Welcome to our Q&A session on commercial leasing. The purpose of this session is to help commercial landlords and tenants during these difficult times.
This session is not intended as legal advice as it is impossible to cover all relevant details, and available rights and remedies will depend on the unique facts of each situation. For specific advice, please speak with your qualified legal counsel before making any decisions or taking any action. Additionally, the situation is extremely fluid and is changing on a daily basis. As things evolve, your best course of action could also evolve so please follow up-to-date and reliable sources for your information.
Esia: My name is Esia Giaouris and I’m a commercial real estate lawyer at Caravel Law. I’ve been practicing for over 19 years and I act on behalf of landlords and tenants in a multitude of industries which include retail, office, industrial and mixed use spaces.
Peter: And I’m Peter Prattas, I have been practicing real estate and leasing law for over two decades now – half the time at a Bay Street law firm, the other half at Walmart and then the last year and a bit here at Caravel.
Shari (Director of Client and Lawyer Happiness): I’m going to start with an email question. This is from a tenant’s perspective. If I get kicked out of my space can the landlord sell or throw out my things because I’m not able to get there because I am socially isolated?
Peter: We are in unusual times, but the lease is still a contract so whatever the landlord decides to do it can’t be contrary to what you’ve agreed to in your contract. So they’d have to follow the termination and default provisions set out in the lease. Usually notice is required, so whatever the lease says – they have to serve notice and take all the steps they’d ordinarily have to do or take before the Covid-19. So Covid-19 does not change those rules.
Shari: We have a second question: Can I insist that the common areas of the building be specially cleaned?
Peter: I think you can ask the landlord. Public health officials have released recommendations and requirements relating to slowing down the spread of Covid-19 and landlords are responsible for taking whatever reasonable measures they should be taking to ensure there is such compliance with public health guidelines. Simple cleaning it is not enough.
Esia: There’s a question here on the chat: What are you seeing with respect to landlord reactions to tenant requests for lease deferrals abatements – have you seen any of the landlords granting them yet? Yes, I have seen landlords offering lease deferrals and abatements. It’s my experience that landlords and tenants are trying to work together to deal with this situation, these are difficult times for everyone. There is a range of Landlord responses from ‘No, you have to pay your rent, it’s due on April 1st to others offering payments by installments. Some landlords are giving relief for a few months on: all rent (base rent and additional rent); a deferral of base rent only; a percentage off on the base rent/additional rent/or both. Each situation is unique, and landlords are responding in different ways and often on a case-by-case basis. In a situation such as this, the best course of action to call your landlord (or tenant) and come up with an agreement that works for both parties.
Peter: (inaudible) Landlords are sitting back and waiting for the tenants to be proactive. And they are only responding to a specific request. Landlords are being flexible but it’s up to tenants to establish there is a need. Landlords are reticent to actually grant deferrals unless they believe the tenant is genuinely in need of them. So you may be asked to provide bank statements or just be honest that the business you are running has shut down. But if it’s not, then you might be asked to establish that there is a need for it before they will grant a deferral.
Rose: Peter, it’s Rose. So what you’re saying is it’s on a case by case basis. It’s up to us as tenants to contact our landlord and say Hey, look, this is our situation, and business has really dropped since this whole Covid-19 situation. Can you give us a break. So if we cannot pay rent, say 1 or 2 or 3 months, like what happens then in a case like that? Is there anything to protect tenants? And kind of pushing that deferral on our own terms?
