With COVID-19 causing a global disruption to businesses, the amount of tenants that are unable to pay their commercial rent is growing substantially. The Canadian Federation of Independent Business released a survey in March, that found a quarter of small businesses would not be able to pay their rent or mortgage in April. Despite the recently announced upcoming change to the status of the Ontario-wide lockdown, commercial tenants are still being faced with how they are going to proceed – and are wondering if they are contractually obligated to pay their rent at all.
Most recently, the COVID-19 pandemic has been the main cause of the financial hardship that is causing businesses to be unable to fulfill their rental obligations. With organizations being forced to partially or even completely shut down, the ability to pay rent is a top concern. As a result of this financial strain, the question has been widely posed of whether or not commercial tenants will be able to find a way out of their rent if they can’t afford to pay it. And if not, what are they supposed to do in order to fulfill their contracts?
As a commercial tenant, there are several possible options available to you when it comes to receiving rent relief. While you may be able to look to your lease to see if it offers relief in the form of a force majeure clause, there are other potential options available to you. These may include reliance on the doctrine of frustration, rent deferral, rent abatement, offering your landlord an incentive, and/or assistance from the Canada Emergency Commercial Rent Assistance (CECRA) program. In this guide, we take a look at all of the above options and examine whether or not they may be of assistance to you during this time.
Whether or not the existence of a force majeure (Act of God) clause will allow a tenant to get out of their lease agreement has been a common question in light of COVID-19. If you’re unfamiliar with force majeure, it 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.
When it comes to COVID-19, a commercial tenant may be able to rely on force majeure, depending on what was expressly stated in the lease that they signed. For example, the force majeure clause would have to specifically capture this event, by using language such as “pandemic”, “epidemic”, or even “public health emergency.” Without this type of seemingly undeniable language, courts may not recognize COVID-19 as a force majeure. Your contract may also include provisions that use language such as “circumstances beyond a party’s reasonable control”, in which case the courts will determine whether COVID-19 fits into these circumstances.
In the absence of a force majeure clause, tenants may be able to rely on the doctrine of frustration. This is a legal test that decides whether or not unforeseen circumstances (such as in the case of COVID-19) have deemed the contract “frustrated”, or 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.
For more information about force majeure and the doctrine of frustration, please visit our dedicated article here, where we delve further into your contractual obligations amid COVID-19.
In the event that you wish to negotiate rent relief with your landlord, there are generally two main types of rent relief that may be available to you:
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.
No matter which option you consider, it’s important to remember that your landlord is also running a business. They potentially have an agreement with a financial institution or other lender that they will also have to negotiate with, so it’s important to be forthcoming and timely with your rental negotiations. Landlords will have to do careful financial planning to assess how and where they can offer relief.
Tenants may want to consider offering an incentive to their landlord in exchange for the rent deferral or abatement. The tenant may offer additional security such as personal indemnity or general security interest, extending the terms of the lease by (perhaps by the same number as the number of months of abatement), deleting special rights previously agreed to (ie. right to renew or expand), or agreeing to a landlord’s right to early termination. These mechanisms are a tactful approach in negotiating relief terms with the landlord.
In the case of a deferral, parties will have to negotiate the repayment terms. Common questions that will need to be answered in terms of repayment include:
As the tenant, you may want to consider proposing to your landlord that you pay your rental amount based on sales revenues. The repayment schedule can be dependent on your monthly financial statements, which may satisfy your landlord that you’re paying as much as you’re financially able to.
It’s important to keep in mind that despite negotiating a repayment plan, the landlord may still demand immediate repayment of the deferred rent if the tenant is found to be in default of the lease. A tenant could end up in default of the lease by claiming bankruptcy, transfer of the lease, or by damage or destruction. At the end of the day, the landlord will want to protect their interest in having the deferred rent paid when repayment appears to be at risk.
With the announcement of the Canada Emergency Commercial Rent Assistance (CECRA) program, some small businesses may be eligible for rent relief for the months of April, May, and June. While exact details of when this program will become available are not yet confirmed, it is expected that commercial landlords themselves (not the tenants) will be able to apply by mid-May.
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.
It’s important to discuss with your landlord whether or not they will be applying for this program if eligible, and to not assume your rent will automatically be reduced due to the introduction of the program.
Withholding rent from your landlord is classified as a “breach of contract”. A breach of contract occurs when one party in the agreement fails to fulfill its promises, as set out in the agreement. Whether you withhold the entire agreed-upon payment of rent from your landlord or just a portion, this is still considered a violation of your contract, and a breach of your contractual obligations. Breach of contract is the most common reason why contract disputes are taken to court.
It’s important to note that commercial landlords have different (and typically more) rights than residential landlords when it comes to their tenant withholding rent. Your landlord typically has rights built right into their commercial lease, allowing them to terminate your agreement without a court order – consequently resulting in an eviction.
Depending on the provisions specifically stated in the agreement, a landlord may hold the following rights when their tenant is in breach of their lease, such as in the case of withholding rent:
If these provisions are included in the lease, your landlord does not need a court order in order to terminate the agreement and evict the tenant as a result.
If these provisions are not included, the landlord still has options to evict the tenant from the premises, in the event that any part of the tenant’s rent has not been paid for 15 days. 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. In this case, landlords are advised to obtain a court order before exercising this particular right.
While it is within your landlord’s legal right to re-enter and repossess their commercial property, there is a reason why it is highly recommended that they obtain a court order before doing so. It is not uncommon for the tenant to sue for damages and/or repossession of their items. If the landlord is 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.
The Canadian Federation of Independent Business is an excellent resource for both landlords and tenants. Their COVID related resources are up to date and accessible. Another independent group called Savesmallbusiness.ca has an excellent proposal outlined to the federal government of tangible solutions that should be offered to businesses right now.
While this guide is not exhaustive, it provides an excellent resource for the most important points to consider when negotiating rent relief. We 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 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 through our contact form on our website.