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 Coronanvirus/Covid-19 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.
Are you a Landlord faced with Tenants seeking rent relief and wondering what are the best practices? Are you looking to understand what other Landlords, of similar assets and size, are being asked by other tenants, and second, what are your options? What are some of the best strategies for Landlords around rent deferral?
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
For a more detail review and explanation of the above options and how they would relate to your specific situation, asset or lease, feel free to contact Raman Bayanzadeh.
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.
Photos Courtesy of Daily Hive