the lesser of up to six months rent and the rent for the remainder
    of the leases following repudiation. The landlords sued Domgroup for their
    additional damages, relying on the provision in the leases confirming that the
    assignor would remain fully liable thereunder notwithstanding any assignment.

[55]

Domgroup argued successfully at first instance that its position was
    comparable to that of the guarantor in
Cummer-Yonge Investments
: the
    effect of the repudiation of the leases in the bankruptcy proposal was that all
    obligations under the leases had come to an end for all purposes, thereby terminating
    its obligations as assignor. Domgroup was successful in having the action
    dismissed in its summary judgment motion: (2001), 39 R.P.R. (3d) 49 (Ont. S.C.).
    The landlords prevailed in their appeal to this court: (2002), 49 R.P.R. (3d)
    171 (Ont. C.A.). Carthy J.A., writing for this court, referred to and approved
    of the reasoning of the British Columbia Court of Appeal in
Transco Mills.
He
    also purported to distinguish
Cummer-Yonge Investments
, on the basis
    of the difference between a guarantor of obligations under a lease and one who
    has primary obligations. In this case, the assignor had signed as principal
    and not as surety.

[56]

The Supreme Court upheld the decision of this
    court. However, rather than attempting to distinguish the
Cummer-Yonge
    Investments
line of cases, Major J., writing for the court, examined the
    issue based on first principles. He concluded that, absent a contractual
    release from the landlord, the original tenant as assignor under the lease
    would remain liable on the covenant to the landlord, notwithstanding the
    insolvency of the assignee and any consequent repudiation of the lease.

[57]

The issue in
Crystalline Investments
was
    fairly narrow: did s. 65.2 of the BIA alone terminate the rights and
    obligations of the assignor under the leases?
[8]
At the time, s. 65.2 read as follows:

65.2 (1) At any time between the filing of a
    notice of intention and the filing of a proposal, or on the filing of a
    proposal, in respect of an insolvent person who is a commercial tenant under a
    lease of real property, the insolvent person may repudiate the lease on giving
    thirty days notice to the landlord in the prescribed manner, subject to
    subsection (2).

[58]

Major J. observed that, while s. 65.2 focusses on
    bilateral relationships, such as a simple lease between a landlord and a
    tenant, the effect of the repudiation does not change in a tripartite
    arrangement resulting from the assignment of a lease: In both situations the
    repudiation must be construed as benefiting only the insolvent: at para. 27. At
    para. 28, he observed that [t]he plain purposes of the section are to free an
    insolvent from the obligations under a commercial lease that have become too
    onerous, to compensate the landlord for the early determination of the lease,
    and to allow the insolvent to resume viable operations as best it can, and
    that [n]othing in s. 65.2, or any part of the Act, protects third parties (i.e.
    guarantors, assignors or others) from the consequences of an insolvents repudiation
    of a commercial lease. Major J. confirmed that such third parties would remain
    liable when the party on whose behalf they acted becomes insolvent. He
    explained that, on an assignment of a lease, while the landlords privity of
    estate with the original tenant comes to an end, the privity of contract
    continues and the original tenant remains liable upon its covenant: at para. 29.
[9]

[59]

The Supreme Court addressed the argument that,
    unless a repudiation under s. 65.2 terminated a lease for all purposes, an
    assignors common law indemnification right against the original tenant could
    frustrate the BIA: the insolvent assignee could face an additional claim on the
    lease in excess of the preferred payment required to be paid to the landlord
    under s. 65.2. Major J. rejected this argument, noting that in such
    circumstances, the assignor would simply join the other unsecured creditors in
    the proceedings: at paras. 32-35.

[60]

Finally, Major J. confirmed that the same
    analysis should apply to the
Cummer-Yonge Investments
facts:
    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: at para. 42.

[61]

Major J. observed that
Cummer-Yonge
    Investments
had created uncertainty in leasing and bankruptcy, as drafters
    of leases attempted to circumvent its holding by playing upon the primary and secondary
    obligation distinction, and courts performed tortuous distinctions in order
    to reimpose liability on guarantors: at para. 39. Major J. noted, at para. 41,
    that, in
Cummer-Yonge Investments
, Gale C.J. applied the reasoning of
    the English Court of Appeal in
Stacey v. Hill
, [1901] 1 K.B. 660
    (C.A.), which was subsequently overruled by the House of Lords in
Hindcastle
    Ltd. v. Barbara Attenborough Associates Ltd. et al.
, [1996] 1 All. E.R.
    737 (H.L.). He concluded that
Cummer-Yonge Investments
should meet
    the same fate: at para. 42.

