CKL BUSINESSES - CAN'T PAY RENT? INFLEXIBLE LANDLORD? YOUR STEP-BY-STEP GUIDE TO KEEPING YOUR RENTED SPACE AND PAYING YOUR COMMERCIAL RENT (OR DEFERRING IT). PROTECTING YOUR BUSINESS TO MOVE FOWARD.

Commercial tenancy relationships in Ontario are governed by Ontario’s Commercial Tenancies Act (the “CTA”) and the lease agreement itself.

They are largely a matter of contract, in terms of rights and obligations, rather than statutory rules.

During Ontario’s State of Emergency (as of Mar. 17, 2020), many businesses in the City of Kawartha Lakes (“CKL”) have been deemed non-essential and forced to close, or substantially reduce operations. Even “essential” workplaces face lay offs, work shortages and possibly closure, at least temporarily.

For both essential and non-essential businesses, tremendous strain is imposed on commercial tenancy relationships.

It is estimated that up to one-half of businesses may be unable to pay commercial rent during the pandemic, particularly those in the food, human services and hospitality sectors.

While the federal government has recently announced financial support for landlords, thereby alleviating tenants from paying rent temporarily, the details have yet to be revealed.

Effectively, it is critical that landlords and commercial tenants act co-operatively, reasonably and flexibly during this crisis, in both their best interests. For example, owners of commercial spaces should consider offering independent tenants an automatic, sixty-day, interest-free rental deferral, with a possibility of further extension depending on the ongoing status of the pandemic.

However, some landlords may not be doing so, leaving the tenant in very difficult circumstances. 

To address landlords that do not act flexibly, the Ontario government (or federal government) must consider proactively enacting legislation, or other measure, prohibiting the forfeiture of commercial leases as of March 15, 2020 to, for example, June or July 30, 2020, or possibly longer depending on the development of the crisis, for commercial tenants failing to pay rent. 

If no deferral arrangement, or other solution, is agreed to by the landlord and tenant themselves, and there is no legislative intervention by either government, the issue becomes challenging to address, legally. These are unique, novel and unprecedented circumstances, legally speaking. It will be difficult to decide which commercial tenancy party should be burdened by the financial loss caused by a global pandemic, beyond either party’s reasonable expectations or control. How is the loss, which both will suffer, to be legally allocated?

Even if a deferral is agreed to, or the government intervenes to grant relief from forfeiture for non-payment of rent, it may not resolve the issue of resumption of the lease when the parties are able, or permitted, to do so. For example, a commercial tenant may financially be unable to accumulate and pay rental arrears when operations resume – rather, it is likely the business will initially struggle to pay current expenses to ramp up and continue, let alone back-pay of rent. 

WHAT CAN THE LANDLORD DO FOR NON-PAYMENT OF RENT?

Currently in Ontario, if commercial rent is not paid under the terms of the lease, and subject to the terms of the lease, a commercial owner/landlord could:

(a)   affirm the lease and sue for rent or for performance of an obligation (not available when rent distress is in progress) and commence an action in the Superior Court of Justice;

(b)   affirm the lease and re-enter and re-let the commercial premises (only if the landlord has reserved a right of re-entry in the lease or has received a Court order to the same effect);

(c)   affirm the lease and exercise rent distress rights (seizure of property assets); or

(d)   accept the repudiation of the lease, terminate and re-enter, and sue for the rent that would otherwise have been payable for the balance of the lease term.

It is likely that most commercial landlords with small-business tenants will elect (d) above during the pandemic.

CURRENTLY NO JUDICIAL ENFORCEMENT OF COMMERCIAL EVICTIONS:

However, due to the pandemic, the owner’s ability to take action, including to terminate, re-enter and sue for damages under (d) above, is currently fettered. 

Ontario has ordered that the Landlord and Tenant Board (“LTB”) may neither consider nor issue eviction orders in relation to residential tenancies and that sheriffs must postpone all scheduled eviction enforcements until further notice.

However, commercial tenancies are subject to the CTA, not governed by the LTB. Therefore, disputes about commercial tenancies are determined by the Superior Court of Justice.

