BROKEn Promises: 3 Signs your Tenant may be Going Bankrupt


The bankruptcy of a tenant is disruptive and may be confusing to a landlord; however, arming yourself with knowledge of some warning signs of financial distress and an understanding of your basic rights will, along with your trusted legal advisor, help you be prepared in the unlucky event that your tenant goes bankrupt.

3 Signs of an Impending Bankruptcy

1. Rent Delinquency

If your tenant has always been diligent in paying rent, but then starts paying rent late, asking if it can make partial payments, or telling you to wait a few days before withdrawing or cashing a monthly payment, be prepared for trouble. Cash flow problems are a good indication that your tenant is on the financial skids. Rent is likely to be one of the last payments a tenant fails to make, as having premises is necessary to its continued business and its ability to pay its trade and other creditors.

2. Staff Changes

If the staff members you’ve been dealing with on behalf of the tenant no longer work there, or key members of the management team have resigned, the tenant may be experiencing financial difficulties. The resignation or termination of staff or management points to an unstable business, one that cannot afford to pay its employees or is having difficulty retaining staff due to the stress of meeting client and creditor demands.

3. Other Creditors are Enforcing

When the secured and trade creditors of a tenant begin to start realization proceedings or sue for overdue accounts, especially when more than one creditor is enforcing, you could be receiving a notice of bankruptcy in short order. Not only does it signal that the company is in financial distress, but it also means the business has to spend more time, energy and money negotiating with creditors and responding to claims, with less of those resources available to run the business.

If any of these signs surface, the best thing you can do is contact your legal advisor. Bankruptcy law is complex, especially where it intersects with landlord and tenant rights. Timing is key in such circumstances and legal expertise is therefore invaluable to the preservation and enforcement of your rights.

3 Important Things to Remember on Bankruptcy

The federal Bankruptcy and Insolvency Act (BIA) provides that landlords’ rights are governed by provincial law, subject to certain exceptions. Alberta has specific legislation to deal with the bankruptcy of a tenant, namely the Landlord’s Rights on Bankruptcy Act (LRBA). The following points are specific to the operation of these laws in Alberta.

1. The Trustee Becomes your Tenant

Pursuant to the BIA and the LRBA, the trustee in bankruptcy can be your tenant for as long as it needs the premises to deal with the tenant’s estate. The trustee has to pay occupation rent, subject to set-off of amounts payable for accelerated rent (see point 2).

2. Claims for Arrears and Accelerated Rent

The BIA gives a landlord priority to other creditors for rent arrears for up to three months before bankruptcy and for three months accelerated rent, provided the lease allows for it. This is also reflected in the LRBA. Unfortunately, the amount payable in priority can’t exceed the amount realized from the sale of the tenant’s property in the leased premises; and any amount payable for accelerated rent must be credited against the occupation rent payable by the trustee, according to both the BIA and the LRBA. The LRBA prohibits the landlord from claiming against the bankrupt tenant for the unexpired term of the lease.

3. Limits on Distress

The limits on your ability to claim for rent might have you thinking that distraining before bankruptcy is a good idea, but it won’t help you much. Distraint is not open to you after your tenant goes into bankruptcy, per the LRBA, and if you managed to distrain before the bankruptcy, the BIA requires you to deliver to the trustee any seized property or any proceeds of sale, although you will have priority to payment for the costs of seizure.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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