Commercial Landlords, Tenants and the Canada Emergency Rent Assistance Program: an update
In April, Prime Minister Trudeau announced the Canadian Emergency Commercial Rent Assistance (CECRA) program, a joint venture between the federal and provincial governments with the aim of assisting commercial landlords and tenants struggling because of COVID-19. Since the initial announcement, more details of the program have been released by the federal government and the government of Ontario. Many commercial landlords and tenants are still waiting for more information, which has been promised.
The Federal Program
Canada Mortgage Housing Corporation (CMHC) will administer the CECRA. On April 29, 2020, CMHC released some particulars: forgivable loans will be given to qualifying commercial property owners, covering up to 50 per cent of the tenant’s gross monthly rent for April, May, and June 2020 (CECRA Period). The landlord and tenant must enter into a written agreement, reducing gross rent by at least 75 per cent for the CECRA Period, stating there will be no eviction during the CECRA Period. In effect, the landlord forgives at least 25 per cent of the rent, the tenant pays up to 25 per cent of the rent, and the governments cover 50 per cent. That funding would be paid by CMHC directly to the landlord’s mortgage lender. If the property owner does not comply with all applicable criteria, the CECRA loan will not be forgiven and ultimately the landlord will have to reimburse CMHC.
Property owners must be the registered owner of the property, have a mortgage loan secured by the property and have declared rental income on their tax returns for the 2018 and/or 2019 tax years. Otherwise they do not qualify. (CMHC also announced that the requirement for a mortgage may be changed.)
Tenants are eligible for the CECRA if they pay no more than $50,000 in monthly gross rent (as defined by the applicable lease) per location, generate no more than $20 million in gross annual revenues (calculated on a consolidated basis at the ultimate parent level), and have either temporarily ceased operations or experienced at least a 70 per cent decline in pre-COVID-19 revenues (compared to the same period in 2019 or the average revenues earned in January and February of 2020).
The landlord is the party who applies. It is expected that the application process will become available by mid-May. The deadline to apply is August 31, 2020 and the CECRA can have retroactive effect. In that case, to qualify for CECRA, property owners who previously received rent from their tenant for the CECRA Period will have to refund the amounts paid by the tenant (or provide the tenant with a credit for future months’ rent).
Confusion in Ontario
Prior to CMHC’s announcement of April 29, 2020, outlining what is set out above, the government of Ontario announced parameters of what it called the Ontario-Canada Emergency Commercial Rent Assistance (OCECRA) program. Some of the announced details of the OCECRA were inconsistent with the CMHC outline above, spawning uncertainty and reluctance.
To the relief of many, on May 7, 2020 the government of Ontario revised its announcement and aligned the OCECRA requirements with those of CECRA provided by CHMC.
The OCECRA still has some additional eligibility requirements: a tenant entity will be excluded if it is owned by individuals holding political office, or if it promotes violence, incites hatred or is discriminatory. Also, tenants who were in the “Lenders special accounts or Restructuring Group prior to March 1, 2020” are ineligible (although the province does not define these terms).
The Update: Some Questions Answered
A link to the information page is here: https://www.cmhc-schl.gc.ca/en/finance-and-investing/covid19-cecra-small-business
CMHC clarified that property owners need not be the titleholder of the property in order to be eligible for the program. The information page now states that the commercial property owner must “own or be the landlord of the commercial property”. This suggests that the range of landlord participants has been expanded to include parties who are sublandlords or beneficial owners of nominee titleholders, etc.
Significantly, CMHC also made it clear that the property owner is not required to have a mortgage loan secured by the property to be eligible for the CECRA. The information page states: “CECRA for small business is administered undifferentiated for properties with mortgages, other forms of debt or no mortgages at all.”
Payment of the forgivable loan proceeds will be made to the landlord’s financial institution (i.e., there will be an electronic funds transfer to a bank vs. a cheque in the mail).
Additionally, the eligibility requirements for tenants have been expanded to include subtenants, stating that they will qualify so long as the “lease structures meet program criteria”. This change is somewhat perplexing. Recall that the rent relief benefit equals 50 per cent of the monthly gross rent. If a subtenant franchisee pays the monthly gross rent to its sublandlord franchisor, who in turn remits monthly gross rent to the ‘true’ landlord, who will receive the forgivable loan in this scenario? The updated CMHC information page suggests that both head- and sub-landlords will be permitted to apply for CECRA for their respective “tenants”. If both receive funding, 100 per cent of the rent will have been covered by CMHC in respect of a single location, with the sublandlord franchisor having pocketed funding that it would not otherwise have received through normal flow-through rent arrangements.
