Tenants in leasehold premises, notably in North America, routinely provide letters of credit (L/Cs) to landlords who suppose that they will provide security of payment in lieu of rent if the tenant declares bankruptcy.

But according to a leasing specialist in one of Canada's larger law firms, landlords would be unwise to rely too heavily on L/Cs to secure such payments of the tenancy exists under Canadian law.

US-Canadian differences

According to Bob Macdonald, a senior partner at Blake, Cassels and Graydon, landlords should beware that the principles of leasing practices in the US and Canada, although similar in most respects, including the standard forms utilised for commercial office, retail and industrial properties, are different in other respects.

In Canada for example, the terms of an agreement to lease may be enforceable even if the parties do not enter into a formal lease agreement and there are, according to the lawyer, important differences between the way the two countries treat capital tax, goods and services tax and real property taxes.

L/C proceeds

In respect of L/Cs used as security for rent payment, Macdonald says that in bankruptcy cases in Canada, courts have been reticent to allow landlords to keep proceeds of L/Cs or security deposits in priority to unsecured creditors on the basis that an L/C or security deposit is stated to secure lease obligations and/or to be applied against rent not paid and that upon a disclaimer of lease in a bankruptcy, the obligation to pay rent ceases.

As a result, the lawyer says that landlords with leases in Canada should be even more diligent in evaluating the covenant of a prospective tenant and avoiding excessive tenant inducements at the commencement of the term.

Similarities

Other lease provisions found in Canadian standard form leases, including those pertaining to repairs, insurance, restrictions on transfers, expropriation and environmental contamination, are similar to those found in the forms used in the United States, says Macdonald.

Blake, Cassels & Graydon is one of Canada's leading law firms with over 500 lawyers.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.