(iii)

Crystalline Investments
did not affect the principle stated in
Re Mussens

[62]

In the present case, the bankruptcy judge
    concluded, after her own review of
Crystalline Investments
, that
    neither the
ratio decidendi
nor the
obiter dicta
of that case
    (overturning
Cummer-Yonge Investments
) addressed whether a landlord
    can claim unsecured damages in the bankruptcy proceedings of its tenant upon
    the disclaimer of a lease by the trustee in bankruptcy. I agree with her
    analysis and conclusion.

[63]

In
Re Mussens
the court equated the
    legal effect of a trustees statutory right of disclaimer to a mutual
    surrender of the lease. Subsequent decisions, invoking that characterization,
    have reasoned that certain third-party obligations that are linked to the lease
    come to an end when the lease is disclaimed by the trustee. This has led to
    confusion and ultimately to cases, like
Cummer-Yonge Investments
, that
    were overtaken by
Crystalline Investments
.

[64]

As noted earlier, although
Re Mussens
used the language of mutual surrender, Taylor J.A. appears to reject that
    characterization in
Transco Mills
. In
Crystalline Investments
,
    the Supreme Court did not address the issue. Whether or not a disclaimer should
    be characterized as a mutual surrender, both
Re Mussens
and
Transco
    Mills
are consistent in their treatment of the legal effect of a
    disclaimer on

the obligations of a bankrupt tenant.

[65]

The key underlying principle that emerges from
Crystalline
    Investments
is that the disclaimer of a lease by the tenants trustee
    benefits only the insolvent party.
[10]
The Supreme Court overruled
Cummer-Yonge Investments
, stating that the
    liability of assignors and guarantors would not be discharged by the disclaimer
    alone. Major J. did not contradict the premise that a trustees disclaimer ends
    the obligations of the tenant under the lease. Indeed, he assumed that the
    effect of a disclaimer is to bring the tenants obligations under the lease to
    an end, and he explained that the purpose of s. 65.2 of the BIA is to free an
    insolvent from the obligations under a commercial lease that have become too
    onerous, to compensate the landlord for the early determination of the lease,
    and to allow the insolvent to resume viable operations as best it can: at
    para. 28.
Crystalline Investments
is consistent with the principle
    stated in
Re Mussens
that a disclaimer operates to end the
bankrupt
    tenants
obligations under the lease. However, it would not support an
    interpretation of
Re Mussens
that would characterize a disclaimer as a
    consensual surrender
for all purposes
.

[66]

The parties to the present appeal requested and
    were granted leave to make written submissions on
7636156 Canada Inc. v.
    OMERS Realty Corporation
, 2019 ONSC 6106, 74 C.B.R. (6th) 312, a decision
    released shortly after the hearing of the appeal. In that case, Hainey J. relied
    on
Re Mussens
and distinguished
Crystalline Investments
in
    the context of a landlords rights under a letter of credit following
    disclaimer by the tenants trustee in bankruptcy. After citing the
Cummer-Yonge
    Investments
line of cases referred to in para. 48 above he concluded that
    on disclaimer, the bankrupt no longer has any obligations owing to the
    landlord under the lease, and the landlord is not entitled to draw on a letter
    of credit provided as security under the lease for any amounts in excess of the
    Landlords three months accelerated rent preferred claim under s. 136(1)(f) of
    the BIA: at para. 39. He accepted the trustees submission that his conclusion
    was not impacted by
Crystalline Investments
because the obligation to
    make payment under the letter of credit was wholly dependent on the continued
    existence of the Bankrupts obligations to the Landlord under the Lease: at
    para. 44.

[67]

736156
has since
    been appealed to this court: C67634. Because the case was concerned with the
    obligations under a letter of credit after disclaimer, and not any claim by the
    landlord in the tenants bankruptcy, and in view of the outstanding appeal, it
    is unnecessary and beyond the scope of these reasons to address the decision,
    except to note that the court accepted the continuing authority of
Re Mussens
.

(c)

Highway Properties

does not provide a basis for the Landlords
    claim for tenant inducements under the Lease

[68]

I turn now to address the Landlords argument
    that
Highway Properties
would support its right to claim as an
    unsecured creditor for the tenant inducements provided for under the Lease. The
    same argument has been rejected in other cases, for good reason, and must be
    rejected here. In short, while
Highway Properties
recognized that, after
    accepting a tenants repudiation, the landlord can assert a contractual claim
    for its prospective losses, the case does not speak to a landlords remedies in
    bankruptcy or insolvency. In particular, it does not address the remedies that
    are available to a landlord after a lease has been disclaimed by the tenants
    trustee in bankruptcy.