The CTA provides that a commercial landlord may repossess a leased premises fifteen days after the tenant fails to both: (a) pay rent; and (b) remedy the failure in the interim. Notably, repossession by reason of the tenant’s non-payment of rent does not require judicial intervention or approval. However, it is usually recommended that such steps by a commercial landlord be sanctioned by the Court, ideally in advance. The resolution of all other disputes is in the Superior Court of Justice of Ontario (“ONSC”), rather than the LTB.

Moreover, the ONSC currently limits operations to only urgent matters and, therefore, the ability for commercial landlords to effect lease terminations will be greatly constrained legally, practically and by reason of public policy considerations and perceptions.

Urgent matters” are defined by the ONSC as:

  • urgent and time-sensitive motions and applications in civil matters, where immediate and significant financial repercussions may result if there is no judicial hearing; and
  • outstanding warrants issued in relation to Small Claims Court or Superior Court civil proceedings.

If a commercial landlord’s proceeding does not qualify, it is likely to be adjourned.

Even if an action could be brought in the ONSC, enabling the landlord to obtain an order for possession of the premises, the Sheriff has been instructed not to enforce the order until further notice.

LIMITATION PERIODS ARE ALSO SUSPENDED:

By an Order in Council, under sub-section 7.1 of Ontario’s Emergency Management and Civil Protection Act, limitation and procedural time periods are suspended in Ontario for the duration of this emergency. The suspension is retroactive to March 16, 2020. Therefore, for potential claims by commercial landlords that have already arisen, but for which the limitation period has not expired, and for claims that may arise after March 16, 2020, the limitation period is suspended until further notice.  

STEPS TO TAKE IF YOU ARE A COMMERCIAL TENANT:

If you are a commercial tenant unable to pay rent, with an inflexible landlord, take these steps:

[1]     STEP ONEApply for the CEBA:

On April 16, 2020, the federal Government announced additional measures to support small businesses, including expanding the Canada Emergency Business Account (CEBA), which provides interest-free loans of up to $40,000 to small businesses and not-for-profits, to include businesses that paid between $20,000 and $1.5 million in total payroll in 2019. This new range will replace the previously qualifying range of $50,000 to $1 million in total payroll.

Commercial tenants struggling financially should apply for this interest-free line of credit, $10,000 of which is forgivable by the government if it is repaid by December of 2020.

[2]      STEP TWORequest your landlord to apply for CECRA:

In addition to the expanded CEBA above, the federal Government also introduced Canada Emergency Commercial Rent Assistance (CECRA) for small businesses. The program will provide loans, including forgivable loans, to commercial property owners who in turn will lower or forgo the rent of small businesses for the months of April (retroactive), May, and June, 2020. Implementation of the program will require a partnership between the federal government and provincial government, which is responsible for property owner-tenant relationships. 

[3]      STEP THREEReview your commercial insurance policy:

[a]     Check for Business Interruption insurance coverage:

You should also consider contacting your insurance broker about your commercial insurance policy and the availability of business interruption (or other available) insurance coverage.

Currently most insurers in Ontario are denying this coverage, but there is already a class action lawsuit commenced in Ontario by commercial tenants claiming damages against those insurers for the denial.

For more information from us about business interruption coverage, go here: http://wardlegal.ca/31585663827877

[b]     Check for other potential insurance coverage:

There may be other potential coverage under your tenant’s policy, such as:

1.    Civil Authority Insurance – covering losses arising from a government orders preventing access to the insured property. Of course, for this coverage to come into effect, there must be a governmental order. Neither governmental recommendations, nor private party decisions (i.e., closing office space), will meet this threshold. However, they may be addressed in a force majeure clause. In this case, the Ontario government has ordered the closure of non-essential workplaces during the State of Emergency, potentially triggering this insurance coverage; and

2.    Liability Insurance – covering losses arising from “third party” claims - a “third party” is anyone not insured under the policy, which could include the landlord or the tenant. Currently it is unsettled whether any liability will arise from third parties contracting COVID-19 from, or while on, an occupier’s premises. However, these policies will come into effect for defending such claims if and as they arise.

