As we are currently in an unprecedented time of uncertainty amid the COVID-19 crisis, an increasing number of tenants are struggling to keep their businesses afloat. This was a reality for a lot of retail and food service businesses in Vancouver before the COVID-19 virus hit and this crisis has only served to accelerate the crunch tenants are experiencing in today’s economic climate.
It is thus likely that most, if not all, businesses will be seeking rent relief from their landlords, whether legally entitled to it or not.
Even though landlords have their own ongoing financial obligations and are typically not obligated to grant rent relief under their leases, they should strongly consider working with tenants on a case-by-case basis, particularly in light of the newly announced Canada Emergency Commercial Rent Assistance Program (CECRA). Simply refusing requests for rent relief outright could impact a landlord’s reputation post-crisis and may harm the landlord’s long-term financial stability if tenants are forced into bankruptcy.
There are a number of factors for a landlord to consider when it receives a rent relief request from a tenant, including:
- CECRA Requirements: In order to receive a forgivable loan under the CECRA, a landlord must enter into an agreement with tenants providing 75% rent relief, among other things. Read our overview of the CECRA here.
- Rent Deferral: The landlord may defer all or a portion of the tenant’s rent, but could require the tenant to repay deferred rent at a later time, either in a lump sum or by increasing subsequent monthly amounts amortized over the balance of the lease term.
- Rent Reduction: The landlord can reduce the tenant’s base rent or operating expenses for a portion or the entire balance of the lease term.
- Rent Abatement: If a tenant is significantly past due on its rent, a landlord may agree to forgive a portion of its rental arrears if the tenant remains current thereafter at the full rate or at a reduced rate.
- Loan Conversion: Instead of forgiving unpaid rent, a landlord could agree to convert the unpaid rent into a loan payable over time evidenced by a promissory note. The tenant would, however, continue to pay the current rent.
- Other Tenant Defaults. The landlord should ensure that the tenant cures any of current defaults under the lease before agreeing to grant rent relief.
In order to make an informed decision as to how to handle these requests, it is important for landlords to perform some due diligence in order to understand the tenant’s current financial position, creditworthiness, and long-term economic viability. It is recommended that landlords request and review financial statements and sales reports for 3 months before the COVID-19 crisis and for 2 months afterward; bank account statements for the same period; listing of account payables; and evidence that a tenant has applied for applicable federal and provincial aid.
One of the most attractive agreements for a landlord in these situations is a rent deferral agreement so that the landlord is entitled to receive the deferred rent at a later date. Following are some key clauses that a landlord will want to consider incorporating into a rent deferral agreement:
- Deferred rent to be repayable by a certain date or repayable over a certain period, such as six or twelve months.
- If for any reason there is an early termination, then the entire remaining unamortized balance will be accelerated and immediately due and payable.
- Financial Assistance: Should a tenant receive any government financial assistance, then the tenant is obligated to inform the landlord and pay a portion of such assistance immediately towards the outstanding balance.
- If there is presently no personal or corporate guarantor in the current lease, the landlord may wish to include a guarantor or add an additional guarantor of the tenant’s obligations as security for the deferred rent.
- The landlord should request a provision in the agreement preventing the tenant from discussing the terms of the agreement with others.
In conclusion, the following tips may help landlords and property managers when receiving and responding to rent relief requests from tenants:
- While there is obviously urgency from the tenant’s perspective, this does not mean that a landlord should sacrifice doing its own due diligence before entering into an agreement with the tenant.
- A landlord should consider this request as an opportunity to tighten up other terms of the lease in exchange for agreeing to grant rent relief. This could mean modifying the term of the lease, renewal terms or default provisions.
- It is critical that a landlord not waive its ability to collect unpaid or deferred rent at a later date.
- If a tenant refuses to agree to something in writing, a landlord will want to ensure that a tenant cannot claim that a landlord has somehow waived or is stopped from collecting unpaid rent. This gives the landlord the added option of suing for unpaid rent and keeping the lease alive rather than terminating the lease following the end of the COVID-19 crisis.