(i)

The Supreme Court decision in
Highway Properties

[69]

Highway Properties
involved the claim of a landlord for prospective losses following a
    tenants repudiation of an unexpired lease. The tenant had abandoned the
    premises and the landlord took possession, while asserting a claim for damages for
    its loss calculated over the unexpired term of the lease. The lower courts had dismissed
    the landlords claim for prospective damages, concluding that the repudiation
    of the lease by the tenant and the taking of possession by the landlord
    amounted to a surrender by operation of law, so that the lease ceased to exist.
    Accordingly, claims for prospective loss could not be supported and only
    accrued loss could be claimed.

[70]

At the time the case was heard, the law
    recognized three mutually exclusive options available to a landlord on a
    tenants repudiation of a lease: (i) to do nothing and insist on the tenants performance
    of the terms and sue for rent or damages on the footing the lease remains in
    force; (ii) to elect to terminate the lease, retaining the right to sue for
    rent accrued due or for damages to the date of termination for prior breaches
    of covenant; or (iii) to advise the tenant of the landlords intention to
    re-let the property on the tenants account and to enter into possession on
    that basis: see
Highway Properties
, at p. 570.

[71]

In
Highway Properties
, Laskin J.,
    writing for the court, observed that a lease is both a conveyance and a
    contract. The termination of the tenants estate in the land when its
    repudiation was accepted by the landlord did not necessarily mean that the
    tenants covenants under the lease came to an end. Laskin J. accepted the
    proposition that the landlord had a fourth
contractual
option on repudiation of the lease, which was exercised in that case: to terminate
    the lease with notice to the tenant that damages will be claimed for the loss
    of the benefit of the lease over its unexpired term, while repossessing the
    leased property.

[72]

Highway Properties
specifically addressed remedies available to a landlord after a
    tenants repudiation of the lease. It did not, however, change the legal effect
    of a disclaimer or alter the principle in
Re Mussens.
To treat a disclaimer
    as a repudiation for damages purposes is to ignore the fundamental distinctions
    between surrender and disclaimer on the one hand and repudiation on the other.

(ii)

Cases considering the Landlords
Highway
    Properties
argument

[73]

The attempt to rely on
Highway Properties
to
    support a landlords claim for prospective damages in a bankruptcy after
    disclaimer has been rejected in a number of cases.

[74]

In
Re Vrablik
(1993), 17 C.B.R. (3d)
    152 (Ont. Gen. Div.), the issue was whether, post-disclaimer, a landlord could
    claim as an unsecured creditor in its tenants bankruptcy for damages in lieu
    of payments that would have been due under the unexpired portion of a five-year
    commercial lease. These included rent before the premises were re-let, taxes, maintenance
    costs, and the shortfall on re‑letting the premises. Maloney J. observed
    that it would be a grave error to adopt the analysis and decision in
Highway
    Properties
as the present case involves a bankruptcy, which is quite
    different from an outright repudiation of a contract. A bankruptcy is a final
    and irreversible situation: at p. 158. He rejected the argument that the reference
    to the landlords rights being determined by the laws of the province in which
    the leased premises are situated in s. 146 of the BIA, referred to the common
    law of the province, including the option to accept the termination and to sue
    for prospective damages, as recognized in
Highway Properties.
Rather,
    this phrase referred to ss. 38 and 39 of the
Landlord and Tenant Act
,
    R.S.O. 1990, c. L.7, which together with the BIA would limit the landlords
    claim to three months rent. Maloney J. concluded that the BIA and the
Landlord
    and Tenant Act
provided a comprehensive scheme for the administration of
    the leasehold interests of bankrupt tenants and that
Highway Properties
had
    no application: at pp. 158-59.

[75]

Similarly, as I have noted in para. 27 above, in
Re Linens N Things
,

the Registrar dismissed an appeal of a
    trustees disallowance of a landlords claim for the costs of building a
    structure, amounts provided under the lease as a tenant's allowance, and the
    commission paid on the lease itself by the landlord, following the disclaimer
    of the lease by the trustee. The landlord, relying on
Highway Properties
,
    had characterized these claims as damages for breach of contract rather than
    rent. The Registrar rejected this argument, noting that in
Highway
    Properties
the tenant had repudiated the lease, and there was no
    insolvency or any question of the applicability of s. 146 of the BIA or
    anything like ss. 38 and 39 of the CTA. As such, the terms of the lease, which
    reserved to the appellant all of its rights at law and equity for breach of
    the lease were irrelevant: at paras. 15-16.