Peter: You have to look at your lease first and does it provide for — and I’m assuming this is in a commercial context — but does your lease provide for what happens when someone can’t do something because of an event beyond their control. That’s typical in most commercial leases, but also in those clauses there’s an exclusion for monetary obligation which means payment of rent. So landlords are going to point to that and say “Hey, look, it doesn’t matter what happened, you still have to pay your rent. I have my payments to make whether it’s to the City for taxes or the bank for the mortgage or to maintain the cable, internet — maintain items to allow the building to continue to operate”. But when crises pass and unresolved landlord/tenant disputes make their way into court system, courts will ask: “Were the parties reasonable? Did the tenant have the basis to make a request for the deferral? Could the landlord accommodate the deferral given their financial situation?” Yes, the landlords have the ability to change the locks, but they are also operating under challenging market conditions. Kicking out a tenant is easy, but then they’ll have to back-fill the space, which may be difficult post-crises. And if landlords are deemed to have acted unreasonably, they can be challenged that it was not a reasonable action on their part and expose themselves to damages. So that’s why I find landlords open to accommodation – and short-term accommodation because no one knows if this will last 2, 6, 12 months. Today, the City of Toronto hinted that social distancing could last another 12 weeks. So, landlords are open to deferrals, and open to deferrals maybe of the minimum rent or the additional rent, depending how they want to structure it. As a tenant, unless you have a unique situation – let’s say you are in a building where the landlord closed the building and you couldn’t operate a business that you could have run given the current guidelines then you might have a challenge you can make to the landlord, but in a case where the landlord kept the building open and you closed, it’s going to be challenging from a tenant perspective given the terms of the lease, again you’ll have to look at your lease, but as long as you are proactive and can demonstrate you have suffered loss and you’re going to put the onus on the landlord to respond and in many cases they are going to be accommodating to some extent. It won’t be full rent waiver, but a partial rent deferral would be something you’d be able to get from many landlords.
Shari: Here’s a question from the Chat: There’s a challenge with SaaS companies to show they are hurting financially, since it’s subscription based. Are there any other ways to show we need the deferral or special concessions?
Esia: It’s pretty much a dialogue between you and your landlord. You will need to determine what else the landlord is looking for to prove there’s hardship. There’s hardship for everybody. It depends on what else you can offer as proof of financial hardship. Peter?
Peter: Yes, if you can’t establish that you are suffering as a result of this, then it will be difficult to show that you needed a rent accommodation — I have another client in the tech industry who is very busy now providing consulting services – and I said to him you’re not going to be able to convince a landlord that you should receive a rent deferral, If you can’t convince a landlord you are suffering in some way they are not going to be open/receptive to a deferral request, unless you can offer something in return. I had one case where the landlord offered a rent concession…(even where the tenant may not have been suffering that much,) in return for a personal guarantee (the tenant was a corporate entity), which was lacking in the original lease deal. So you’ll have to come back to the landlord. The key thing here is, looking at it from a reasonableness perspective, if the tenant doesn’t have a need it’s going to be tough for them to argue I should withhold rent or not pay or demand a deferral.
Esia: I also wanted to add that the tenant does not want to act unilaterally and not pay rent because a default under the lease can result in the loss of special rights (e.g. an option to extend or right of first refusal) that were negotiated at the beginning of the lease term.
Peter: Yes, do not act unilaterally. That’s the key.
Shari: I’ll read another question: As a manager with an essential service, insurance brokers and tenants, what obligation does the landlord need to grant us access to his building? Our concern is the landlord may close the building because many other tenants are non-essential.
Peter: That’s an interesting one. This is where a tenant would have a more direct right because the lease provides that (which is typical)t the tenant has what we call ‘Quiet Enjoyment’ from the landlord, meaning, provided that the tenant is complying with their obligations the landlord has to ensure they are not interfering with the operations. In this case, a landlord would find difficulty —- unless they are forced or told by governmental authorities that they have to close the building, if they had a significant tenant in there that’s an essential service and needs to remain open that’s something you could push back on the landlord , and say you have to keep the building open. Your response may be – you may be asked to assume certain liabilities, via keeping the building open, carrying costs or operating costs, it depends, but if you have a full lease that contains that Quiet Enjoyment clause you can push back on the landlord on that point.
Shari: What recourse do landlords have with regards to their mortgage and tax payments with banks and municipalities in deferring payments?
Esia: You’d have to talk to your bank to see what mortgage concessions they are willing to offer. I have heard that people that have approached their banks are paying their interest and getting relief on the principle. Municipalities are also offering deferrals of utility and property tax payments.
