Since March 24th’s mandatory shut down of all non-essential services in Ontario, many economic activities have come to an abrupt halt. It has been a difficult balance for officials, as they try to stem the spread of COVID-19 while minimizing the effect on the economy as best they can. One of the many clear issues that comes along with the shut down of non-essential businesses, is the fact that tenants are not able to conduct business as usual in order to meet the demands of their financial obligations. Whether or not an organization can financially afford to proceed with these contracts does not change the fact that they were signed – including the contractual promise for tenants to pay rent to their commercial landlords.
While the Canadian government has been continuing to make changes to uplift the struggling economy, it has largely been up to landlords and their tenants to deal with their rental agreements on their own. With tenants being unable to afford to financially keep up with their financial obligations and most businesses being tied to commercial leases, landlords are struggling to stay afloat themselves.
Regardless of the fact that the COVID-19 pandemic is causing a great amount of stress on tenant/landlord relationships across Ontario, landlords are under growing pressure from the government to be accommodating to their tenants. Having said this, what are landlords supposed to do if their tenants simply do not pay their rent? Are they still encouraged to be flexible and work with their tenants no matter the situation? And is there assistance available to landlords to pay their mortgages if they are not receiving rent payments from their tenants?
There are several possible options available to you as a landlord to carry out your lease’s provisions in the event that your tenant does not pay rent, or is having difficulty in doing so. While negotiating by way of a rent deferral or rent abatement is the option that is most widely encouraged by the government, this is not always the ideal solution for either party. As a commercial landlord, you may have a number of rights outlined in your lease, including the ability to retain your property and sue for missed rental payments. In this guide, we take a look at your rights as a commercial landlord, as well as possible ways to negotiate with your tenants in order to receive the rental payments owed. We will also examine whether assistance from the recently announced Canada Emergency Commercial Rent Assistance (CECRA) program applies to you.
If your lease agreement includes a force majeure (Act of God) clause, this may legally allow a tenant a way out of their contractual obligations, depending on careful wording and the specifics of the situation at hand. Force majeure is a clause in a contract that is carefully inserted in anticipation of events that neither party can control. If this unprecedented event does occur, the tenant may legally be allowed out of their agreement.
For a force majeure clause to be enforceable when it comes to COVID-19, the lease agreement with your tenant would have to include language that specifically and undeniably captures this event. This may include language such as “pandemic”, “epidemic”, or “public health emergency.” Without this specific language, there is a good chance that courts will not recognize COVID-19 as a force majeure, and your tenant will be unable to rely on it. If your contract includes provisions that use language such as “circumstances beyond a party’s reasonable control”, the courts will then determine whether COVID-19 fits into these circumstances.
If a force majeure clause is not included in your commercial lease, tenants may be able to rely on the doctrine of frustration. This is a legal test that decides whether or not the unforeseen circumstances have either deemed the contract “frustrated”, unable to be completed or have made the contract fundamentally different from its original purpose. It’s important to note that each individual lease contract has to be assessed and interpreted separately, in order to determine whether frustration applies.
If your lease agreement does include a force majeure clause, or if you believe your tenant will attempt to rely on the doctrine of frustration to pull out of their contractual rights, it’s important to make sure you fully understand your own rights as a landlord. For more information about force majeure and the doctrine of frustration, please visit our dedicated article here, or give us a call at (905) 595-2225 where we can delve further into contractual obligations in light of COVID-19.
If your tenant is experiencing financial difficulty and is unsure of how to proceed with rent payments, offering a negotiation may be reasonable. In terms of rent relief, there are generally two main types that you may wish to consider:
Negotiating rent relief must not happen without an enforceable confidentiality provision. As relief will be determined on a case-by-case basis, the terms of the relief need to be kept confidential to protect both parties and the communities that the tenant and landlord serve. A common way to enforce confidentiality would be for the landlord to demand immediate repayment of the relief upon failure to comply with confidentiality.