[76]

The Registrar observed, at paras. 20-21:

The Ontario statute did not provide for such a
    damage claim and deemed creditor status 76 years ago, and it does not do so
    today. The Dominion Parliament, in exercising its jurisdiction over bankruptcy
    law in the Dominion, has wholly left it up to the Provinces to determine the
    rights of lessors in these circumstances, and the Provincial Parliament has not
    seen fit to provide for the type of damage claim advanced by the Appellant

[N]either of
    the statutes which govern rights in these matters provides for the type of
    claim advanced. Even more, the CTA and its predecessors, has been found for the
    better part of a century to have the effect of a consensual ending of the
    lease, and the cases recognize that this is a statutorily permitted breach for
    which there is no damage remedy, beyond the s. 38 CTA and s. 136 BIA preferred
    claim.

[77]

The application of
Highway Properties
was
    argued and rejected in the Alberta case
Principal Plaza Leaseholds Ltd. v.
    Principal Group Ltd. (Trustee of)
(1996), 9 W.W.R. 539 (Alta. Q.B.). In
    that case, the trustee of a bankrupt tenant disallowed the landlords claim for
    damages for the unexpired portion of the leases, taking the position that on
    disclaimer, the entire balance of the unsecured claim was extinguished. The
    landlord argued that
Re Mussens
and
Re Vrablik
were wrongly
    decided because they concluded that a disclaimer has the same effect as a
    surrender, when in fact a disclaimer is a form of repudiation by the trustee without
    the landlords consent. The landlord argued that on disclaimer, the landlord
    has the same rights that it would have on repudiation in a non-bankruptcy situation
    under
Highway Properties
. Cairns J. rejected this argument, stating
    that the overwhelming weight of authority was that the combined effect of the
    federal and provincial legislation is that the claim of the landlord
    respecting the unexpired portion of the leases has been extinguished by the
    disclaimer of the leases: at p. 596.

(iii)

The
Highway
    Properties

remedies
    are for repudiation, not disclaimer

[78]

Highway Properties
dealt with the remedies available to a landlord after the
    abandonment of the leased premises by the tenant. The tenant was not bankrupt
    and the provisions of the BIA and CTA were not at issue. Instead, the case addressed
    the landlords remedies, outside of bankruptcy or insolvency, following a
    tenants repudiation or fundamental breach.

[79]

The distinction between repudiation before
    bankruptcy and disclaimer after bankruptcy was central to the facts in
Re TNG
    Acquisition Inc.
, 2011 ONCA 535, 107 O.R. (3d) 304. In that case, a
    trustee in bankruptcy disallowed a claim for prospective damages
[11]
by a landlord after the
    tenant, which had been in CCAA proceedings, made an assignment in bankruptcy
    and the trustee had purported to disclaim the lease. The issue was whether the Chief
    Restructuring Officer (the CRO) had already repudiated the lease on behalf of
    the tenant before the restructuring efforts failed and the tenant declared
    bankruptcy. If so, the landlord could claim its prospective damages as an
    unsecured creditor in the tenants bankruptcy.
[12]

[80]

The Initial Order in the CCAA proceedings gave
    the tenant the right to vacate, abandon or quit any leased premises and/or
    terminate or repudiate any lease  without prior notice  in writing  on such
    terms as may be agreed upon between the Applicant and such landlord or, failing
    such agreement, to deal with the consequences thereof in the Plan. The CRO
    exercised that right, sending a repudiation letter to the landlord. The
    landlord never acknowledged, accepted, signed or returned the repudiation
    letter before the restructuring failed and the bankruptcy occurred. The
    landlord submitted a Proof of Claim that included its unrecoverable expenses
    during the entire term of the lease. The trustee issued a disclaimer of the
    lease the following month. The landlord argued that the repudiation was
    complete when the trustee received the repudiation letter, and that the lease
    had already been forfeited when the trustee issued its disclaimer. This
    argument was rejected at first instance, and the appeal from the disallowance
    was dismissed.

