HOW LANDLORDS DEAL WITH COMMERCIAL TENANTS WHO ARE NOT PAYING THEIR RENT BUT SHOULD BE…
COVID 19 has been devastating for all sectors in society while many small businesses have struggled to keep their doors open. The requirements to pay employees, suppliers, and landlords continues even though many businesses were forced to close because they were deemed non-essential operations. Various levels of governments introduced programs such as CEBA (a $40,000 loan to qualifying businesses) and CEWS (a wage subsidy) to assist such businesses. This summer, the federal government also introduced the Canadian Emergency Commercial Rent Assistance program (CECRA) to assist qualifying commercial tenants. CECRA provides forgivable loans to qualifying commercial property owners for 50% of rent payments payable by eligible small business tenants for the period April to September 2020. The tenant must pay 25% of their rent whilst the landlord absorbs the remaining 25%. The key criteria for the tenant to qualify is that they had to suffer a reduction of at least 70% in pre-COVID 19 revenues on average for April, May, and June. The goal is for the landlords and tenants to share the pain in a nearly unprecedented time.
The CECRA program is not mandatory. Many commercial landlords did not apply in the pandemic’s earliest days. Most landlords, understanding that many of their commercial tenants (especially those in the office and retail sectors) were struggling or, in fact, not operational, did agree to defer rent payments to some future date in exchange for some minimal on-going rent payment. In most deferral cases, tenants would be required to pay a proportionate share of operating costs but not base rent, the theory (from the landlord’s perspective) being that this would allow the landlord to make its normal operational payments (property taxes, mortgage payments, operating costs, property management, admin and utility costs and so forth). Landlords recognized that if they did not work with their existing tenants to assist them through this difficult time that the alternative could be worse—an empty building.
On June 8, 2020, The Protecting Small Business Act, 2020 (the “Act”) was introduced by the Ontario legislature to prevent landlords from evicting commercial tenants. This was primarily in response to the failure of many commercial landlord’s applying for CECRA. But the Act was heavy handed and prevented landlords from exercising any re-entry rights or seizing any goods or chattels even where the Act itself did not prohibit such actions. Further, the Act was retroactive to May 1st, which meant that any landlord who exercised such remedies between May 1 and June 8 was forced to reinstate such tenants at their cost. This Act remains in force today with an expiry date of September 30th and we await to see if Premier Doug Ford and his government will further extend such non-enforcement period. Damages are significant for a landlord who fails to comply—essentially, a landlord must reimburse a tenant for “any damages sustained by the person aggrieved as a result of contravention or non-compliance.” This includes both direct costs and indirect costs such as lost profit.
While the Act has not yet been judicially tested, it clearly limits the remedies normally available to a commercial landlord, but it does not prohibit all remedies. A key item in the Act is that it only applies to tenancies in which the Landlord is eligible to receive assistance under CECRA. As such, well performing tenants who do not meet the CECRA criteria (most importantly the 70% reduction in their revenues) are not protected by the Act.
Our law firm has advised numerous tenants and landlords in this difficult environment. In one instance, we represented a landlord of a small commercial plaza who had many defaulting tenants. One tenant, a general contracting firm, had a history of missed lease payments and other lease defaults. This tenant failed to pay any rent for the entirety of the COVID timeframe (so far). The landlord presented the firm with a rent deferral agreement, which was rejected. Upon enactment of the Act, the landlord presented the tenant with a CECRA application, which was also summarily rejected. The tenant wrote a detailed letter to the landlord admitting that its revenues had “never been higher” and further that they were “protected by law” and could not be evicted and they “planned to bank their revenues for future dark times.” In addition to these actions, the tenant allowed its mandatory insurance to lapse and committed various other breaches of their lease. The landlord, with the assistance of a qualified bailiff, was successful in terminating the tenancy and evicting this tenant. The Act is intended to protect vulnerable small businesses. By the way, the tenant has not yet surfaced to challenge to eviction.
Landlords have had certain of their remedies curtailed by the Act. However, it is important to note that it is not a blanket prohibition. Landlords and tenants must continue to act in good faith in their dealings with one another and they must always come to court with “clean hands” in respect of any action.
Steven Sheppard's primary area of practice is real estate, and he regularly assist clients with all types of real estate matters including acquisitions, dispositions, financing, commercial leasing, planning, land development, construction and all related matters.