The ongoing global pandemic is currently having an enormous impact on commercial retailers, restaurants, and other commercial tenancies in, among other places, British Columbia and Alberta. We have recently seen a number of tenant defaults (or potential defaults depending on the wording of the relevant lease) which include failing to pay rent and closing down operations for a period of time. These circumstances are, of course, impacting landlords as well. In addition, we have also recently become aware of tenants who have approached landlords, prior to a default, and have asked for rent relief due to the dramatic decrease in business over the last week or so.
What is a commercial landlord able to do in the face of a default by a tenant? Similarly, how can a landlord respond to a request for rent relief? Below we outline some general principles which a landlord ought to have in mind when faced with a defaulting tenant or a tenant who seeks rent relief.
Some basic and general overriding principles landlords ought to know when dealing with a commercial lease default include:
- If there is a default, the tenant usually has to be given notice to cure the default. The lease will have to be reviewed, but it could be a 5 day cure period, 7 days, or more. If no days are noted, a prudent landlord may wish to provide at least a few days notice to cure unless the goal of the landlord is an immediate termination of the lease in order to gain control of the premises.
- Just because there is a default, it does not mean that termination is the only remedy. Termination is, of course, one remedy but if the landlord wants the tenant to remain, it does not have a backup tenant to take over the premises, or it does not want the premises to go “dark” for any length of time, then other remedies should be examined.
- If the tenant default is a failure to pay rent, then one option is that the landlord can distrain (seize) the tenant’s goods on the premises with a view to eventually having those goods sold to pay for the arrears of rent.
- There are strict rules that must be followed if a distraint process is used (including that only sufficient goods to pay the rent arrears can be seized, there has to be an appraisal of the goods, it has to be the tenant’s goods, etc). Also, if this option is chosen, then the lease will have been affirmed and the landlord cannot later change its mind and terminate for that same breach.
- If the default is a failure to open for business, then a different cure period under the lease likely applies. Also, there may be clauses in the lease which excuse performance by a tenant especially if an order or directive from a local, provincial, or federal government is in play.
- Another option is to sue the tenant for the arrears of rent. That action also affirms the lease and therefore a landlord can’t sue for arrears and then attempt to terminate later for failure to pay those same arrears (a further default will have to occur in order for a landlord to attempt terminate).
- Rent guarantees or indemnities ought to be reviewed as those entities ought to be provided with notice of whatever action the landlord takes so as not to risk the guarantor/indemnitor being absolved of liability.
Some basic principles a landlord ought to consider if asked by a tenant to consider a form of rent relief include:
- Simply asking for rent relief will not be a default under the lease.
- If a landlord agrees in principle to a form of rent relief, then specific provisions of any such agreement should include:
- A lump sum payment or scheduled payments over time and which will be added to as rent continues to accrue.
- interest on the outstanding late payment of arrears should be charged at the rate provided for in the lease or otherwise.
- A default provision should be included that could be different (stricter) than the lease default provision (e.g., a shorter cure notice period).
- Rent guarantees or indemnities should be included or, if those are already in place, ensure that guarantors/indemnifiers sign off on the rent relief agreement.
- There should be a confirmation that the lease terms continue to govern (which will then cover any other defaults which may occur).
- A right to revert to the usual lease payment terms on a specified notice to the tenant.
- Payment of legal fees for the rent relief agreement as well as for any defaults going forward.
- A confidentiality provision with a clawback of relief if that clause is breached (so as not to impact other tenants).
In addition, as the current situation continues to unfold on a daily basis, there may be other issues that may be imposed upon landlords by governing authorities such as termination restrictions. Any such directives will have to be reviewed carefully and in light of the relevant lease. As always, landlords and tenants ought to seek independent legal advice to address any particular or specific circumstance which they may face as the response to the pandemic evolves.
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