[81]

In the landlords further appeal to this court, Gillese
    J.A. noted that the effect of the trustees disclaimer of the lease was to
    bring the lease to an end and to terminate all rights and obligations for the
    payment of rent: Thus, if the trustee disclaims the lease, the landlord has no
    claim for rent for the remainder of the lease: at para. 14. She went on to
    discuss the effect of the repudiation letter. Citing
Highway Properties
,
    Gillese J.A. explained that repudiation does not in and of itself bring a lease
    to an end. Rather, [i]t confers on the innocent party a right of election to,
    among other things, treat the lease as at an end, thereby relieving the parties
    of further performance, though not relieving the repudiating party from its
    liabilities for breach: at para. 34. In the absence of any election, the
    landlord/tenant relationship remained intact, and the lease, which had not been
    brought to an end in the CCAA

proceedings, was therefore susceptible
    to statutory disclaimer by the trustee following the commencement of
    bankruptcy: at paras. 38, 40.

[82]

It was essential in
Re TNG Acquisition
to
    determine whether the landlord had already accepted the CROs repudiation of
    the lease at the time of the bankruptcy because this determined the remedies
    available to the landlord. If the repudiation had been accepted, the various
    options under
Highway Properties
would have been available to it,
    including an unsecured claim for its losses over the unexpired term of the
    lease. Unless this had already occurred, the effect of the disclaimer was to
    preclude any such claim.

[83]

In his text,
Canadian Bankruptcy and
    Insolvency Law for Commercial Tenancies
, David Bish observes that, while
    in practice, particularly outside of insolvency law, the terms disclaim and
    repudiate are used without distinction,
[13]
there are fundamental differences:
[
F
]
or example, as a
    matter of common law, a landlord has no claim for damages following a
    disclaimer (i.e., but for the statutory reservation of such claim), whereas a
    landlord does have a claim for damages following repudiation: at p. 225n.

[84]

David Bish explains why disclaimer should not be
    viewed as a type of repudiation, at pp. 235-36:

It may be argued that disclaimer ought to be viewed as a type
    of
repudiation
, or equivalent to a repudiation. In some
    respects, they achieve similar outcomes and share similar characteristics,
    including a fundamental refusal by a tenant to perform a lease. However, the
    better view is that there is an important distinction between the two concepts
    and neither the acts nor the consequences that flow from the acts are
    synonymous. Disclaimer is appealing because of its simplicity in insolvent
    circumstances and in sidestepping unnecessary legal complications that arise in
    cases of repudiation. In this respect, disclaimer is more akin to a unilateral
    and irrevocable act of the tenant (one that dispenses with complications such
    as the doctrines of waiver, notice, elections and the like), with established
    consequences for tenant and landlord alike. A disclaimer, unlike a repudiation,
    does not put the ball in the landlords court, so to speak; it avoids the
    dance between landlord and tenant that ensues where a repudiation occurs.

[85]

David Bish further observes that the argument that
    the panoply of
Highway Properties
options should be available on
    disclaimer makes little sense in the insolvency scenario where it is clear that
    certain of those options are unworkable and where the statute provides a
    specific right to compensation. The landlord should not be able to elect a remedy
    that would negate or undermine the statutory right to disclaim: at pp. 234-35.

(iv)

Conclusion on the Landlords
Highway Properties

argument

[86]

The Landlord asserts that Curriculums
    bankruptcy and the disclaimer were each events of default under s. 16.1 of the Lease,
    triggering the rights and remedies provided thereunder. The Landlords rights
    and remedies in this case, however, are determined by statute and not by the
    terms of the Lease. The remedies provided under the Lease for default  even
    those specifically applicable in bankruptcy or upon disclaimer  simply were
    not available once the Lease was disclaimed.

[87]

On bankruptcy, the Lease vested in the Trustee
    and was subject to the various rights and remedies prescribed by the
    legislation. As in
Re TNG Acquisition
there was no termination of the
    Lease that preceded the bankruptcy, and the Landlords claim for damages for
    the loss of the Lease is precluded.

[88]

It was suggested that the Landlords claim for
    tenant inducements might be considered an existing or accrued claim because the
    Landlord seeks to recover money it has already spent (in the nature of a loan
    to the Tenant) and not damages for the loss of the Lease. There is no merit to
    this argument. The Landlords claim is not for the value of the tenant inducements
    accrued up to the time of bankruptcy. The Landlord has already recovered such
    amounts in the rental payments it received. The claim is for the value of
    tenant inducements calculated for the remaining term of the Lease. The
    entitlement to recoup an amount for tenant inducements arises under the Lease
    and only if [the] Lease is terminated due to the default of Tenant, or if it
    is disclaimed, repudiated or terminated in any insolvency proceedings. It is a
    remedy for default, including bankruptcy or disclaimer. In other words, the
    Landlord had no right to recover such amounts prior to the bankruptcy, when the
    Lease was immediately vested in the Trustee.

