Business Builder

CONFRONTING THE CHALLENGES OF COVID-19

How to navigate commercial tenancies during the pandemic and beyond

By Tejpaul Grewal

The pandemic has had far-reaching effects on commercial landlords and tenants. In Ontario, businesses that qualified for the now expired Canada Emergency Commercial Rent Assistance (CECRA) program benefitted from a temporary ban on evictions from May 1, 2020, to Jan. 31, 2021. Tenants eligible for the Canada Emergency Rent Subsidy (CERS) can forestall evictions up to April 22.

While some businesses have switched to work-from-home scenarios, others have been unable to do so and continue to be severely impacted by the restrictions imposed by provincial governments to combat the spread of Covid-19.

All commercial tenancy agreements contain specific landlord and tenant responsibilities. For the tenant, the most significant of these is the requirement to pay rent and operate its business continuously in the leased premises.

With the arrival of Covid-19, parties must now address concerns arising out of the possible inability of a business to continue operating in the same way it was prior to restrictions imposed by government. These kinds of restrictions were certainly not anticipated by most contracting landlords and tenants before 2020; however, they will be top of mind in new tenancy agreement negotiations.

An obvious restriction is one that hinders small businesses from conducting their normal course of work within the leased premises due to provincial government lockdown orders. A good example is fitness centres and gyms, which have been effectively shuttered in the wake of Covid-19. Such a tenant will want to exclude or limit any covenant in a lease for continuous operation within the premises if it is prevented from doing so by government restrictions. The landlord may not want to do this yet it needs to be prepared for the very real possibility this may occur. For that reason, a landlord might consider expanding the use clause in a lease to permit potential ancillary uses like office use or storage space, or to allow the tenant to use or expand the space for different commercial purposes. Most leases will define and limit the specific commercial activity the tenant is permitted to operate within the leased premises. However, authorizing a tenant to engage in a related business, such as allowing a dine-in only restaurant to offer takeout services or to use outside common areas for dining and curbside pick-up, may be advisable to ensure the tenant has the means to pay its rent.

The Ontario government has asked landlords to work collaboratively with their tenants to ensure they are not unduly burdened during times where they cannot come up with the entirety of their rental payments. But this can also unduly burden landlords who count on those rental payments to meet their own obligations. Some landlords have been able to require that tenants continue to pay their applicable taxes, maintenance and insurance costs (‘additional rent’) and work out a payment plan for their base rent, which they can no longer pay because of restrictions imposed upon their business. These forbearance agreements are meant to be temporary arrangements and must be drafted in a manner to ensure the parties’ obligations are clear and unambiguous.

Landlords looking to enter into a commercial tenancy should also speak with a lawyer who can advise on how to structure a lease in such a way that allows them to require their tenant to have health and safety procedures in place during health emergencies. Examples include requiring staff and visitors that enter a leased premises to consent to temperature checks; establishing the tenant has adequate sanitation protocols in place and is following guidance from health officials; and ensuring adherence to mask policies.

Landlords should also familiarize themselves with force majeure clauses incorporated within a commercial lease. A force majeure clause is a contractual term by which a party may be temporarily excused or discharged from performing the contract, in whole or in part, when an event beyond the control of either party makes such performance impossible.

Now more than ever, landlords need to make sure any prospective tenants have adequate capital and insurance to stay afloat should their businesses be impacted from a temporary operational halt. Business interruption insurance, however, is often not available in circumstances of a pandemic or other calamity, so a thorough review of the tenant’s insurance policies should be undertaken when the commercial lease is negotiated.

Collecting a deposit is nothing new for commercial landlords when they are considering leasing their premises to a tenant. Typically, a tenant will provide one month’s rent as security. In the current landscape, it might be advisable for the landlord to request a larger deposit. The nature of the business should be evaluated to determine the security deposit. Other factors would also be considered, such as the relationship between the landlord and tenant.

The law and public policy will continue to evolve to keep pace with the realities of Covid-19. For commercial landlords and tenants, having a lease prepared and reviewed by a commercial leasing lawyer is pivotal in order to ensure contingencies are in place to minimize losses during a period of economic downturn like that caused by the current pandemic.

A landlord might consider expanding the use clause in a lease to permit potential ancillary USES, OR TO ALLOW the tenant to use or expand the space for different commercial purposes.

Tejpaul Grewal is a real estate lawyer at Lawrence, Lawrence, Stevenson LLP, a Brampton, Ont.-based law firm. He can be reached at tgrewal@lawrences.com.