Peter: Yes, each municipality is offering different deferrals to property owners on taxes. I think Richmond Hill as of yesterday was at 1 month. City of Toronto 6 months. A little bit longer/shorter in other jurisdictions. That’s one of the pushbacks to the landlord you will have – the landlord can get a deferral on his/her taxes and they should be able to pass that down to the tenant. And landlords are open to that when they are not having to pay that expense themselves, vis a vis the landlord’s mortgages – they are in the same boat as individuals who have their own home mortgages and have to go to the bank and establish whether or not they can carry the interest changes and it’ll depend on the specific financial situation. There are a few landlords that don’t have mortgages and they are more flexible because of that. So you’ll find the landlord’s flexibility will depend on how much flexibility they have on their payment side if they are highly leveraged and their bank is not being accommodating, then you will feel that, through their responses to you as a tenant and any request for a deferral. If they are lightly leveraged or have no mortgage, you’ll find greater flexibility from landlords in that situation.
Shari: Here’s another question: If I waive collecting rent for a tenant now, will they still owe me the rent later?
Esia: Well, yes. So if you are deferring the rent – it’s not a rent forgiveness, it’s a rent deferral. So, if you are agreeing with your tenant to defer the rent, it’s important you identify the parameters of that rent deferral. You need to identify when the deferred rent is to be repaid—this can take many forms: eg. Payment by a given month? By the end of the term? In installments until all deferred rent is paid. It depends on the agreement you are comfortable making with your tenant.
Peter: Yes, be careful with the terminology used. Use language like ‘deferral’ that clearly indicates that it’s not being waived or forgiven, so there’s no confusion between the parties.
Esia: It’s also very important that you document it. Document the terms of the deferral.
John: Shari it’s John Tyrrell from Calgary. Anyone listening in from Alberta, most of the municipalities in Alberta have provided that property tax deferrals and also utility fee deferrals, so — if one goes to the Alberta Government Covid-19 website there’s a notation there that the province is encouraging landlords to pass on those deferrals to their tenants. So people know that it’s not uniquely Ontario, this approach.
Shari: Thank you John.
Shari: Does anyone have any questions they’d like to review? Peter? Esia?
Peter: Nothing to add. Just reiterating the need to be proactive, especially on the tenant side. Be clear on what the asks and what the agreements are and then document those agreements, especially if you may be thinking this may last a few months and it just drags on and you want to look back at what you agreed to. It should be clear. And you want to avoid future disputes.
Shari: In terms of communication, what happens if on the landlord or tenant side you get an answer of ‘I’ll get back to you’? And you haven’t heard anything. What do you recommend in those situations?
Esia: In that situation you should reach out again, acting unilaterally is not a good idea. If still no response then advise the landlord, in writing, the course of action you are intending to take if you do not hear back from the landlord. Without agreement however, you, as tenant would be in default of your lease and before defaulting you should review your lease to identify what rights you may be giving up.
Peter: Yes that’s true with respect to rental payments. Some leases – they are drafted with respect to rental defaults – sometimes rent defaults arise the first day you miss it, other times you are given a grace period. You want to be clear before you stop paying rent that you have that right in your lease to do so. You have to be clear – many leases are drafted differently. In some leases, if you miss the payment on that day it’s treated as an immediate default – others you are offered a grace period.
Esia: Some rights that may be impacted include extension rights as well as rights of first refusal – you negotiate those very heavily at the beginning and you don’t want to give it up.
Peter: And especially when they are only available when you are not in default. That’s how they are usually drafted.
Shari: In terms of your interactions so far with clients on the landlord and tenant side, what are people — what’s our outlook right now? Are they taking a wait and see approach? What are pressing concerns you’ve heard about?