[89]

To reiterate, the Trustees disclaimer brought
    to an end the rights and remedies of the Landlord against Curriculum with
    respect to the unexpired term of the Lease, apart from the three months
    accelerated rent specifically provided for under the CTA and BIA. The
    Landlords unsecured claim, however it is characterized, is precluded because
    the disclaimer brings to an end both the Tenants ability to insist on
    performance of the Lease by the Landlord and the Landlords ability to claim in
    the Tenants bankruptcy in respect of any of its remedies. The Lease ended by
    disclaimer without the Landlord having terminated it or invoked its remedies
    under the Lease upon the occurrence of events under s. 16.1.

[90]

The statutory claim is provided in place or in
    lieu of any ongoing rights a landlord might have against the tenant under its
    lease. In Ontario, the landlord has a right to claim for three months
    accelerated rent. While the right can only be exercised if the lease provides
    for it, the right is one prescribed by statute and does not assume the
    continued existence or enforceability of the lease.

(d)

The harmonization argument

[91]

The Landlords final argument on this issue is
    that the disclaimer provisions should be interpreted to permit it to assert a
    claim for damages for the unpaid tenant inducements because claims for damages
    are permitted under the parallel BIA proposal provisions and the CCAA disclaimer
    provision. The Landlord relies on the Supreme Court decision in
Century
    Services Inc. v. Canada (Attorney General)
, 2010 SCC 60, [2010] 3 S.C.R.
    379 for its harmonization argument. The Landlord quotes para. 24 of that
    decision, which states the following:

With parallel
CCAA
and
BIA
restructuring schemes now an accepted feature of the insolvency law landscape,
    the contemporary thrust of legislative reform has been towards harmonizing
    aspects of insolvency law common to the two statutory schemes to the extent
    possible and encouraging reorganization over liquidation.

[92]

Nothing in
Century Services
assists the
    Landlord in the present appeal. In that case, the issue was whether GST
    collected by a debtor but not yet remitted was subject to a statutory deemed
    trust under the
Excise Tax Act
, R.S.C. 1985, c. E-15 (the ETA)
    in favour of the Crown, and whether the deemed trust would prevail when a CCAA
    stay was lifted to permit the debtor to enter bankruptcy. The debtor had
    attempted reorganization under the CCAA, and the subject funds were held in the
    monitors trust account until it could be determined whether the reorganization
    would be successful. The ETA provided that the deemed trust operated despite
    any other enactment of Canada, except the BIA. Under the BIA, the Crown
    priority was lost. As a preliminary issue, the court confronted the apparent
    inconsistency between two federal statutes: the ETA which only expressly
    recognized the BIA loss of priority and the CCAA, which was enacted before the
    ETA and provided that notwithstanding any provision in federal or provincial
    legislation that has the effect of deeming property to be held in trust for Her
    Majesty, property of a debtor company shall not be [so] regarded: s. 18.3(1).

[93]

Deschamps J., writing for the majority, resolved
    the statutory interpretation issue by concluding that the Crowns deemed trust
    was lost under the CCAA in the same way that it was lost under the BIA. She
    refused to accept that the ETA trumped the provision of the CCAA purporting to
    nullify most deemed statutory trusts. At para. 47, she noted that a strange
    asymmetry would arise if the interpretation giving the
ETA
priority
    over the
CCAA
urged by the Crown is adopted here: the Crown would
    retain priority over GST claims during
CCAA
proceedings but not in
    bankruptcy. Although the effect was to harmonize the two regimes in their
    treatment of the Crown deemed trust, in fact, this was simply a question of
    statutory interpretation. Deschamps J. gave effect to the provisions of the
    CCAA and the BIA which treated Crown GST claims the same way.

[94]

Later in her reasons, Deschamps J. used the term
    harmonization to describe something else: the ability of the CCAA judge to
    partially lift the CCAA stay to allow the debtors entry into bankruptcy,
    without requiring the term sought by the Crown  the payment of the claimed
    deemed trust for GST. She recognized that the CCAA judges order fostered a
    harmonious transition between reorganization and liquidation and that the court
    had discretion under the CCAA to construct a bridge to liquidation under the
    BIA: at paras. 77, 80.

