Managing Commercial Lease Obligations During the COVID-19 Pandemic
The Rent Obligation
On March 20, 2020, Premier Ford announced that residential tenants who cannot afford to pay rent on account of the COVID-19 crisis cannot be evicted from their homes. The same policy has not been extended to commercial tenants. Commercial tenants must continue paying their rent, as due and in accordance with their lease agreement, regardless of the impact that COVID-19 has had on their business.
Understandably, commercial landlords and tenants are concerned about whether payment obligations will be met. In the coming weeks and months, many commercial tenants will consider whether they can, or will, pay their rent. During this time, landlords should consider cost-effective responses to the impact the COVID-19 crisis is having on its commercial tenant(s).
Below is a brief review of the legal options available to commercial landlords and tenants. Ultimately, it is in everyone’s best interests to take a proactive approach to reach an interim solution that accommodates the tenant’s affected cashflow while giving the landlord financial security.
Tenant’s Default Options
Tenants experiencing financial difficulty during this time are likely reviewing their lease to see what relief, if any, is available. For instance, tenants may be able to take advantage of “go dark” rights or conditional or reduced operating hours. Tenants are also likely considering whether the Force Majeure clause in its lease (See our article on Force Majeure clauses) applies. The burden to obtain relief under this clause is high and often drafted in favour of the landlord. Given that Force Majeure is limited to the precise wording of the clause, it is unlikely tenants will be able to avoid paying their rent.
In some select circumstances, landlords may have already decided to close their building in response to the provincial and federally declared state of emergency. However, the obligation to pay rent, including additional rent or TMI (taxes, maintenance and insurance), is almost always absolute. Most lease agreements provide that rent is owed without any set-off or abatements. Notability, “rent” includes base rent and additional rent or TMI.
Landlord’s Enforcement Options
If a tenant misses one or more rent payments, or, alternatively, decides to pay less than the rent amount owing, landlords must consider how to respond to this breach. The landlord will be entitled to change the locks and evict the tenant or to treat the lease as continuing and bring an action against the tenant for the amount of unpaid rent.
Landlords should seriously consider whether eviction is the best, cost-effective option in these circumstances. A tenant may respond by going to court to request relief from forfeiture - permission from the court to let them re-enter the premise. A court will grant this relief, one time, where it would be fair and just to do so in the circumstances. A court will likely be sympathetic to the financial difficulties commercial tenants face during this time. If the tenant obtains relief from forfeiture, the landlord will have to pay thousands of dollars for the tenant’s legal costs – although the landlord will get its rent.
In many cases, landlords may determine that keeping a tenant is preferable to a vacant unit, from a business perspective. First, the tenant is likely not operating its business right now and forcing the tenant to meet an obligation it simply cannot afford is a futile exercise that will ruin your business relationship. Second, if the landlord evicts its tenant(s) it will be difficult to re-let the place within a reasonable amount of time in this market. Third, a new tenant will almost certainly leverage the present economic conditions to negotiate a discounted rent for the same unit. Accordingly, before a landlord decides to terminate its lease, it should consider the long-term consequences that will materialize.
Negotiate an Interim Arrangement
Landlords and tenants should be practical and accommodative to find a solution. Landlords should appreciate that tenants’ business is likely completely closed and suffering financial hardship. As such, paying full rent (or, at least, paying full rent consistently over the next several months) may be financially impossible. However, tenants need to be realistic about paying the landlord’s operating costs, including tax, utility, insurance and other payment obligations that continue regardless of the COVID-19 crisis. The landlord’s operating costs can be adjusted to reflect mortgage relief, reduction in utility costs etc.
There are several solutions parties can reach to manage the commercial tenancy in these times. The solutions can be made as an amendment to the lease and on a temporary basis, without prejudice to either party. A few examples include:
Allowing for partial rent reduction for a fixed time period;
Accepting rent deferrals, with or without interest, to be paid at a later date; or,
Implementing rent instalment plans to pay rent in accordance with an amendment that establishes a new payment schedule over the next few months.
Reacting to a tenant’s breach with eviction or litigation may be premature and not in the landlord’s long-term interests. Landlords should consider this issue from a cost-benefit perspective, with a litigation lawyer, when weighing the legal and non-legal options. Such an analysis must also be informed by the long-term economic effects that may result during these difficult times.