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ARTICLE · 21 SEPTEMBER 2016

Landlords, Leases And Financial Distress

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Prepaid rent or a security deposit? The distinction is an important and potentially costly one for landlords in the current economic climate.

CanadaReal Estate and Construction
Denise D. Bright
Denise D. Bright
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Prepaid rent or a security deposit? The distinction is an important and potentially costly one for landlords in the current economic climate. In 2015, the Alberta Court of Appeal in York Realty Inc. v Alignvest Private Debt Ltd., 2015 ABCA 355 [Alignvest CA] upheld a decision of the Court of Queen's Bench (Alignvest Private Debt Ltd. v Surefire Industries Ltd., 2015 ABQB 148 [Alignvest QB]) declaring that a $3.2-million deposit from York's bankrupt tenant, Surefire Industries Ltd., was a security deposit, rather than prepaid rent and consequently was not the property of the landlord and had to be returned to the tenant.

Security Deposit vs. Prepaid Rent

Monies deemed to be prepaid rent are ideal for landlords whose tenants become bankrupt or insolvent. Prepaid rents are non-refundable to the tenant in the event of its bankruptcy or insolvency, as they become the property of the landlord, usually upon execution of the lease. In contrast, a security deposit

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