CMHC has also announced a few new details surrounding the application process: it will include fillable fields and templates of the required documents, and, when applying, landlords will be required to provide proof (1) that they have entered into a rent reduction agreement with the tenant that meets program requirements (i.e., one that reduced the tenant’s gross rent by at least 75 per cent for April, May and June 2020, and includes a moratorium on evictions), and (2) that the tenant is eligible under the program by providing an attestation of a 70 per cent decline in revenue. Landlords will be able to apply for all impacted tenants at once, but will have to provide separate attestations for each tenant. If a tenant paid rent (or more than 25 per cent of it) for April and May, it will be entitled to a refund from its landlord, which could be in the form of future rent credits. And if a tenant cannot pay its “up-to-25 per cent” contribution, it still cannot be evicted if the landlord wishes to take advantage of the CECRA.
Clarification on Property Owners and who can Apply
CMHC has walked back its statement that the property owner can either “own or be the landlord of the commercial property”. The sample Property Owner’s Attestation released by CMHC, provides that the property owner must be the “registered owner, ground lessee, emphyteuta, superficiary or usurfructuary of the Property and generates rental revenue from the Property relating to commercial leases”.
With this change, it is unclear whether both landlords and sub-landlords may apply for the program. While property owners, sub-landlords/tenants and sub-tenants can/must provide attestations and rent reduction agreements with respect to each lease and sub-lease, it could be that all documents are to be submitted solely by the “ultimate” property owner.
Property owners must not be subject to pending insolvency proceedings or have filed for bankruptcy protection. The property may not be owned by a member of Parliament or a Senator, or by a person who promotes or incites hatred, violence or discrimination. The property must not be used for any type of criminal activity.
CMHC also clarified that properties owned by the federal, provincial, or municipal governments are not eligible for the CECRA, with exceptions where the property owner is: (1) a First Nation or an Indigenous organization and/or government which is the tenant of the property pursuant to a ground lease or similar long term lease from the government; (2) the tenant under a ground lease or similar long term lease from the government to operate the property (such as an airport); (3) a crown corporation designated as eligible by CMHC; or (4) a post-secondary institution, hospital or pension fund.
Forgivable Loan Terms
More information on the forgivable loan was given. The sample Forgivable Loan Agreement, to be completed by the property owner, outlines that the loan amount will be equal to 50% of the gross rent owed to the property owner by the impacted tenants during April, May and June 2020 (CECRA Period) minus a pro rata portion of any insurance proceeds available to the property owner or any non-repayable proceeds received from any other government rent assistance programs (other than the CECRA) received by the property owner and/or the tenant during the CECRA Period.
Additionally, the property owner must agree that the loan will only be used towards any costs and expenses relating directly to the property, including debt service payments, operation, maintenance and repair obligations and to reimburse the impacted tenants for rent paid above the 25% threshold during the CECRA Period. The property owner is required to maintain proper and detailed records of these expenses. If the property owner fails to meet the requirements of the program, any loan granted must be repaid by December 31, 2020. The loan will be without interest unless the property owner defaults under the loan agreement.
CMHC has engaged MCAP Mortgages and First Canadian Title to deliver the CECRA forgivable loans to the property owners’ financial institutions.
Eligibility Requirements for Impacted Tenants
The majority of the eligibility requirements for impacted tenants remain the same, with a few key requirements, including that the impacted tenant must: (1) be a party to a lease or sublease with a term that is set to expire after August 31, 2020; (2) not be subject to a pending insolvency proceeding or have filed for bankruptcy protection; (3) not be owned by a member of Parliament or a Senator or by a person who promotes or incites hatred, violence or discrimination; (4) not use the leased property for any type of criminal activity; and (5) have opened for business before March 1, 2020.
Significantly, samples of documents required to apply for the CECRA program were provided. These documents are stamped “SAMPLE” – the actual documents will apparently be available when the application portal opens. The sample documents consist of the Tenant’s or Sub-Tenant’s Attestation, the Property Owner’s Attestation, the Rent Reduction Agreement, and the Forgivable Loan Agreement.
