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 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.
In January, people were thinking about what book to read on March break. Today, the world is under a COVID-19 pandemic declaration by the World Health Organization ("WHO") and landlords are scrambling to implement thoughtful and scalable strategies to meet the increasing pressures from their (i) tenants who are asking for rent concessions, (ii) service providers who may not be able to provide all of the services required to maintain apartment and office buildings, shopping centres and industrial properties, and (iii) lenders who expect mortgage payments unless landlords have negotiated payment relief with their lenders for their commercial real estate portfolio.
A good survival guide is all about breaking each hurdle or challenge into bite size pieces and tackling them in a coordinated and thoughtful manner. We recommend that you consider the following topics and issues:
How does Bill C-13 Emergency Response act (passed March 25, 2020) help landlords?
Bill C-13, the COVID-19 Emergency Response Act, today received Royal Assent, guaranteeing the rapid implementation and administration of measures to protect Canadians' health and safety and stabilize the Canadian economy. Bill C-13 was crafted to provide the government with powers to take broad reaching steps to support Canadians and Canadian businesses, and the economy as whole, as the COVID-19 pandemic situation continues to evolve.
Part of Bill C-13 contains the Government's COVID-19 Economic Response Plan, which provides direct support to Canadian workers and businesses (approx. $52 billions), plus $55 billion through tax deferrals, for a total of $105 billion to help meet the cash needs of Canadian businesses and households, and to help stabilize the economy. In addition helping Canadians pay for essentials like housing and groceries, it is also intended to help businesses continue to pay their employees and their bills during this time of uncertainty. Here is a link to the Bill C-13, the COVID-19 Emergency Response Act, which summarizes the key elements of the new legislation:
Two key elements of Bill C-13 are funding that the Federal Government will make available to both the Business Development Bank ("BDC") and the Economic Development Bank ("EDC"), which funding will in turn be funneled to the banks and lending institutions that Canadian business have their operating loans, lines of credit, inventory loans, business credit cards, and other commercial credit facilities.
Through these stimulus mechanisms, the Federal Government is using BDC and EDC as conduits to funnel money to Canadian businesses. This is critically important to Landlords because in response to those tenants who request rent concessions and who claim that they are unable to pay their rent, Landlords can direct and encourage those tenants to access the benefits available under the Canadian government's COVID-19 Economic Response Plan.
Here is a link to the Canadian government’s financial assistance plans titled: “Support to Business” which is now available to Canadian business across Canada:
What is considered an “essential workplace”? - Who must close and who is legally entitled to remain open?
Prime Minister Trudeau has requested that Canadians remain in their homes and self isolate; however, other than the changes to the Quarantine Act, that take effect as of midnight on March 25, 2020 that mandate that all travellers to Canada MUST self quarantine for 14 days, the federal government has not legislated Canadians to "shelter-in-place". The federal government has encouraged Canadians to only leave their homes if they are involved in an "essential service" " as this term is defined in the Public Service Labour Relations Act (Canada).
The responsibility for legislating restrictions on the ability of Canadian's to go to work and to school and to gather in public has been left to the provinces.
The Ontario government instituted a State of Emergency on March 17, 2020. The list of business and facilities that were required to close pursuant to the Ontario government's State of Emergency are actually rather limited. In fact, Premier Ford stated to the press on March 17, 2020 that "This is not a Provincial shutdown". The Ontario government declared that essential workplaces were to remain open. The following link defines an "essential workplace".
The government of Quebec ordered the minimization of all non-priority services and activities from March 25, 2020 until April 13, 2020. The following is a link to the services and activities that the Quebec government considers "essential."
In response to the COVID-19 pandemic, the Province of British Columbia declared a provincial state of emergency on March 17, 2020. Similar to Ontario, the BC government has placed many of the same restrictions on its citizens such as closing schools, universities, places of worship, restricted gatherings to less than 50 people, and imposed restrictions on restaurants. The following is a link to the government of BC's COVID-19 state of emergency and preparedness response and recovery plan.
In response to the COVID-19 pandemic, the Province of Alberta has announced a state of public health emergency under the Public Health Act. The declaration enables the Alberta government to take measures intended to protect public health. To date, among other measures, the provincial government has prohibited mass gatherings, attendance at recreation and entertainment facilities, and the operation of restaurants above 50% capacity.
The Alberta government has not yet declared a provincial state of emergency under the Emergency Management Act. Should it do so, the provincial government would have access to sweeping powers to impose further restrictions and regulations, including in relation to travel, price controls, mandatory closures, and the acquisition of property necessary to alleviate the effects of an emergency.
Importance of understanding Bill C-13 and what is an “essential workplace"
Shopping Malls have seen the most dramatic slow down in their business. Some major malls in Canada have seen 90% of their stores close. Retail malls and plazas have been hardest hit in most provinces because of the call for social distancing and the move of most provinces to declare state of emergencies. Most tenants in office buildings in Canadian cities have asked their staff to work from home. Manufacturing business and factories have also been hard hit because of the difficulty in effecting social distancing and the fear that many Canadians have of simply going to work and taking the risk of contracting COVID-19 virus. There is no question, that there isn't a Canadian that hasn't been affected and impacted by the health and economic impact of the COVID-19 virus crisis.
