By Melissa Nowak
As non-essential workplaces close and more workers are asked to work from home, there is concern about how commercial tenants will fare during this economic downturn.
Landlords and tenants alike are facing the difficult question regarding what happens if the tenant cannot pay its rent?
This is not just a tenant issue. In the past ten years, landlords for the most part would be able to fill vacant space at a reasonable rental rate. However, in the current economic climate, evicting a non-paying tenant (a technical procedure) will not always resolve the problem. There is likely going to be depressed demand for commercial space, at least in the near-term.
Not all situations are alike, and this article is not intended to advocate for a particular solution. Rather, it is intended to advise both landlords and tenants about their rights and potential courses of action.
A review of the lease is imperative to ascertain a landlord’s or a tenant’s rights and to understand risk.
Non-payment of rent when due is typically an event of default. When the default is triggered will depend on the terms of the lease.
For tenants, regardless of financial circumstances, we think engaging in dialogue now to discuss some form of rent abatement is worthwhile. Tenants will be well served to start a negotiation process when they are not days away from the start of the next payment and/or in a weakened financial position (to the extent possible).
As the first of the month rapidly approaches, this means starting communication sooner rather than later.
For landlords, we do not suggest commencing talks with a view to rent abatement, but it will be important to understand how your tenants are faring and to properly understand your rights under the lease.
Neither party will want to engage in extensive dialogue without having a firm grasp on their legal footing and what next steps might look like.
Landlord Remedies on Default
The case of Highway Properties Ltd. V Kelly, Douglas and Co Ltd.[i] sets out a landlord’s options in the event of default under the lease:
- do nothing to alter the relationship of landlord and tenant, but insist on performance of the terms and sue for rent or damages on the basis that the lease remains in force;
- terminate the lease, retaining the right to sue for rent accrued due, or for damages to the date of termination for previous breaches;
- advise the tenant that the landlord proposes to re-let the property on the tenant’s account and enter into possession on that basis;
- elect to terminate the lease but with notice to the defaulting tenant that damages will be claimed on the basis of a present recovery of damages for losing the benefit of the lease over its unexpired term.
This is a high-level summary of a landlord’s remedies, that both landlords and tenants should be aware of.
The rules governing how remedies play out will be covered under most commercial leases.
Understand the Landlord’s Options in the Event of Tenant Default
If the landlord terminates the lease and re-enters the premises, they can sue the tenant for damages. The landlord’s damages would include all costs incurred by the landlord to terminate the lease (i.e. legal fees, bailiff costs in the event of a lock-out), costs to re-lease the premises (broker fees, re-demising costs), and rent due from the time of termination to the expiry date in the lease. The landlord has a duty to mitigate its damages and work promptly and diligently to re-lease the space. However, if there is a discrepancy between the rent in the lease that was terminated and a lease with a new tenant, a tenant is liable for any shortfall through the expiry of the lease, had it not been terminated.
If the landlord leaves the lease in place, it will often do so if it can either (i) exercise the remedy of distraint which is the seizure of the tenant’s chattels within the leased premises and sell them to satisfy rental arrears; or (ii) leave the lease in force and sue the tenant for rental arrears while leaving the lease in force.
Important Lease Terms in Understanding Risks
- Term. The term of the lease will dictate how much rent the tenant may be liable for in the event of default. Ensure the lease is still in effect, and if it has expired without a written renewal, what is the holdover rent?
- Payment of Rent Timing. Review the lease to determine the date that rent is due. This is not always abundantly clear in the lease, and if it is not explicit, review prior rental invoices. It is important to know exactly when rent is due each month in order to determine how much time the tenant has to cure a default.
- Event of Default Clauses. Default clauses typically stipulate the timeframe, if any, that a tenant has to cure a default for non-payment of rent. It will also highlight the procedure for a landlord to enforce its remedies.
It is important to understand how much time a tenant has to rectify non-payment before the landlord can exercise its remedies above. Also, under Section 18(1) of the Commercial Tenancies Act, a landlord can re-enter and repossess the Tenant’s premises if rent remains unpaid for 15 days after due, even without a formal demand.
- Tenant: Who is the tenant? If it is a numbered company, this can change the negotiating strategy for rent abatement as these companies typically have limited assets.
- Government Directives: We have seen the government grant delays in payments of rent for residential purposes. While we do not expect the government to grant the same leeway to commercial tenants, the situation is constantly changing and is worth monitoring.
- Government Assistance: Certain businesses can and should investigate government assistance that may be available for business owners.
Preliminary Review of Lease Terms
Enforcing default provisions requires following strict rules. The Landlord must ensure it follows the proper steps or it risks a countersuit from the tenant.
- Landlords: obtain legal advice prior to proceeding with terminating or re-entering a tenant’s premises.
- Tenants: Even if a tenant does not require immediate rent abatement, we recommend starting the conversation with the landlord now. A lawyer should review the key terms of the tenant’s lease so that the tenant understands its options and potential consequences. The tenant will also gain a better understanding of how to monitor the actions of the landlord if the landlord is enforcing its rights under the Lease due to an event of default.
Develop a Strategy
Landlords and tenants should understand their rights and understand how events may unfold.
Tenants are acutely aware of their financial condition and should be prepared if negotiations with a landlord do not result in a favourable outcome.
Landlords will want to assess the market conditions and the viability of reletting the space, should a tenant be unable to pay its rent. If market demand is soft, this will guide potential rent abatement options.
Starting a Dialogue
For tenants, once you have a firm understanding of your rights and a strategy in place, engage with your landlord if you require rent abatement. As stated previously, it is usually better to negotiate with more time and flexibility.
Landlords may not want to initiate this dialogue, but they should be prepared that they may be approached by their tenants.
Houser Henry & Syron LLP is a business law boutique, experienced in commercial real estate, particularly leasing. In these uncertain times, please feel free to contact Melissa Nowak, Senior Associate at 416.860.8028 or at firstname.lastname@example.org for a preliminary consultation to review your commercial lease and determine what protections or exposures your lease may provide.
Since 1934, Houser Henry & Syron LLP has provided legal services to Canadian and foreign private businesses, helping them deal with complex legal challenges to grow and to manage risk successfully. We help our clients with mergers and acquisitions, commercial real estate, reorganizations, shareholders disputes and agreements, commercial agreements, employment issues and financing. We also pride ourselves in practising in Plain English.
[i] Highway Properties Ltd. v. Kelly, Douglas & Co. (1971),  S.C.R. 562,  2 W.W.R. 28, 17 D.L.R. (3d) 710, 1971 CarswellBC 239, 1971 CarswellBC 274 (S.C.C.)