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Gowling WLG has been monitoring the development of COVID-19 closely and is continuously advising clients as more information becomes available. In the interest of helping commercial landlords and property managers manage the challenges created by the outbreak of COVID-19, Gowling WLG has prepared the following bulletin.
Updates will be available as new information is released.
You will recall that on April 16th, the Government of Canada announced its intent to introduce forgivable loans to commercial property owners to reduce or forgive rent for April, May and June 2020.
The Canada Emergency Commercial Rent Assistance (CECRA) is to be managed by the Provinces. The Government of Canada and the Province of Ontario have now released more details on CECRA and the Ontario-Canada Emergency Commercial Rent Assistance Program (OCECRA). We now know that the program will take the form of forgivable loans to qualifying commercial landlords to eligible small business tenants, and will cover 50% of the landlord's before profit costs of the April, May and June rent. Of particular note, the Province of Ontario has indicated that by applying for OCECRA, the landlord agrees to forego all profit for this 3 month period .
To qualify for the OCECRA, it appears that each of the following tests must be met:
- The rent relief loans only relate to commercial property, or residential or mixed use which include at least 30% commercial component.
- The rent relief is in the form of a forgivable loan that will be administered by CMHC. If the landlord's property is not mortgaged , we are advised to contact CMHC to discuss program options which may include applying funds against other forms of debt facilities or fixed cost payment obligations (eg utilities).
- The landlord must enter into a rent forgiveness agreement with the eligible tenant and agree to reduce the rent to 25% of rent that relates to fixed costs for April, May and June 2020.
- The Province has indicated that by applying for OCECRA, the landlord agrees to forego profit for this 3 month period .
- While we have no details, I suggest that:
- all commercial landlords are being asked to absorb significantly more than 25% of the rent despite the statements by the Feds and Province to this effect, and
- landlords, whose commercial property is not mortgaged or on which the mortgage has been significantly paid down, will be even more significantly impacted given their "profit" component will be significantly greater.
- The rent forgiveness agreement must also provide that the landlord will not evict the tenant while the agreement is in place.
- The monthly rent payable by the tenant must be less than $50,000 gross.
- The tenant must be a non-essential business.
- The tenant must have either temporarily closed or experienced a 70% drop in revenues (to be determined by comparing to the tenant's April, May, June 2019 revenues or, alternatively, by compared to average revenues for January and February, 2020.
- We are advised that non-profit and charitable organizations are also eligible tenants.
Many landlords are reaching out to us to ask what this all means and what do they need to be doing today to address these announcements. Frankly, it is difficult to say given the lack of detail regarding not only eligibility but also the actual mechanics of the programs. Landlords are being placed in a particularly difficult situation – on the one hand, tenants are extremely anxious for assurances from their landlords as to the scope of rent relief the landlord is prepared to give, and on the other, it is very difficult to commit to give rent relief pursuant to these programs without a complete and comprehensive understanding of the financial implications of the programs. I suggest that, for now, landlords not agree to rent relief that they would not be prepared to grant without financial assistance from the government . The programs are intended to be retroactive. Landlords can always decide at a later date to be more generous once the terms and mechanics of these programs are more completely disclosed.
If you are concerned about how COVID-19 might impact your business, feel free to reach out to a member of our COVID-19 response team, Real Estate or Commercial Leasing group.