Esia: Well it’s the not knowing how long this will last and what impact this will have on the economy. So, there’s caution on both sides. Landlords, they are careful because there aren’t that many tenants lining up to take over space that may become vacant. And tenants, a lot of them may not be able to operate their business or they are operating at partial capacity or are closed. If an action taken by either party is challenged, I think at the end of the day, what will carry a lot of weight is reasonableness; were the landlord and tenant acting reasonable in the circumstances. Like Peter said – if the tenant can pay the rent and their business is operating, they’re not going to be looked well upon if they choose to take advantage of the situation. If the actions of the parties are challenged, the courts will, in addition to looking at the contract, likely take into account whether the parties acted fairly and equitably given the circumstances. When dealing with your landlord and dealing with your tenant, just make sure that what you are doing is reasonable. You do have a contract, the lease is a binding contract between 2 parties, but reasonableness is also something you should keep in mind.
Shari: I have a question here. I’ll read the first. Through a series of events we never renewed our lease which we should have done by February 1st, but we are paid up until yesterday. Going forward, is it reasonable to push for not signing a lease, and perhaps paying an agreed upon monthly sum until Covid-19 is over? We currently have no income.
Esia: In that situation you are an overholding tenant which would be defined in the lease itself. Typically, leases provide for an increased rent during an overholding period. To avoid this, you can negotiate a month-to-month tenancy based on the old lease until you sign and negotiate a new lease.
Shari: Another question. I am struggling to understand the logic. In Ontario we were told to stay closed if we are a non-essential business. I am shocked that there are no legal rights for tenants to postpone paying if there has been an order from the Government to shut down.
Peter: Yes it might seem illogical but given that parties arrangements are contractual in nature and there’s very limited legislation to impact those contractual rights agreed to by the parties, the first document that gets looked at is what did the parties agree to? Modern contracts today contemplate (not specific to pandemics), instances where parties are not able to perform as part of the contract, which in this case is when you’re told by a government that you can’t operate. These contracts have these clauses which provide that each party is going to be excused from carrying out their obligations where they are forced to not being able to do that beyond items beyond their control. But there are carve-outs. In the leasing context, those carve-outs are for monetary obligations which are usually a tenant’s responsibility and include rental payments So these contracts, and we’d have to look at your particular contract, but these contracts, on the face of it, kind of address the situation even if they are not specifically mentioning a pandemic – they are dealing with factors beyond the control of the tenant. That’s why the first item we have to look at is the contract and given that parties might not be able to pay or be able to operate and disputes arise, courts will have to try to disentangle and deal with these problems and will look at each party’s reasonableness in the process. But the first item that gets looked at is: Do you have a contract and what does it say? And there’s very limited scope from a legislation perspective to interfere with those contractual arrangements. It’s not like the residential side where the Landlord and Tenant Board is now restricted from issuing eviction orders relating to related to residential tenancies and no one is getting evicted. It’s different in the commercial context where parties have leeway to contract and courts will respect that leeway and the agreements that arise from such interactions between the parties. So, that’s where we are unfortunately. That’s why it may seem illogical but that’s the logic of it.
Shari: Here’s a final question: What about the co-working spaces not willing to shut down since they consider themselves to be an essential business even though cases of Covid-19 have been reported inside the building?
Peter: Again you’d have to look at the contract. But if there are instances of Covid-19 in the building – you may have a situation where your employees themselves may not have to go into work because the work environment may no longer be safe (under provincial occupational health regulations)y don’t have to go and work in an environment that’s not safe or healthy and you can analogize that to your landlord and that would be one of the instances you’d be able to raise in a reasonableness argument that it’s unsafe to be in the building. Forget the contractual requirements – it’s simply unsafe because of the presence of the virus. Grocery stores are cleaning their premises and opening up the next day. What did the landlord do in response to that factual matter? And parties will be looked at by courts to act reasonably in that situation before they strictly try to enforce their contractual rights.
Shari: I just want to thank everyone for dealing in today. Thank you to Esia and Peter for fielding these questions. I know you are both open to speaking to anyone with questions. So a big thank you for today. Again, if you need specific questions answered please consult your lawyer or feel free to reach out to Caravel Law. We wish everyone the best. Thank you.