[4]      STEP FOUR - Review your lease:

Carefully review your lease agreement and check for:

[a]   dates to meet any obligation, such as rent due date, completion of landlords’ or tenants’ work, expiry dates, damage and destruction time periods;

[b]   any clause obliging you to stay open for business during the term of the lease, given the Ontario government’s emergency order to close all non-essential businesses – you may be forced to close, or the landlord may have to close its building and, if so, either the doctrine of frustration or force majeure may be triggered, as explained below; and

[c]   any clause requiring you to comply with all laws – with orders and legislation being issued by all levels of government, you and the landlord need to be aware of the ongoing changes, respectively.

[5]   STEP FIVE

Review your lease for any “Force Majeure”/Unavoidable Delay Clause(s):

A “force majeure” event is an unforeseeable circumstance that prevents a person from performing an otherwise valid agreement or contract. If a person is unable to perform his or her contractual obligation due to unforeseen events, beyond his or her control, a force majeure clause may be triggered to validate the non-performance. Force majeure clauses can suspend the timeliness of obligations and are a matter of negotiation.

These clauses may, in certain circumstances, excuse a tenant’s failure to perform contractual obligations, like paying rent. They are commonly incorporated into commercial leases.

For example, your lease may contain a clause requiring you to stay open and operate during regular business hours during the lease. If so, and if you are deemed a non-essential business by government decree, it may trigger your ability to successfully argue force majeure, thereby relieving you of your contractual non-monetary obligations under the lease.

It is important to review your lease for timelines and deadlines that are, or will be, affected by the pandemic.

Most commercial leases contain a force majeure clause. Generally, the clause will provide that if any of the described events occur, which significantly affects a tenant’s ability to perform the lease obligations, the tenant will not be required to perform the obligation, either for as long as the event continues or permanently. However, in commercial leases, this virtually always excludes the payment of rent and the surrender date from the suspension.

So, if your lease contains a force majeure clause, read it carefully. In most commercial leases, those clauses expressly exclude a tenant’s obligation to pay rent. As a result of COVID-19, many commercial tenants that, by government emergency order, cannot operate and, therefore, generate revenue, are forced into a position of breach of their commercial leases.

Landlords would, if nothing were changed, be able to terminate the lease, replace the tenant and sue for unpaid rent under the lease, both past and future. A result that simply cannot arise in the CKL or elsewhere in Ontario.   

Force majeure clauses are also narrowly interpreted, which means the words used to identify the triggering event are narrowly construed. To be relied upon successfully, a force majeure clause must both: (a) be in the lease itself; and (b) expressly describe the event causing the inability to perform, or the delay in performance. If there is no express force majeure clause, it will not be implied into the agreement by the Court.

For an event to be considered a force majeure event, it must: (a) be unforeseen; (b) render performance of the obligation “impossible” (not merely more costly or difficult, unless cost or difficulty are expressly referenced); and (c) be the actual and direct cause of your inability to meet your obligation, as distinct from merely being incidental.

Note that many force majeure clauses require a tenant or landlord to give notice to the other and other affected parties that the “event” is, or will, result in a failure to meet one or more obligations under the agreement. For example, maintenance and repair obligations. Such notice allows the other party or parties to take steps to mitigate, if possible. There may be specific requirements for the notice in the lease agreement. A party failing to perform a contract must also consider what, if any, steps are available to mitigate the damages that may be caused due to the non-performance.

For more information from us about force majeure, go here: http://wardlegal.ca/the-virus---does-it-cancel-contracts-rental-agreements-separation-and-parenting-agreements-maybe---read-on

[6]   STEP SIX

Review your lease for Health Emergency” Clauses and Operation of Building and Control of Common Areas:

Health emergency” clauses allow a landlord to limit or control access to the building, if required or recommended by the authorities. Similar to a force majeure clause, a health emergency clause provides that where there is a triggering event (which is typically described with a non-exhaustive list of “epidemic”, “pandemic”, “disease”, “contagion”, etc.), the landlord will have increased control over the common areas and will be permitted to create new rules and regulations regarding the operation of the building.

