By Raman Bayanzadeh, CCIM
Commercial Investment & Leasing Advisory
Royal LePage Commercial
Past President, CCIM Western Canada Chapter
In addition to impacting the wellbeing of hundreds of thousand of people all over the world, we are starting to see the effects of the Coronavirus/Covid19 on the global and local economies and financial markets.
With consumers being advised to stay home and certain businesses ordered to significantly limit their operations or to close on an indefinite basis, many tenants specifically in the restaurant and retail sector, are experiencing problems in managing their employees and paying their expenses including their rent.
Increasingly, tenants are approaching landlords and seeking financial assistance for this crises period. Landlords in turn are facing a major dilemma in how to respond to these requests. The financial burden on the landlord is also significant as they still have to pay their mortgages and property taxes. Under a commercial lease, a landlord usually has many remedies available to them in dealing with a tenant in default of their lease due to non-payment of rent or closure of business, however, these are not normal circumstances. With the current crises being so widespread, an incorrect strategy by the landlord can result in significant vacancies and irreversible financial implications.
Considerations for Tenants:
Before taking any action, tenants are advised to review their lease agreement and seek legal advice on the implications of their potential actions, what would constitute a default of the lease, and legal options available to their landlord.
British Columbia has recently issued a ban on eviction of tenants which has created major misunderstanding amongst many business owners. It is important to understand that the ban, at this point of time, only applies to Residential Tenancies and not to Commercial Tenancies which are governed by their lease agreements and common law.
Some item that tenants need to review are as follows:
- Is the business considered to be a service that has been ordered to close or may it stay open with certain adjustments?
- What action or condition triggers a default by the tenant under their lease? Tenants must remember that in many lease agreements, a default , even if resolved, may take away future renewal options and 1st rights of refusals.
- Under what conditions can a landlord evict them due to closure of business?
- Would the landlord benefit from the property becoming vacant? Does the property have immediate development potential that the property owner would like to take advantage of?
- How much is the security deposit that the landlord holds and under what conditions can a landlord use it?
- What potential coverages are available to the tenant under their commercial insurance policy?
- What other options become available to the landlord if they close their business?
- Is there a “Force Majeure” clause in their lease and if so how is it defined? Does it impact the party’s performance requirements under the lease due to the current circumstances?
- What are the relief programs offered by the Federal and Provincial governments for small businesses? Increasingly many options are becoming available in the form of interests free and low interest loans, payroll subsidies, tax deferments, and more…
After reviewing the above, a Tenant should assess their financial position and understand what best case and worst-case concessions they would require from landlord. As with landlords, tenants also need to understand that a win-win solution is required.
Tenant’s should contact their landlord and explain how their businesses are being affected and be prepared to provide financial data to support their claim.
Considerations for Landlords:
As with Tenants, Landlords are similarly advised to review their lease agreement and seek professional and legal advice and fully assess both legal and business consequences of pursuing any remedies available to them under their lease agreement. Landlords should remember that a request for rent relief does not imply a default itself.
- Is there an upside for the landlord to terminate their tenancies and have the property vacant? Is there any immediate development potential or density transfer opportunity that requires the property to be vacant.
- Is there a “Force Majeure” clause in their lease and if so how is it defined? Does it impact the party’s performance requirements under the lease due to the current circumstances?
- Under what conditions would the Tenant be considered in default of the lease?
- What is the financial capability of the tenant? Would they truly be able to survive the situation without the landlord’s help? What are the chances that the tenant will default in the near future after this crisis is over? Would they have the financial power to repay the owned rent in the future?
- Are the Tenants aware of the relief package for small businesses available through the Federal and Provincial governments? Would it be valuable for the landlord to distribute notices to make tenants aware of their options?
- How much is the Tenant’s security deposit and under what conditions can a landlord use it?
- Are there any Federal or local financial relief programs available for the landlord? Some Utility companies are offering penalty free late payment options and some municipalities are considering deferral options for property taxes.
- What are the chances that the landlord would be able to re-lease the space if the tenant can not continue?
- If the landlord does not decide to assist the tenant overcome the current situation, depending on the lease agreement they may have options to terminate and reposes spaces or keep the tenancies in place and sue for damages.
Some Viable Options Available To Landlord’s And Tenants:
- Temporary Rent Reduction/ Basic Rent Free Periods
- Deferral Of Rent:
- Converting Basic Rent Leases to Percentage Rent Leases
- Rent Abatement
- Landlord Loans:
- Use Of Security Deposit:
- Subleasing
Both Landlords and Tenants should take the time to review the government of BC's COVID-19 state of emergency and preparedness response and recovery plan.
#covid19 #rentrelief #cre #commercialrealesate #retail #royallepagecommercial #ramanbayanzadeh #rlpcommercialvancouver #royallepagevancouver #landlords #tenants #commerciallease #investment