What can commercial tenants and landlords do to protect themselves from the impact of Covid-19 related closures on commercial lease obligations? Here are some tips for businesses who are in the difficult situation of having to deal with potential defaults on commercial rent obligations related to closures or reductions due to the Covid-19 situation.
1. Review The Lease Agreement Carefully For Potentially Relevant Clauses
In Ontario, the commercial landlord-tenant relationship is governed by the Commercial Tenancies Act, R.S.O. 1990, c. L.7., (the “Act”) which outlines the relationship, rights and obligations between commercial landlords and tenants. However these relationships are heavily governed by the commercial lease agreement in place between the landlord and the tenant, which can take precedence over the Act based on the agreement of the parties.
Review the Act and more importantly, review your commercial lease agreement carefully to appreciate whether the agreement contemplates the type of situation that the Covid-19 pandemic has created.
By example, the commercial lease agreement may contain a Force Majeure clause which is a provision that excuses a party from not performing it’s contractual obligations during extraordinary circumstances or events which include “Act’s of God” such as hurricanes, earthquakes, volcanic eruptions, etc. Usually these clauses will allow a party to suspend temporarily their obligations under the contract for the duration of the Force Majeure.
It should be noted that these clauses are usually narrowly construed, one should look for wording which specifically includes or intends to include the type of situation encompassing the Covid-19 pandemic – such as “disease”, “public health emergency” or “pandemic”.
If there is no Force Majeure clause, one may have recourse to the doctrine of Frustration. This doctrine comes into effect when an event intervenes and through no fault of either party, the event making performance under the contract untenable, usually due to unforeseen events. The threshold for this clause to apply is extraordinarily high, the event must go to the core purpose of the contract. Unlike Force Majeure which temporarily suspends the contract, Frustration typically brings the contract to an end.
There may also be a continued operation clause contained in the lease agreement which requires a tenant to continuously operate from its premises. However, most leases also include provisions which require tenants to comply with federal or provincial regulations and laws, such that a tenant would likely be excused from performance under this clause so long as they continue to pay the rent.
Some commercial leases contain rent abatement rights, which allow a tenant to abate rent for any event which makes the premises unusable. This may assist restaurants for example that are only able to provide take out service, such that they may seek a rent abatement for the dine-in area of the restaurant.
There may be other clauses in your lease agreement that potentially apply to the Covid-19 pandemic situation, it is important to seek the proper advice from legal professionals to understand these clauses.
2. Provide Notice And Enter Into Negotiations With The Landlords & Tenants Early
If your business will be unable to pay the rent owing on a commercia lease due to Covid-19 closures it is important to notify your landlord as soon as possible and enter into negotiations to see what accommodations might be available. Conversely if you are a landlord consider policies and responses that can be implemented to respond to the Covid-19 pandemic impact on tenants.
By example a landlord may be willing to suspend a tenant’s rent obligation for the duration of the Covid-19 closure and to add the accumulated missed rental period to the remaining rental period under the lease on a pro-rata basis. Alternatively, a landlord may be willing to add a balloon payment at the end of the lease requiring you to pay the missed rent period or offer a full or partial temporary rent abatement.
3. Know Your Rights And Obligations Under The Lease But Act Reasonably And With Due Care
It is important to be cognizant of your rights and obligations under the lease agreement. As a tenant who is seeking a rent deferral, reduction or abatement, do not assume that your landlord is obligated to accommodate such a request. Have a contingency plan in place if possible where a default under the lease contract is inevitable. Tenants should be prepared to take steps to mitigate the situation as best they can and minimize the loss exposure to the landlord and the consequence of potential breach under the contract.
Landlords should consider the long-term ramifications of the impact of the Covid-19 situation when preparing policies on how to respond to tenants in need of relief. Landlords should be cognizant of the potential remedies that their Tenants may have under the terms of the lease and notice periods, cure periods and extension rights that may apply. Landlords should have responses and policies in place to respond to claims for relief from Tenants which aim to sustain the relationship with minimal exposure to both parties.
4. Consider Potential Negotiations With Other Parties – Banks, Lenders, etc.
If the property is encumbered by debt Landlords must consider relief from and negotiations with lenders and review their lending arrangement contracts carefully. Tenants may want to consider extending business loans or relief offered by their lending institutions to assist with covering overhead costs during Covid-19 related closures.
5. Pay Attention To Legal And Policy Developments Arising from Covid-19
Since the Covid-19 pandemic has created an unprecedented economic situation, governments are working to develop policies, programs and relief for businesses and individuals alike to assist with mitigation efforts on the impact of these closures. It will be important for all businesses to keep abreast of these policy announcements. The legal impacts of Covid-19 will develop slowly as courts re-open, they will undoubtedly be confronted with dealing with the economic impact of Covid-19 on businesses.
If you need to consider an urgent court hearing date concerning your commercial lease matter consider the current court closures in effect and the procedure. Parties may also wish to arbitrate their dispute or be required to do so pursuant to arbitration clauses in the lease agreement.
Whether you are a landlord or a tenant in a commercial lease, the Covid-19 pandemic has created an unprecedented situation. It is important to seek legal advice to navigate through negotiations during these difficult, delicate and uncertain times. Lawyers may be able to assist the parties in negotiating and drafting potentially mutually agreeable solutions, or seek legal recourse for defaults under the agreement.
Do you need assistance and guidance with your commercial lease obligations or disputes due to the Covid-19 Pandemic? The lawyers at Gilbertson Davis LLP have experience assisting landlords and tenants with commercial lease contracts, negotiations and disputes. Contact us to see if we can help.