[95]

The Landlords harmonization argument,
    advocating for the identical treatment of the disclaimer provisions, has no
    merit where Landlord claims are expressly treated differently in a BIA
    proposal, under the CCAA and in a bankruptcy.

[96]

In a proposal under the BIA, s. 65.2 provides for
    a commercial tenant to disclaim or resiliate
[14]
a lease, subject to the landlords objection and the courts determination
    whether the insolvent person would be able to make a viable proposal without
    the disclaimer or resiliation. Section 65.2 provides that the landlord has no
    claim for accelerated rent even if the lease provides for it. The landlord has
    an election as to the calculation of its claim: it may claim its actual losses
    or an amount prescribed by a formula. No provision is made for priority of the
    landlords claim. The disclaimer provisions also contemplate what happens where
    the proposal fails and the tenant becomes bankrupt, and also the reverse
    where a tenant is bankrupt and then makes a proposal.

[97]

Unlike the BIA proposal provisions that deal
    specifically with commercial leases, the CCAA disclaimer provision, s. 32, applies
    to the disclaimer of all agreements, including leases. Again, the disclaimer is
    subject to objection of the other party and court order. Subsection 32(7)
    provides that, where an agreement is disclaimed or resiliated, a party who
    suffers a loss in relation to the disclaimer is considered to have a provable
    claim.

[98]

The fact that the BIA proposal provisions and
    the CCAA disclaimer provision specifically provide for a landlords claims for
    damages following disclaimer simply indicates that Parliament intentionally
    departed from the bankruptcy model for landlord claims in the context of a restructuring.

[99]

In sum, the fact that the three insolvency
    regimes all permit disclaimer but provide for different remedies represents a
    policy choice by Parliament. In such circumstances, there is no scope for
    applying the harmonization principle, or reading the different provisions as
    providing for the same remedy. Such an interpretation would render the
    legislators deliberate policy choice irrelevant.

(2)

Is the Landlord entitled to assert the balance of its claim for three
    months accelerated rent as an unsecured creditor in Curriculums bankruptcy?

[100]

The second issue on appeal is governed by s. 136(3) of the BIA. Subsection
    136(3) provides that [a] creditor whose rights are restricted by this section
    is entitled to rank as an unsecured creditor for any balance of claim due him.

[101]

The Landlord was entitled to a preferred claim for three months accelerated
    rent. However, the priority of its preferred claim was subject to higher
    ranking priorities and, under s. 136(1)(f), was limited to the realization from
    the property on the leased premises. As noted above, the Trustee realized only $24,571
    from the sale of the property on the premises leased by Curriculum. In
    consequence, the Trustee allowed the Landlords preferred claim for $24,571,
    but disallowed the balance.

[102]

The Landlord is entitled to rank as an unsecured creditor for the unpaid
    balance of its preferred claim. This is the plain effect of s. 136(3) of the
    BIA. See also
Re Gingras Automobile Lté
e.
, [1962] S.C.R. 676,
    at p. 680, where Abbott J., writing for the court, held that the combined
    effect of the relevant provisions under the
Bankruptcy Act
, R.S.C.
    1952, c. 14 is that a landlord is only entitled to rank as an unsecured
    creditor for any balance to which it may be entitled under provincial law. Under
    s. 38 of the CTA, a landlord is entitled to a preferred claim for three months
    accelerated rent.

[103]

The Trustee ought to have permitted the Landlord to claim the
    balance of its preferred claim for three months accelerated rent ($50,289.28)
    as an unsecured creditor.

VII.

DISPOSITION

[104]

For these reasons, I would allow the appeal, but only to the extent
    of permitting the Landlord to claim the balance of its preferred claim for three
    months accelerated rent as an unsecured creditor in Curriculums bankruptcy in
    the amount of $50,289.28. The Trustee did not seek costs and given the divided
    success, I would not award costs of the appeal.

Released: April 27, 2020 (A.H.)

K. van Rensburg J.A.

I agree. Alexandra Hoy A.C.J.O.

I agree. L.B. Roberts J.A.

[1]

Subsection
    136(1)(f) also gives a landlord a preferred claim in respect of three months of
    arrears of rent preceding the bankruptcy. However,
there is no
    issue in this case about arrears of rent or other amounts that were owing at
    the time of the bankruptcy, claims that the Landlord could have asserted as an
    unsecured creditor in Curriculums bankruptcy. In these reasons, the analysis
    is limited to the issue of whether the landlord can claim as an unsecured
    creditor in the bankruptcy for damages relating to the unexpired term of the
    lease.