These clauses may permit a landlord to close the building (or parts of the building), control access to the building and permit a landlord to implement new health-related rules and regulations, which the tenant, its employees and invitees must follow. These clauses may also provide for how additional services for the building are to be paid. For example, increased sanitation and cleaning services may be undertaken. Additional support by property managers may be required to respond to COVID-19. The cost of these services may be passed on to tenants through additional rent or operating cost provisions in the lease. However, if not, a health emergency clause may permit the landlord to charge back these costs to the tenants.

Finally, these provisions may have a force majeure element, too. If the health emergency exists, such as COVID-19, the landlord will not be in default if it fails to comply with its maintenance and repair obligations until health emergency ends.

In addition to business interruption insurance coverage, some insurance policies may also incorporate broadly-worded ‘loss of attraction’ or even ‘pollution’ clauses, particularly for industrial commercial tenancies, which potentially could trigger insurance coverage and, if so, financial assistance with paying rent and utilities during the pandemic.

[7]     STEP SEVENConsider applying for relief from forfeiture:

If rent is unpaid and the landlord either terminates the lease, per (d) above, or otherwise distrains or re-possesses the premises, the tenant may also apply to the Court to relieve it from the forfeiture under the lease [Courts of Justice Act, s. 98 (“CJA”)].

The Court is empowered to reinstate the tenancy, even though the lease may have been validly terminated by the landlord for non-payment of rent.

Specifically, the CTA, sub-section 20(1), reads:

Relief against re-entry or forfeiture

  1. (1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor’s action, if any, or if there is no such action pending, then in an action or application in the Ontario Court (General Division) brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.”

 

In addition to this relief from forfeiture remedy, the Court “may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just” [CJA, s. 98].

The Court also has a general, inherent authority and ability to grant relief from forfeiture, beyond these statutory provisions. While it is entirely discretionary to the Court, which will review each case on a case-by-case, factual basis, the Court is likely to consider:

- the conduct of the tenant and the gravity of the breach;

- whether the purpose or object of the right of forfeiture in the lease was essentially to secure the payment of money; and

- the disparity or disproportion between the value of the property forfeited and the damages caused by the breach.

The Court is also likely to consider other circumstances, too, specific to the parties themselves and their specific lease agreement, such as their contractual history, the conduct of both parties and whether a party attempted to act reasonably or with good faith, or act otherwise. 

Prior to the onset of the pandemic, generally speaking, the Court would often grant relief from forfeiture to a commercial tenant, if the tenant could pay up the arrears and carry on paying the accruing rent. If money or some additional time were capable of resolving the problem and restoring the status quo arrangements, the Court is likely to favour that outcome. However, pre-COVID-19, the Court usually required the tenant in default to pay all arrears owing to be granted relief from forfeiture, conditionally. 

But now what? COVID-19 has imposed unique, novel and entirely uncertain circumstances upon landlords and tenants, entirely without blameworthy conduct. The law has not yet addressed relief from forfeiture when a business is deemed non-essential by government order and forced to close, or substantially reduce operations. Physical distancing and other containment measures also impact significantly the ability for both essential and non-essential businesses to operate and generate regular revenue to pay financial obligations ongoing, like commercial rent.

While it has yet to be tested judicially, presumably the law will need to evolve and adopt to COVID-19, including by granting relief from forfeiture without requiring the payment of all arrears or, at least, a structured program to do so reasonably affordable to the tenant and its specific circumstances.

On the other hand, the landlord, which may rely on commercial rent payments to pay its own mortgage for the building, must avail itself of the mortgage deferral options now available through the large financial institutions, which must co-ordinate with the non-payment of rent by the tenant. 

Due to COVID-19, if a commercial tenant, particularly a non-essential business, applies for relief from forfeiture, the Court will need to expand its review and consider additional circumstances, such as:

[1]    that the tenant may be required to close, or reduce operations, by government decree;

[2]    the bargaining power and economic status of each party, as relief should more likely be granted to small business owners occupying premises owned by larger, commercial property companies, in particular;

[3]    the ability of the landlord to seek deferral of underlying mortgage payments, or other obligations, if the landlord can demonstrate reliance on the tenant’s rent payments to pay those monthly obligations; and

[4]    a fair and sensible allocation between the specific parties for the losses mutually experienced due to the global pandemic, including allocating those losses reasonably and with a view to the public’s best interest to restore the economy and commerce as soon as possible.

