Commercial Real Estate Information Session - Tenant & Landlord Issues & Possible Solutions While Dealing with Rent Relief Requests
During the COVID-19 Era
~ Tuesday April 14, 2020.
This is not an overview of the latest programs which are being rolled out by the various levels of Government and which are being changed and amended on a daily basis. For a general overview about these specific programs, please visit the links provided for at the conclusion of this slide deck.
The information contained in this presentation has been gathered from a variety of sources including the CCIM Institute and the American Institute of Real Estate Management (IREM), and also draws from our firms 30+ years of property management experience. I would like to thank Connect Ottawa, in the guise of Bernie Franzgrote, for both the invitation and for hosting this event.
Commercial Landlords, many of whom were just learning to adjust their business models in the new shop-at-home reality, have again been faced with another crisis which threatens not just themselves, but the very people they depend on to sustain continued growth and investor expectations, their tenants.
While the general consensus amongst both Landlords and Tenants is that landlords are expected to be empathetic, it is unrealistic to expect that Landlords have an obligation, or the ability, to “foot the bill” for something that they are not responsible for. Nor would it be realistic for a Landlord’s tenants to continue on as if it were business as usual and be expected to meet their monthly obligations to their Landlords.
In Ontario, commercial tenancies are governed by the Commercial Tenancies Act. The act dictates that a commercial Landlord may repossess the premises, in case of default by the Tenant, fifteen days from the date of said default.
Unless the tenant were to give up the premises willingly, the standard “prudent” practice, is for the Landlord to apply to the Court for a Writ of Possession. (I say “prudent” in this fashion because it should be noted that it is not an absolute requirement that a Writ be applied for). This Writ is subsequently served upon the Tenant by the Sheriff’s Department. However, the Ministry of the Attorney General of Ontario in a March 16th announcement stated that, in relation to eviction orders issued by the Landlord and Tenant Board, whose main purview are residential tenancies, that the Sheriff’s Department was to postpone all scheduled eviction enforcements until further notice. This has had the effect of prohibiting the Sheriff’s Department from carrying out any such Writs, commercial as well as residential.
It is important to note that the Ontario Superior Court of Justice is closed for all but the most extraordinary of issues – it would be difficult to argue that application for a Writ of Possession would qualify considering the circumstance we find ourselves in.
Even if it was possible, is the eviction of a tenant the absolute best solution given the current situation? All other factors taken into consideration, and considering the substantial litigation and lease-up costs, should a new tenant have to be found, I would probably argue not.
So where does this leave us?
Some Landlords have already announced broad measures to assist their tenants. RioCan recently announced that it would grant an automatic 60-day interest free rent deferral to independent commercial tenants who ask for it. Stateside, the Texas company Camden Property Trust, who specialize in residential apartment units, has established a $5,000,000 USD relief fund for renters who have been impacted by the COVID-19 pandemic. Renters can apply for grants of up to $2,000. which can be used for any purpose, not just towards the payment of rent.
There are many examples of companies and independent landlords being “good corporate citizens” and while the lease may not obligate the landlord to enter into negotiations under the current set of circumstances, it is my opinion, as well as the opinion of the vast majority of property owners and their managers, that it is in the best interest of the landlord to engage in negotiations in an effort to find and provide short term relief for their tenants.
It has never been more important for clear lines of communication to exist between Landlords and their Tenants. We are in uncharted territory when it comes to the pressures that both parties face and there is no clear solution or path. The onus is on both Landlords and Tenants to work together to attempt to find something that works.
Here are a few observations and possible solutions for both the Commercial Landlord and Tenant to consider:
Reduce or Eliminate Basic Rent for a Fixed Period of Time;
General (Landlord Specific):
Reduce Basic Rent for a Fixed Period of Time and defer repayment by increasing Basic Rent once the crisis has passed;
Reduce or Eliminate both Basic and Additional Rent for a Fixed Period of Time;
Reduce both Basic Rent and Additional Rent for a Fixed Period of Time and defer repayment by increasing Basic and Additional Rent once the crisis has passed;
Covert the outstanding Basic and or Additional rent to a loan and amortize the balance of the loan over the remaining term of the lease;
Allow the Tenant to apply their last months deposit to the current period;
Allow the Tenant to sublet all or a portion of the premises. This solution is more of a consequence to the situation we see ourselves in rather than an immediate solution;
Make the tenant aware that failure to pay rent without an agreement is a clear breach of the terms of the original lease:
Also, make the Tenant aware of what Provincial and Federal programs may be available to them to help them meet their obligations.