[2]
The
    principle cited in
Re Mussens
was articulated in Canada
    at least as early as 1922 in
Eastern Nut Krust Bakeries, Ltd. v. Damphousse, Trustee and the
    Catherine Realties Ltd.
(1922), 2 C.B.R. 215
    (Que. S.C.).

[3]

Termination
    Payment is defined in s. 2.30 of the Lease and provides a formula based on the
    amount by which the net present value of the amounts payable as Rent and
    Additional Rent under the Lease for the lesser of the balance of the Term or
    the next three years following the Termination Date exceeds fair market Rent.
    Termination Date is defined as the date on which the Lease is terminated,
    disclaimed or repudiated.

[4]
Schedule C of the Lease provides a similar remedy to the Landlord on bankruptcy
    of the Tenant, but only in respect of the recovery of the unamortized portion
    of the leasehold improvement allowance.

[5]

The
    original claim of $100,558.59, less the recovered preferred claim in the amount
    of $24,571, less the occupational rent paid by the Trustee in the amount of
    $25,698.31.

[6]
The
    reference to deemed surrender was subsequently omitted from the U.K.
Bankruptcy
Act: see
Transco Mills
, at p. 365.

[7]
At the
    time s. 65.2 of the BIA used the word repudiate rather than disclaim and
    limited the landlords compensation to payment of an amount equal to the rent
    payable over the six-month period immediately following repudiation or the
    remainder of the term of the lease if less than six months. The section was
    amended in 1997 to substitute the word disclaim for repudiate. It was also
    amended to prescribe a different landlord remedy.

[8]
Major
    J. concluded that, whether the leases were terminated by surrender, which was
    raised for the first time by Domgroup in the Supreme Court, or by the
    application of some other principle of common law, was a question best left for
    trial: at para. 10.

[9]
While
    accepting that upon assignment, the landlords privity of estate with the
    original tenant/assignor comes to an end,
Major J. did not address the
    question of what became of the leasehold interest as between the assignor and
    the landlord, once the assignor was called upon under the assignment. In
Transco Mills
,

Taylor J.A. concluded that the
    disclaimer would result in the automatic revesting of the balance of the term
    in the assignor, preserving the leasehold interest, which could be recognized
    by a vesting order: at

p. 369. This
    is similar to what is provided for expressly in the comparable U.K.
    legislation, as interpreted by cases such as
Hindcastle Ltd. v. Barbara
    Attenborough Associates Ltd. et al.
, [1996] 1
    All. E.R. 737 (H.L.)
. Indeed, in
Hindcastle Ltd.
, the House of Lords decision referred
    to by Major J. at para. 41 of
Crystalline Investments
, Lord Nicholls concluded, at
    p. 748, that a disclaimer operates to determine the bankrupt tenants interest in
    the leased property, and that it has the effect of accelerating the reversion
    expectant upon the determination of that estate, such that as between the
    landlord and tenant the lease ceases to exist. At the same time, the rights of
    others, such as guarantors and original tenants/assignors are to remain as
    though the lease had continued and had not been determined.

[10]

I
    note that although U.K. insolvency legislation is different, the House of Lords
    has treated a disclaimer in the same fashion; a disclaimer
puts
    an end to the bankrupts obligations under the lease, but determination of the
    lease is not permitted to affect the rights or liabilities of other persons:
    see
Hindcastle

Ltd.
, at p. 748;
Re Park Air Services Plc
, [1999] 1
    All. E.R. (H.L.), at pp. 678-79,
per
Lord Millett.

[11]
The
    trustee allowed the landlords preferred claim for three months accelerated
    rent limited to the value of assets on the premises as well as an unsecured
    claim for a portion of the arrears, operating costs and the cost of repairs. At
    issue was the landlords claim for prospective losses.

[12]
The events in this case preceded amendments to the CCAA (S.C. 2005,
    c. 47, s. 131) that came into force in 2009 permitting the disclaimer of
    agreements, including leases: see CCAA, s. 32.

[13]
As
    discussed, even in the insolvency context, repudiate and disclaimer are at
    times used to mean the same thing. The proposal provisions under the BIA
    authorized the repudiation of leases, until repudiation was replaced by
    disclaimer in 1997. In that context, the statutory repudiation that was
    authorized was the same as a disclaimer.

[14]

Resiliate
    is a term used under Quebecs civil law. The
discussion in
    this paragraph leaves out references to resiliation, as only disclaimer is
    relevant in Ontario.