Given the impact of the COVID-19 pandemic, a large number of businesses are seeking some form of rent relief from their landlords.
When negotiating a rent relief agreement, there is a balance to be struck between providing meaningful relief to a tenant so that its business has a better chance of long term survival, while still allowing the landlord to meet its ongoing obligations, which may include mortgage payments on the property, and other costs which it may not be able to defer.
Assuming a landlord and tenant can agree in principle to a rent relief arrangement, it is very important for them to prepare a formal written agreement, as relying on verbal discussions or imprecise electronic communications frequently raises questions of enforceability, as well as leading to genuine misunderstandings. Such communications, which are generally imprecise in nature can also fail to address a number of important points that should be considered.
While recognizing that each situation is unique, the following are the basic points to consider when negotiating a rent relief agreement for a commercial tenancy:
- Conformance to Lease: In addition to including all other elements necessary to form a valid contract, a rent relief agreement should clearly identify the subject lease, along with any agreements that modify the lease, for example, amending agreements, and assignments.
- Clear Understanding of Rent Relief Arrangement: The most important aspect in considering a rent relief arrangement is that the nature of the rent relief be clearly understood by the parties and set out in the agreement. For example, what rent is the relief applicable to - is it the base/basic/minimum rent, additional rent/operating costs, or a combination of those? Is it the full amount otherwise due, or a portion? Does this take the form of an abatement with no obligation to repay, or will it be a deferral, to be repaid in the future? If a deferral, what is the schedule for repayment, and is there any interest to be charged?
- Impact of Default on Rent Relief Arrangement: Consideration should be given to whether there are any circumstances that should result in the rent relief arrangement being made null and void. A typical example might be where a tenant defaults under the lease or the rent relief agreement, however additional circumstances can be considered, including: where a tenant transfers the lease; the tenant or a related party makes financial distributions to its officers, directors, or shareholders, or makes or guarantees loans outside of the ordinary course of business. A landlord may also want to consider having the tenant confirm it will not seek relief under bankruptcy and insolvency legislation, or relief from forfeiture.
- Address Defaults Under the Lease Due to Tenant Not Operating its Business: If the tenant is unable to operate its business due to a required closure or otherwise, consideration should be given to addressing any technical defaults arising from such closure such as a breach of a continuous operating requirement.
- Confirm All Other Terms of the Lease Continue to Apply: When making any modification of obligations under a lease, the agreement should include a confirmation by the parties that all other terms of the lease continue to apply. In the case of closures, one aspect worth highlighting is to ensure that the tenant is taking all steps necessary to maintain the required insurance coverage, as the policies may include requirements that are not met if the tenant is not regularly in the premises.
- Treatment of Existing Guarantors/Indemnifiers: Any existing guarantors/indemnifiers of the tenant’s obligations should be included as parties to the rent relief agreement, which should include a confirmation of their obligations, an acknowledgement the tenant is entering into the rent relief agreement, and confirmation that the guarantors/indemnifiers liability under the existing agreement extends to the tenant’s obligations as modified in the rent relief agreement. In Alberta, care should be taken to ensure any applicable Guarantees Acknowledgement Act requirements are met.
In addition to the basic points described above, the parties may also want to consider the following:
- New or Modified Terms: There may be existing provisions of the lease that are to be modified, or new provisions to be added in exchange for the landlord making rent concessions. These may include:
- Modification of the duration of the lease, whether an extension, or reduction.
- Deletion of existing special rights, such as restrictive covenants, options to renew/extend, and rights of first refusal.
- Addition of financial reporting obligations in order to provide the landlord with ongoing information as to the tenant’s viability and progress.
- Addition of guarantors/indemnifiers of the tenant’s obligations.
- Addition of unilateral early termination rights.
- Treatment of Security Deposit: The landlord may wish to obtain an additional security deposit or other security as consideration for agreeing to the relief or may actually choose to return of some or all of the existing security deposit in order to assist the tenant with cash flow issues.
- Confirmation of No Defaults: The parties may also want to provide confirmation that there are no defaults by the other to that point, or otherwise seek to resolve ongoing disputes with release language.
- Use of Governmental Assistance / Insurance Proceeds: While the details may be unclear at this point, it may be worthwhile to address the potential applicability of governmental assistance. This could include a requirement that the tenant take steps to obtain any applicable governmental assistance, and to address how such assistance is to be used, for example: a requirement for a tenant to pay any such assistance received towards any forgiven or deferred rent. A similar approach can be taken in relation to business interruption insurance which may be available to the tenant.
- Further Negotiation: Recognizing that it may be difficult to come up with a complete solution in the face of significant continuing uncertainty, consideration can be given to potentially revisiting, extending or otherwise modifying the rent relief arrangement. While ultimately this concept may be difficult to be fleshed out beyond an ‘agreement to agree’ type clause, this may be meaningful for a tenant to see included in the rent relief agreement. Consideration could also be given to tying the rent relief period/scope to an objective measure, such as when a government mandated closure is lifted.
- Confidentiality: A landlord may want to provide that the rent relief details are to be kept confidential by the tenant.
While the above is meant to provide insight into issues to be aware of when considering entering into a rent relief agreement, every situation is unique, and we would recommend the parties first have a clear understanding of the existing lease, and how the terms of that, as well as applicable law may inform the negotiation of, and provisions to be included in the rent relief agreement.
If you require assistance, or have any questions regarding rent relief agreements, please contact the author or any member of our Real Estate Group.
Devin is a partner based in our Calgary office and has a practice focused on commercial transactions and real estate law, including purchase/sale transactions, financing, corporate matters, condominium work, commercial and ...
Shaun Partridge, QC is a partner based in our Calgary office. Shaun practices in our Real Estate and Corporate Commercial practice groups and has a practice that encompasses a broad range of sophisticated real estate and ...
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