[8]      STEP EIGHT - Consider the doctrine of frustration of contract:

If there is no force majeure clause in the lease, a commercial tenant is not necessarily without a remedy for an unforeseen event, such as COVID-19, that causes the tenant to be unable to perform its obligations under the lease.

The legal doctrine of frustration provides that where the occurrence of an event results in a contract becoming fundamentally different in character from what the parties originally intended, the contract may be terminated without liability. However, a fairly high threshold must be achieved for the doctrine will be invoked by an Ontario Court and, if so, it means that the contract will be terminated (and not merely suspended for the duration of the event). Frustration will only apply where the event or circumstance was unforeseeable and not the fault of either party.

Presumably COVID-19 would potentially qualify as the triggering event, but every case is likely to be considered on a case-by-case basis. 

In Ontario, the relevant legislation is the Frustrated Contracts Act (the “FCA”), which under sub-section 2(1), affirms that it applies “to any contract that is governed by the law of Ontario and that has become impossible of performance or been otherwise frustrated and to the parties which for that reason have been discharged. The FCA also deals with the adjustment of rights and liabilities between the parties when a contract has been frustrated.

If a lease is terminated by the landlord and the tenant does not apply to the Court for relief from forfeiture, the landlord may also sue the tenant for back and future rent and any other damages arising from the defaulted tenancy.  

If so, the tenant should rely on the FCA, or the doctrine of frustration generally, to release both parties from their contractual obligations, respectively, including the obligation to pay rent.

While economic downtown historically has been held by the Ontario Courts not to give rise to a frustration of contract, times are now dramatically different. The Court must now re-evaluate the law in the face of COVID-19 and adopt to achieve fairness and reasonableness during the pandemic, to both parties. It would be inconceivable for a Court to conclude, for example, there can be no frustration when a small business is ordered to shut down by a provincial emergency order.

It is likely that a defence related to frustration will prevail for a tenant that is sued, but every case is likely to be reviewed on its own merits and a case-by-case basis. 

SUMMARY:

Therefore, if you are a commercial tenant who cannot pay your rent and: (a) your landlord will not act flexibly or responsibly; and (b) neither the federal nor provincial governments intervene, so that everything above still applies, you should take these steps:

[1]    request your landlord to apply for the new CECRA;

[2]    apply for the expanded CEBA;

[3]    request your landlord to act co-operatively, reasonably and flexibly, particularly if you are a non-essential business, as specifically directed by both the federal and provincial governments, in writing;

[4]    request your landlord to agree to a ninety-day, interest-free rental deferral, with the possibility of further extension depending on the ongoing status of the virus, in writing;

[5]    if your landlord remains inflexible and it strictly intends to enforce the lease, consider having your qualified lawyer send a letter affirming your position and threatening legal action against the landlord, including the payment of costs;

[6]    review your lease carefully for:

(a) a force majeure clause;

(b) health emergency clauses;

(c) liability protection clauses;

and any other clauses that may allow you to argue frustration of the commercial lease and, therefore, absolve you of liability for your obligations, including rental payment;

[7]    speak to your insurance broker about the availability of business interruption and any other available insurance that may assist you, including to pay rent, as explained above;

[8]   if necessary, seek assistance from your lawyer to apply for relief from forfeiture, subject to any further governmental steps that may be taken in the near future to assist you, or the landlord; and

[9]   if your landlord sues you for any damages, speak to your qualified lawyer about defending the claim based on frustration of contract.

You might also call your M.P.P. and request that the Ontario government immediately and legislatively, or by other suitable measure, ban the forfeiture of commercial leases from March 15, 2020 until June 30, 2020 (or longer, if necessary, due to the pandemic). 

 

 

 

 

 

 

 

 

 


Thank you for reading this - Jason Ward of WARDS LAWYERS PC.

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This WARDS LAWYERS PC blog is for general information only. It is not legal advice, or intended to be. Specific or more information may be necessary before advice could be provided for your circumstances.

More information? We're here to help - jason@wardlegal.ca | www.wardlegal.ca