And this is why the Federal government passed Bill C-13 on March 25, 2020 and why time was taken at the beginning of this paper to lay out many of the important financial elements of the Bill C-13. The Canadian Government has taken the step to inject capital into the economic engine of the Canadian economy through Bill C-13, which is intended to have a trickle down effect to see Canadians through this crisis.
Landlords are encouraged to make themselves aware of the various elements of Bill C-13 and encourage your tenants to do the same. There is no question that there will be pressure on some of the major landlords in Canada to potentially step up and take on a bit more of the financial burden during this difficult time, but by the same token, there are other financial resources that are now available to tenants, that they should be both encouraged and expected to take advantage of to the extent that they are able.
Landlord benefit from their tenants understanding the scope and depth of government assistance that they, and their employees can access and benefit from. In addition to the Bill C-13, tenants may be able to look to their business interruption insurance for compensation during the state of emergency. Tenants may be able to exercise force majeure clause with suppliers to defer payments. All of these concessions potentially enable a tenant to get back on its feet and pay full rent faster, and most importantly, not have to look to the landlord predominantly or exclusively for financial relief.
The following is a list of concessions in the short term that landlords may consider extending to their tenants:
- Basic Rent abatement or deferral
- Basic Rent suspension for defined periods (i.e. 3-6 months or longer depending on the nature of the tenancy)
- Basic Rent deferrals for a defined period and a corresponding increase Basic Rent at a point in the future to make up for a Basic Rent deferral;
- Either eliminating or reducing the obligation to pay Basic Rent and replacing it with the requirement to pay Percentage Rent for a defined period of time. A switch to paying Percentage Rent is similar to a "pay what you can" approach;
- Less common, is abating or suspending both Basic Rent and Operating Costs. Typically landlords like to recover at least their out of pocket expenses such as realty taxes, insurance, utilities still and maintenance costs;
- Reduction or elimination of administrative fee and/or management fee component of operating cost charge;
- Reduction or elimination of promotional and marketing fees;
- Reduction of services offered and performed at the property to effect a reduction in operating costs to be charged to tenants during the COVID pandemic crisis;
- Depending on the size of the property, number of tenants and nature of the tenancies in a given property, a landlord can consider a reduction of services provided to tenants during the state of emergency, which would potentially reduce operating costs;
- If the landlord would rather that a particular tenant vacate its premises, then the landlord may consider building in an automatic termination or an option to terminate for the landlord.
- Ensure that any concession you agree to clearly provides the following:
- insert a consideration clause;
- clearly state when the concession expires;
- the lease is otherwise in full force and effect and remains unamended;
- time shall continue to remain of the essence;
- the concession is not a waiver of any other clause in the lease;
- the indemnifier signs the amendment, if applicable.
Permission and not consent
Some retail tenants have taken it upon themselves to inform their landlords that they are not going to pay rent during the current COVID-19 crisis. This is a bold move, but a strategic move. These tenants are betting on the fact that during this current economic crisis tenants will not be lining up at the landlord's door to rent the space. While in some cases that may be true, there may be situations in which a landlord may want a given premises back or the landlord may want to otherwise redevelop a given property and are prepared to take the premises back. The failure to pay rent without an agreement from the landlord in writing is a clear breach of the terms of a lease. The tenant risks losing options to extend, first rights of refusal, exclusivity rights, no build covenants and other contractual benefits. If you have tenants who threaten not to pay their rent, you might want to remind them of what they risk.
What to remind your tenants
It is critical when communicating with tenants to remind them to (i) keep their insurance up to date and pay their insurance premiums, (ii) maintain and repair their premises, (iii) not turn the heat off in their premises that would prejudice water lines and/or other base building services and equipment in the building, (iv) inform their insurers if they intend to leave the premises vacant for a period of time to ensure that insurers can't vitiate policies.
Communication is not a radical idea, but it is something that is often not embraced and engaged in early enough. Communication must be thoughtful and well informed so as to ensure that you don't overstep and over promise but by the same token you open the lines of communication with all interested parties to ensure a collaborative working structure within you can develop, manage and implement a strategy plan. One thing that is clear over the past few weeks, is that local, provincial, federal and international governments are modifying and changing recommendations, directives, and orders on a daily basis. Consequently, those changes have corresponding impacts on the trajectory of your strategies.
Never forget your loan obligations
Finally, communication is key with not only your tenants, but also with your lenders. Ensure that you have carefully reviewed your loan documents and consider the provisions that require you to (i) inform your lenders that you intend to consider and grant rent and possibly other concessions to some or all of your tenants, and (ii) request that your lender provide you with the protocol that it requires to be followed in terms of whether your lender will either agree to permit you to use your discretion in the circumstances or require the lender's consent for rent and other concessions over a specified dollar amount.
As we noted at the outset of this paper, a good survival guide is all about breaking each hurdle or challenge into bite size pieces and tackling them in a coordinated and thoughtful manner. Know and be confident that there is a path forward and we will all get through the COVID-19 pandemic crisis. This is a unique economic crisis in which the Canadian government and Canadian financial institutions are stepping up to help Canadians succeed. It is up to all of us to help that process forward.
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