Covid-19 and Commercial Tenancies

By: Tejpaul Grewal, Associate - Lawrence, Lawrence, Stevenson LLP

The COVID-19 pandemic has had far-reaching effects on global commerce, especially on commercial landlords and tenants. Businesses eligible for the Canada Emergency Commercial Rent Assistance (CECRA) program have had the benefit of a temporary ban on commercial evictions from May 1, 2020 to October 30, 2020, which was further extended until January 31, 2021 in Ontario. At the time of writing this article, it hasn’t been announced if the ban will be further extended, although it does appear likely.

Some businesses have been fortunate in employing a work-from-home shift, but businesses unable to conduct their work in a similar manner have been, and continue to be, severely impacted by the restrictions imposed by the provincial government to combat the spread of COVID-19.

All commercial tenancy agreements contain specific responsibilities for the landlord and the tenant to meet. For the tenant, the most significant of these is the requirement to pay rent, and to operate its business continuously in the leased premises. However, with COVID-19, parties must now be careful to address concerns arising out of the possible inability of a business to continue operating the way it was conducting business before new restrictions were imposed by the provincial government. These restrictions weren’t typically anticipated by most contracting landlords and tenants before 2020, but now will be top of mind in negotiations for new tenancy agreements.

The most obvious restriction is one that affects small businesses unable to conduct their normal course of work within the leased premises because of the provincial government’s mandate to halt such work until the expiration of provincial lockdowns. One of the most topical examples is fitness centres and gyms, which have been effectively shuttered in the wake of COVID-19. Such a tenant will exclude or limit any covenant in a lease for continuous operation within the leased premises if it’s prevented from doing so by government restrictions.

The landlord may not want to do this, but it needs to be prepared for the real possibility of the tenant operating its business because of a provincial lockdown. A landlord might, therefore, consider expanding the use clause in a lease to permit potential ancillary uses, such as office or storage uses, or to allow the tenant to use or expand the space for different commercial purposes.

Most leases will define and limit the specific commercial activity that the tenant is permitted to operate within the leased premises. However, allowing a tenant to engage in a related business, such as offering a dine-in only restaurant, take-out services, or to use outside common areas for dining and curb-side pick-up, may be advisable to ensure the tenant has the means to pay rent.

The provincial government has asked landlords to work collaboratively with their tenants to ensure they’re not unduly burdened during times they can’t come up with all of their rent. However, this can also unduly burden landlords who count on those rental payments to meet their own obligations. Some landlords have required a tenant to pay only their applicable taxes, maintenance, and insurance costs (the “additional rent”) and then work out a payment plan for the base rent the tenant would also normally pay but can no longer do so because of restrictions imposed on their business. These forbearance agreements are meant to be temporary arrangements and must be drafted to ensure the parties’ obligations are clear and unambiguous.

Adapting to change

Landlords who seek to enter into a commercial tenancy should speak with a lawyer who can advise them on how to structure a lease that allows them to require their tenant to have health and safety procedures in place during health emergencies. Examples of this would be requiring staff and visitors who enter leased premises to consent to temperature checks; ensuring the tenant has adequate sanitation protocols in place and is following guidance from health officials; and ensuring adherence to mask policies, to name a few.

Landlords should also familiarize themselves with force majeure clauses incorporated within a commercial lease. A detailed discussion in regard to force majeure clauses can be found in the May 4, 2020 column, Contracts and COVID-19 in this publication by my colleague, Louis Vouloukos.

Now more than ever landlords need to make sure that prospective tenants have adequate capital and insurance to stay afloat should their businesses be impacted from a temporary operational halt. Business interruption insurance, however, is often not available in circumstances of a pandemic or other calamity, so a thorough review of the tenant’s insurance policies should be undertaken when the commercial lease is negotiated.

Collecting a deposit, for example, is nothing new for commercial landlords when they’re considering leasing to a tenant. Typically, a tenant will provide one month’s rent as security. In the current landscape, it might be advisable for the landlord to request a larger deposit. The nature of the business should also be evaluated to determine the security deposit, i.e., can the business remain operational and profitable during restrictions? Other factors would also be considered, such as the relationship between the landlord and tenant, i.e., is it a
long-established relationship or a new one?

The law and public policy will continue to evolve as we grapple with the realities of COVID-19. For commercial landlords and tenants, having a lease prepared and reviewed by a commercial leasing lawyer is pivotal in ensuring contingencies are in place to minimize losses during a period of economic downtown and the unprecedented effects the global COVID-19 pandemic has brought with it.

Tejpaul Grewal is a real estate lawyer at Brampton, Ont.-based Lawrences law firm.
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