To verify that the applicants are eligible for the CECRA program, each impacted tenant or sub-tenant must complete the Tenant’s or Sub-Tenant’s Attestation and property owners must complete the Property Owner’s Attestation.
All of the attestations include an Integrity Declaration, under which the declarant states that: they have not been convicted of an offence in relation to any financial matters; they have not been declared ineligible to do business with any level of government in Canada; there are no facts known or unknown that would give rise to CMHC having a concern with either entering into a business relationship with the party, or with the party’s integrity; and they have fully disclosed all relevant information.
The Rent Reduction Agreement sample has several interesting aspects. First, the agreement can be used by landlords and tenants, sub-landlords and sub-tenants, and landlords and tenants where the tenant is not an impacted tenant but has a sub-tenant that is an impacted tenant. Second, it provides that the tenant is only required to pay the reduced rent for the CECRA Period within 30 days of the date on which the application receives final approval (effectively granting the tenant both a rent deferral and a rent reduction). Third, the sample agreement provides that during the period from the commencement of the CECRA Period until the later of (1) 3 months after the date the application is made (which may be as late as August 31, 2020), and (2) the date on which the tenant is no longer receiving any rent reduction or credits under the agreement, the landlord is prohibited from pursuing an eviction of the tenant for any default arising from COVID-19 (effectively protecting the tenant for an extended period beyond June 30).
The property owner must also complete the Property Owner Forgivable Loan Agreement, which sets out the terms and conditions of the loan.
Updates to the Application Process
CMHC has announced that the application portal will open on May 25, 2020. Expecting a large volume of applications, CMHC is requesting that property owners register for the program according to the following schedule:
- Monday, May 25: those with up to 10 eligible tenants in Atlantic Canada, BC, Alberta and Quebec;
- Tuesday, May 26: those with up to 10 eligible tenants in Manitoba, Saskatchewan, Ontario and the Territories;
- Wednesday, May 27: all others in Manitoba, Saskatchewan, Ontario and the Territories;
- Thursday, May 28: all others in Atlantic Canada, BC, Alberta and Quebec; and
- Friday, May 29: all remaining property owners.
Property owners must provide the following: the address, property type, property tax statement, latest rent roll and number of commercial units. Property owners must provide: banking information (including bank statement), contact information, and co-ownership information. Tenants must provide: contact information, registered business name, lease area and the monthly gross rent for the CECRA Period.
Many Unanswered Questions Remain
There are still many unanswered questions contributing to indecision on the part of both landlords and tenants. For example, while the information page makes it clear that non-arm’s length tenancies will be included in CECRA for small businesses so long as there was a valid and enforceable lease agreement in place prior to April 1, 2020 on no greater than market terms, the page does not state whether relationships akin to leases (such as licenses) will qualify. As noted, franchise relationships have not been addressed. Further, does the repeated statement, “CECRA for small businesses” hint at a future development, yet to be announced, being a CECRA for large businesses?
Will Uptake Improve?
It seems likely that CMHC’s latest update will generate more enthusiasm among landlords and tenants. The update indicates that Ottawa is listening to the commercial landlord and tenant community, to some extent. When the application facility finally becomes accessible, there will be an opportunity for the governments to evaluate whether the program has garnered traction. The August 31 deadline for applying suggests that they expect commercial landlords and tenants to take the time to do some math, talk to each other and make calculated decisions. It will be interesting to report the actual experiences. In the meantime, it seems that many landlords and tenants have slowed down on their attempts to document rent deferrals, as they accept that all of this will take some time to unfold.
Re-Opening for Commercial Activity
Various provinces have commenced re-opening their marketplaces. Newfoundland and Labrador, New Brunswick, and Saskatchewan were among the first out of the gate, followed shortly by British Columbia, Alberta, and Quebec. Manitoba, PEI and Nova Scotia followed and Ontario announced that Stage One of its re-opening plan would commence today. The most notable aspect of Ontario’s re-opening is that construction in the province will be permitted to resume.
These are welcome developments for commercial landlords and tenants who were forced to pause so many critical activities, including developments, fit-outs and planning. Though the road is long, significant steps towards normalcy are being taken.
Daoust Vukovich LLP is recognized as a leading Canadian law firm in the field of commercial leasing and property management. www.dv-law.com
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice.