On June 29, 2020 the federal government announced an extension to the Canada Emergency Commercial Rent Assistance (CECRA) program, a joint effort between the federal and provincial governments, to help ease the financial stress for commercial property owners and tenants to cover eligible small business rents through July 2020. On July 31, Finance announced that the CECRA was extended for one month to help eligible small businesses pay rent for August.
The program’s extension for July and August, coupled with separate announcements by the provinces that restrict landlords’ rights to evict non-paying tenants, was apparently designed to prod commercial landlords who opted not to apply for the CECRA to revisit that decision.
Here we discuss the CECRA program generally, as well as some of the risks identified by landlords which have resulted in the program’s slow adoption, as well as provincial initiatives to provide temporary commercial eviction protection for small businesses.
The window of opportunity to access the program is closing soon. The deadline to apply for the program was August 31; however if you have been previously approved and need to reapply for July and August, you have until September 14, 2020 to do so.1
Challenges for tenants
Since mid-March, commercial real estate tenants and “non-essential” brick-and-mortar retail stores and restaurants across Canada have been greatly impacted by forced closures. These forced closures, coupled with the economic slowdown, have left many commercial tenants with cash flow issues that, in some cases, threaten their short-term viability. As rent often constitutes one of their most significant monthly expenses, many tenants sought relief from their obligation to make rental payments, in whole or in part, in the form of rent deferral arrangements.
Challenges for landlords
Of course, a landlord’s financial condition is closely linked to that of their tenants. Accordingly, a tenant’s failure to make rental payments can, in turn, challenge a landlord’s ability to meet their own financial obligations. Indeed, many commercial landlords have mortgage payments and other debt obligations that leverage either their rental properties or the rents received from such properties (whether, for example, those debts are incurred to improve or maintain existing properties, develop new properties or to develop or fund other businesses).
Additionally, the many expenses associated with operating a commercial property continue without relief. These may include property taxes, payments to various associations (e.g., fees in respect of Business Improvement Area association of commercial property owners), insurance, GST/HST, and the landlord’s own labour and overhead costs. Further, certain commercial landlords have obligations to their investors which may limit their freedom to enter into a rent deferral agreement. Meanwhile, some commercial property owners rely on rents received as their only source of income.
In response to these concerns, on April 24, 2020 the federal government announced its intention to partner with the provinces and territories to establish the CECRA program, which grants rent relief to small business tenants that have been impacted by the pandemic.
Under the CECRA program, the Canada Mortgage and Housing Corporation (CHMC) provides forgivable loans to eligible commercial property owners worth up to 50% of their tenants’ monthly gross rent.
To qualify, a property owner and each of its participating tenants must enter into an agreement to reduce the tenant’s obligation in respect of rent (a rent reduction agreement). Specifically, the property owner must forgive at least 75% of the original rent owed for each of the months of April, May, June and, if requested, July and August 2020. Additionally, the property owner must agree not to evict the tenant while the rent reduction agreement is in place.
The deadline to apply for CECRA was August 31, 2020. Property owners could apply in respect of any period as long as their submission was made before August 31 of this year. Existing applicants need to reapply for July and August and have until September 14, 2020 to do so.
If an application is approved, loan funds will be deposited directly into the property owner’s bank account within approximately two weeks. Further, the loans will be forgiven on December 31, 2020 without formal notification of forgiveness, as long as the property owner complies with all the terms and conditions of the loan. The property owner will be required to pay back the loan if it defaults on it, files for bankruptcy, restructures, reorganizes or is dissolved.
Eligibility requirements for impacted small business tenants
To qualify for the CECRA, small business tenants, including nonprofit and charitable organizations, must:
- Not pay more than $50,000 in monthly gross rent per location under a valid and enforceable lease agreement
- Generate no more than $20 million in gross annual revenues2 on a consolidated basis (at the ultimate parent company level)
- Have temporarily ceased business operations or have experienced a drop of revenue of a minimum of 70% as compared against pre-COVID revenues
To calculate the reduction in revenues, small business tenants must compare their revenues in April, May and June 2020 to the revenues earned in the corresponding period in 2019. However, if the business was not operational in 2019, their revenues in April, May and June 2020 can be compared to the average of their revenues earned in January and February 2020.
Finance has announced that those who qualified under existing parameters will be able to apply for the additional two months based on having a 70% revenue decline for April, May and June, without having to determine whether they continue to have a 70% revenue decline in July or August. To qualify, a tenant’s revenues must be earned from ordinary activities in Canada calculated using its normal accounting methods; revenues from extraordinary items should not be included in the calculation.
Additionally, eligible small business tenants who are in sublease arrangements are eligible for the CECRA if their subleases meet the above criteria.
Eligibility requirements for property owners
To qualify for the CECRA, a commercial property owner must:
- Be the owner or landlord of a commercial real property that is occupied by one or more tenants who meet the criteria for eligibility as described above.
- Have entered into a rent reduction agreement with the affected tenant.
- Have declared rental income on its tax return for the 2018 and/or 2019 tax years or attest that the property commenced generating commercial revenue in 2020. Where the real property is newly constructed, recently purchased, or no rental income has been declared for 2018 and/or 2019, the property owner may still be eligible for the CECRA, provided that all other program requirements are met, including the requirement to have a valid and enforceable lease agreement with the impacted tenant on or before April 1, 2020.
How to apply
The following must be submitted to CMHC, along with certain factual information about the leased premises, as part of an application for a CECRA loan:
- A legally binding rent reduction agreement entered into between the property owner and the commercial tenant which conforms with the CECRA program’s terms and conditions
- An attestation by the property owner confirming all information relating to the attestation and the application is correct and confirming its eligibility under the program
- An attestation by the tenant or subtenant confirming their eligibility under the program
- A forgivable loan agreement, the terms of which must be agreed to by the property owner
Landlords’ concerns regarding rent deferral agreements and rent reduction agreements
When entering into a rent deferral arrangement, landlords should always be mindful of the effects of incorporating rent forbearance clauses or adjusting their existing payment schedule under their lease. Consideration should be given to whether such a rent deferral agreement may impact the landlord’s rights typically enjoyed on insolvency of a tenant, or whether choosing not to exercise a landlord’s right of repossession otherwise impacts the enforceability of all or parts of the lease agreement or any amendments.
Additionally, entering into a rent deferral arrangement may have unintended GST/HST implications. The Excise Tax Act generally provides that GST/HST on commercial rent is payable by the tenant on the earlier of the day the rent is payable and the day it is paid. Therefore, the landlord must remit the GST/HST when rent is payable under the lease, even if the amount is not paid until a later date. Accordingly, landlords should ensure that any rent deferral agreement to which they become a party specifies that rent is not due until a later date (along with any GST/HST). Until June 30, 2020, landlords will have benefited from GST/HST deferrals. However, after June 30, landlords will be required to remit GST/HST in respect of the commercial rent.
Further, landlords should be aware that the CECRA restricts their right to evict tenants who are also subject to the program. While it’s a well-intentioned inclusion in the program criteria, restricting a commercial property owner’s ability to evict tenants can have adverse consequences. For example, just as a vehicle on the verge of being repossessed may not be maintained as well as the family minivan, a tenant whose viability is in jeopardy may not prioritize the maintenance of rental premises to the same degree as they otherwise would where the consequences for failing to do so are dampened. A commercial property owner may not be able to seize and sell the goods of the tenant left on the premises for rent arrears or repossess during the applicable months where they might otherwise under normal circumstances.
Landlord may not be able to evict in any event
Initially, fewer applications were received for the CECRA program than were anticipated. Many commercial property owners cited their inability to evict tenants as their primary reason for not applying for the CECRA. In response, and apparently to compel commercial property owners to apply for the CECRA, many of the provinces and territories generally indicated that they would impose statutory limitations on a landlord’s ability to evict their commercial tenants in any event.
Statutory moratoriums on commercial rent evictions
On June 1, 2020, the Government of British Columbia announced that landlords who are eligible for the CECRA but who choose not to apply will be barred from evicting a tenant who is unable to pay rent. Pursuant to Ministerial Order M179, commercial landlords who were eligible for the CECRA are prevented from taking any of the following actions:
- Exercising any contractual or other right of re-entry to the tenant’s leased property
- Giving the tenant notice of re-entry or notice of termination of the tenant’s lease
- Distraining the tenant’s property for rent due
- Taking any steps to rent out the tenant’s leased property on the tenant’s behalf
Ministerial Order No. M179 is effective from May 29, 2020 and expires on the earlier of the expiry (or termination) of the state of emergency in the province or the last date for which the CECRA will provide assistance.
On June 8, 2020, the Government of Ontario announced its intention to temporarily halt evictions of commercial tenants. Following this announcement, the Protecting Small Business Act, 2020 was introduced, which amends and limits the remedies normally available under Ontario’s Commercial Tenancies Act. It received Royal Assent June 17, 2020.
Protecting Small Business Act, 2020 should only apply where a commercial landlord was eligible to receive assistance under the CECRA. No such landlord would be able to exercise a right of re-entry during the period between June 18, 2020 and ending the earlier of September 1, 2020 and the day named by proclamation of the Lieutenant Governor.
Further, if a CECRA-eligible landlord has, between May 1, 2020 and June 18, 2020, repossessed a commercial tenant’s rental property, they must restore the tenant’s possession (unless the tenant declines) or, if the landlord is unable to restore the tenant’s possession, compensate the tenant for damages sustained because of the landlord’s inability to restore possession.
On June 5, 2020, the Government of Saskatchewan announced its intention to provide temporary commercial eviction protection for small business tenants during the COVID-19 emergency. The commercial eviction protection was enacted by way of a ministerial order which provides that, where a tenant and a landlord have a lease agreement to which the CECRA applies, the landlord must not, in response to a tenant’s failure to pay rent due, take any of the following actions:
- Exercise any contractual or other right of re-entry to the tenant’s leased property
- Give the tenant notice of re-entry or notice of termination of the tenant’s lease
- Distrain the tenant’s property for rent due
- Take any steps to rent out the tenant’s leased property on the tenant’s behalf
This eviction moratorium begins on June 4, 2020 and ends on the date of the last renewal of the declaration of emergency in the province or the date after the last date for which the CECRA provides assistance, whichever is earlier.
On June 5, 2020, the Alberta Government announced that it was also considering a moratorium on commercial evictions in cases where landlords chose not to participate in the CECRA. Following this announcement, Bill 23, Commercial Tenancies Protection Act was introduced. Interestingly, unlike the prohibitions of evictions announced by the above provinces, it is possible that Alberta’s prohibition may apply to both CECRA-eligible landlords and their small business tenants, as well as other larger tenants that have been negatively affected by the economic fallout of COVID-19. This is because Bill 23 provides that the types of landlords to which this eviction moratorium will apply will be prescribed by regulation, and as of the date of writing those regulations have yet to be released. This prohibition on eviction would apply from March 17, 2020 to August 31, 2020.
The Québec Government also announced measures to protect commercial tenants that are struggling to pay rent. Amendments to Bill 61, An Act to restart Québec’s economy and to mitigate the consequences of the public health emergency declared on 13 March 2020 because of the COVID-19 pandemic, were announced which would prohibit the termination of a commercial lease or seizure of the goods contained therein where there has been a failure to pay rent that became due between March 13, 2020 and August 1, 2020 (or any other date specified by the government before that date). Similar to Alberta, this prohibition on eviction may apply to landlords that were ineligible for the CECRA.
With landlords and tenants both facing a crunch, legislators created the CECRA in attempt to address cashflow issues. There are only a few more days left for existing applicants to apply for August. While the expansion of the program generated additional interest, we will need to wait until the final numbers are in before we can assess its overall success.