Once again, above all else, Landlords should stay in constant communication with their tenants, acknowledging the difficulties both parties are facing while seeking out a fair and equitable solution.
Landlords should approach their Lenders and in cases of severely reduced cash-flow, they should request a postponement of their monthly mortgage payments. The Big Six Banks, the RBC, TD, BMO, ScotiaBank, CIBC, and the National Bank, all announced that they have introduced a 6-month deferral programme for those clients who have requested such assistance. If your Financial Institution offers such a programme – take advantage of it. While there may not be an immediate need – we do not know what the ultimate outcome or timeline of the current situation will be;
From a Tenants Standpoint::
Does your Property Insurance Policy or Lease Document contain a “Force Majeure” or “Act of God” provision? Just because a “Force Majeure” clause may exist in your insurance policy, in the form of a restrictive covenant, or in your own Standard Form Commercial Lease, it does not mean that it is a blanket provision. A great deal will be decided by the wording contained in the clause and ultimately the Court’s interpretation of same.
Landlords should also review the terms of their Insurance Policies to ensure that the policy does not fall into default because the Property may be partially or totally vacant. If a Landlord finds themselves in just such a position, it is imperative that the Landlord, and/or their respective property manager inform their Insurance Company or Broker.
Further, from solely a property management standpoint, Landlords should insure that:
- the property is secure, including roof access, and is being regularly inspected;
- HVAC systems should not be turned completely off – there must be adequate air circulation in order to prevent the development molds which could lead of other respiratory diseases, including, but not being limited to, Legionaries Disease)
- the property is adequately heated;
- water should be regularly added to sinks and drains to ensure that sewer gases do not enter the premises;
- The Landlord should also place adequate notice on all exterior doors indicating who to contact in case access is needed or in case of emergency;
- It is also a good idea to ensure that unused equipment is powered down – both that belonging to the landlord and to the tenant;
Read your lease.
Force Majeure Clause:
If you are uncomfortable with the terms contained within the lease document, consult the services of a Lawyer, or qualified Real Estate Professional to help you with the interpretation;
Understand what constitutes a default under the terms of your lease;
Understand what remedies are available to both you and the landlord;
Does your lease contain a “Force Majeure” or “Act of God” provision? (Again, I’m often asked about this specific clause – we’ll have a couple of examples at the end of this section)
Have you given your Landlord a deposit – will the landlord consider applying that deposit to your current month’s rent?;
Review your Insurance Policy, better yet, speak to your insurance agent. Does the policy include a Loss of Income provision? If so, what is the procedure for filing a claim?;
Tenants should have a clear, definable “ask” of your Landlord. Ask youself “what do I need to survive these next 3 or 4 months;
Familiarize yourself with available Government Programs.
Avoid “Take It or Leave It” Attitudes. It serves absolutely no purpose and may well prove a detriment should you at some point require or request a further lease concession or extension. Here the old adage holds true – “You attract more bees with honey than you do with vinegar”
Stay in constant communication with your Landlord, acknowledging the difficulties both parties are facing while seeking out a fair and equitable solution.
Here are two examples of Force Majeure Clauses pulled from Commercial Leases. Essentially the clause is a provision in a Contract that excuses a party from not performing its contractual obligations because it has become impossible to fulfill due to an unforeseen or uncontrollable circumstance or situation. Essentially, the contract has been “Frustrated”.
Not every lease contains this clause and not every clause is written the same so a great deal can be, and will be left up to interpretation.
In the illustrated examples, one clause for instance provides for a remedy, while the other is left open, however both succinctly state that such a situation does not mean that the Tenant can immediately stop payment of their lease obligation.
Any concessions should be documented on an Amendment to Lease document. It should clearly state:
- What the concession will be (Basic, Additional, or Both);
- When the concession starts and when it expires;
- It should be signed by all parties to the original lease, including any Guarantors;
- It should clearly state that “All other terms and conditions as contained in the Original Lease Agreement dated “BLANK”, shall remain in full force and affect”.
In conclusion, we will get through this.
By being empathetic and by educating ourselves, plausible solutions to most any Landlord and Tenant scenario can be found.
Be Kind, Be Safe,
And Thank you for this moment of your time.
Frederick (Fred) Crouch,
FRI ACoM CLO CRES
Broker of Record