Potential Support for Commercial Landlords and TenantsJun 3 2020
With the ongoing pandemic and physical distancing measures, many small businesses are struggling to pay rent. We have summarized potential remedies available to landlords and tenants during this unprecedented time.
CECRA FOR SMALL BUSINESSES
The Canadian Government has implemented a rent assistance program for small businesses impacted by the COVID-19 pandemic. The Canada Emergency Commercial Rent Assistance program (“CECRA”) provides relief for small businesses experiencing financial hardship due to the COVID-19 pandemic by offering forgivable loans to eligible commercial property owners to reduce the rent owed by their impacted small business tenants.
The CECRA program allows commercial property owners to apply for government aid to cover half of the rent payments. CECRA will cover 50 per cent of the rent with small business tenants expected to pay 25 per cent and landlords forgiving the remaining 25 per cent.
To be eligible to apply, a commercial property owner must:
- own commercial property which is occupied by one or more impacted small business tenants; and
- enter into a 75% rent reduction agreement for April, May, and June 2020 which includes a moratorium on eviction and declaration of rental revenue.
Impacted small business tenants must:
- pay no more than $50,000 in monthly gross rent;
- generate no more than $20 million in gross annual revenues; and
- have experienced at least a 70% decline in pre-COVID-19 revenues.
Commercial property owners have until August 31, 2020 to apply for the CECRA program, which can be applied retroactively.
Please visit the Canada Mortgage and Housing Corporation website for more information.
COMMERCIAL TENANCY (COVID-19) ORDER
The BC government announced that a commercial landlord, who is not eligible for assistance under CECRA for the sole reason that it has not entered into a rent reduction agreement with a tenant that includes a moratorium on eviction, must not, due to a tenant’s failure to pay rent:
- exercise a right of re-entry;
- terminate a lease;
- distraint a tenant’s property for rent due; and/or
- rent out the leased property on the tenant’s behalf.
The order will be in effect as long as CECRA is in place, which is currently set to end on June 30, 2020.
Force majeure clauses are often included in contracts to allocate the risk of future events. Force majeure clauses account for situations where one of the contractual parties cannot perform their obligations due to circumstances beyond their control.
Whether you can invoke a force majeure clause due to the COVID-19 pandemic depends on the below considerations.
1. Scope of the Force Majeure Clause
You must fit the intervening event into a contract’s definition of force majeure.
The COVID-19 pandemic will likely qualify as a force majeure event when language such as “pandemics”, “quarantines”, “public health emergency”, and/or “government bans” are included in the clause. Where COVID-19 is not covered by a specified event, it may be covered under a contract’s broader “catch-all” phrases, such as, “Act of God”.
2. Impact of COVID-19
You must prove that the intervening event sufficiently impacted your ability to perform your contractual obligations. Force majeure clauses often describe the required impact which ranges from “delays” in performance to “impossible” to perform. The fact that an intervening event renders a contract more expensive to perform is insufficient to invoke a force majeure clause.
Whether the COVID-19 pandemic meets the required degree of impact to be invoked in a commercial lease arrangement depends on the factual circumstances of the lease agreement.
3. Cause of Non-Performance
The force majeure event must be the direct cause of your inability to perform your contractual obligations. Whether COVID-19 caused you to default on your lease obligations will be fact specific.
4. Avoid and Mitigate
You must be mindful of your obligations to avoid and mitigate foreseeable impacts. There could be specific terms in your lease requiring you to mitigate possible losses by doing what you can to lesson the damage.
In limited circumstances where there is no applicable force majeure clause in your contract, frustration may apply to relieve you from your contractual obligations. Frustration does not need to be specifically written into the contract; it occurs where a situation arises that parties did not account for in the contract and performance of the contract becomes a thing “radically different” from what was agreed upon in the contract. If a contract is frustrated it is treated as at an end, and all contractual obligations cease.
Whether your lease agreement is frustrated due to the COVID-19 pandemic will depend on the factual circumstances of your situation. The main consideration is whether the COVID-19 pandemic makes performance of your lease agreement impossible or impractical; an increase in difficulty of performance of your lease will not result in it being frustrated.
Determining whether you can (and should) invoke a force majeure clause or whether you can terminate your commercial lease agreement due to the COVID-19 pandemic requires careful consideration. Please contact our office at 604.853.0774 and we can setup a consultation with one of our lawyers to discuss your options.