On April 16th, Prime Minister Trudeau announced a new measure to support small businesses struggling to pay their monthly rent. The Canada Emergency Commercial Rent Assistance (CECRA) program will be a partnership between the Federal and Provincial Governments to offer forgivable loans to commercial property owners, who can then pass these resources onto their small business tenants for the months of April (retroactively), May, and June.
For landlords and tenants who see no concrete way of collecting or paying rent at this exceptional time, this program is viewed as essential. On the 24th, the Prime Minister clarified the details of the program, explaining that it would consist of forgivable loans to landlords covering 50 percent of expected rent payments as long as the landlords offered a 75 percent reduction in rent to their eligible small business tenants. To be eligible, the small businesses must pay less than $50,000 per month in rent and have temporarily ceased operations or have experienced at least a 70 per cent drop in pre-COVID-19 revenues. The program is also available to non-profit and charitable organization.
While positive, the program is not a panacea, and landlords and tenants will continue to struggle to come up with solutions for rent payments in the coming months. Below, we have put together a list of valuable things for commercial landlords to consider in maneuvering rent payments while the economy remains on pause.
Review your Leases
The first step for anyone trying to figure out how to proceed is to check their lease agreements for force majeure (or “superior force” in English) and business interruption insurance clauses. As we discussed at length in our earlier newsletter on the topic, these clauses, which are often included as standard form additions to commercial leases, can have an enormous impact on landlord and tenant obligations in unexpected situations. While courts have yet to conclude whether COVID-19 does in fact constitute a force majeure, the specific wording of these clauses can, in some cases, clarify a tenant’s existing obligation to pay, or not to pay rent in situations such as this.
Further, if a lease includes an obligation to take out business interruption insurance, despite the economic shutdown, it should, for the most part, be the case that a tenant has the resources and structure in place to continue to fulfill their obligations.
Take It Case by Case
If the lease itself does not clarify a tenant or landlord’s obligations, and a tenant is seeking relief regarding their obligation to pay rent, a landlord should take a case by case approach in deciding how to proceed.
There are many options available to landlords, they can waive rent entirely, offer abatement, or suggest a scheme where full or partial payment is postponed until the tenant is in a more financially stable situation. The decision the landlord makes will have to depend on several unique factors, including the timeline for the tenant’s financial recovery and their likelihood of being able to pay back a loan in the future, their current capacity to earn some income, and their entitlement to the other government benefits in place for businesses. It is also important for landlords to take stock of their own obligations such as taxes and loan responsibilities and ensure that they are in a good place to meet them.
Given the circumstances, it is unlikely that a hard-lined approach will serve landlords, as tenants have little control over their finances. Eviction of tenants for failure to pay the rent does not seem like a valid approach: landlords must accept that the probability of finding another, more affluent tenant in this era is virtually nil. Working with tenants to find mutual feasible arrangement is a best bet for everyone getting back to normal.
Let Us Help You Figure It Out
Navigating these complicated conversations and decisions is not easy and there are many fundamental things to keep in mind. Landlords must ensure that temporary arrangements and all resulting documentation are clear, and don’t risk permanently modifying their original leases. Further, keeping these discussions confidential is valuable for protecting the financial information of all parties and avoiding a situation where several tenants are comparing the deals they were offered without all the necessary information.
As is always the case, our Business Law Group would be happy to assist you in working through any of the challenges you may be facing in this singular moment. Feel free to reach out to us.