It is important to remember that your tenant is also likely in a state of panic, and does not realize that you may have an agreement with a financial institution or another lender that you have to negotiate with as the owner of the property. Agreeing to negotiate with your tenant may offer some assurance that you will be receiving your rent, while the tenant is awarded time to catch up on their financial obligations.
In the case of a deferral, you will have to negotiate the repayment terms with your tenant. It is important to be as specific as you can when negotiating these repayment terms, outlining the specified dates and amounts. Common questions that you may wish to discuss with your tenant in terms of repayment include:
You may also wish to negotiate your tenant’s new rental amount and repayment dates based on their company’s sales revenues. In this case, the repayment schedule can be dependent on your tenant’s monthly financial statements, which may provide some reassurance that the tenant is paying all they are financially able to.
While both commercial and residential landlords are advised to provide assistance to their tenants as best they can during this time, there are some instances where the landlord is not expected to negotiate. If the tenant is found to be in default of the lease, the landlord may not continue to comply with a possible abatement or deferral of rent. A tenant could end up in default of the lease by claiming bankruptcy, transferring the lease, or by damaging or destroying the property.
As we approach mid-May, it is expected that commercial landlords will soon be able to apply for the Canada Emergency Commercial Rent Assistance (CECRA) program. This will allow those eligible to receive a portion of rent relief for April, May, and June.
The CECRA program was created in order for tenants and landlords to share the cost of a portion of their commercial rent, with landlords receiving a forgivable loan for the remainder. The details of this program state that the tenant and the landlord would each be liable to pay 25 percent of the landlord’s before profit costs and the provincial and federal government would share the remaining 50 percent.
Until recently, it was believed that only commercial landlords who hold mortgages would be eligible for the CECRA program. Canada’s federal government has announced that it’s working to fix this gap in the COVID-19 commercial rent-relief program and to stand by for further information.
It is important to note that other specified requirements must be met by commercial landlords in order to be eligible for this program, a full list of which can be found here.
As a commercial landlord, you have several rights available to you if your tenant is withholding rent, some of which are plainly outlined in your lease. In the event that your tenant is in violation of your agreement, this may allow for termination of the lease without a court order.
A commercial landlord may hold the following rights when their tenant is in breach of their lease, such as in the case of withholding rent:
If the above provisions are included in the commercial lease, a landlord does not need a court order to terminate the agreement.
If the above provisions are not included, the landlord still has options available to evict the tenant, sue for missed rental payments, and/or repossess the premises in the event that any part of the tenant’s rent has not been paid for 15 days. Having said this, obtaining a court order is highly recommended before doing so.
Section 18 of the Commercial Tenancies Act gives landlords the right to re-enter the commercial property and repossess it. If there are any possessions left within the commercial property that belong to the tenant, these possessions then also become the property of the landlord. It is not uncommon for the tenant to sue for damages and/or repossession of their items. If a landlord does decide to proceed with repossession under Section 18, has not obtained a court order, and is then found to be in the wrong, they could be facing a hefty lawsuit, costing them far more than a few months missed rent.
Currently, the Ontario courts are closed to all but emergency matters, which has caused the legal enforcement of most court orders to be put to a standstill. For this reason, it will be difficult for a landlord to obtain a court order granting termination under Section 18 of the Commercial Tenancies Act at this time.
If you are a landlord or a tenant looking for up to date tools and resources in regards to COVID-19, the Canadian Federation of Independent Business (CFIB) is a great place to look. Another independent group called Savesmallbusiness.ca has outlined their three urgent calls to action in their proposal to the federal government, involving tangible solutions that should be offered to businesses right now (one of which has been achieved).
We at Gosai Law intend to provide this information to you so that both landlords and tenants can consider reaching negotiations that benefit both parties during this uncertain time. While this guide has been specifically curated for commercial landlords, we have also compiled a guide for tenants, which can be found here. While our physical office location is currently closed, we continue to work remotely and are here to help landlords and tenants review their current leases. Please feel free to contact us by email at email@example.com or via our contact form on our website to find out more information.