The COVID-19 pandemic continues to disrupt public health and economic activities across the globe. While the full effects of the virus remain to be seen, we need to be prepared for what is a challenging time. Relationships between tenants and landlords have been disrupted as millions of people shelter in place, thousands of businesses close their doors, and the Canadian economy faces its biggest challenge since the 2007-2009 Great Recession.

I’ve gathered some resources to help you navigate potential issues among commercial tenants, landlords, and lenders. Market forecast contributions are from CBRE Media Relations and Avison Young public reports.

How Landlords Can Respond

As retail outlets across the country try to recover, tenants have been approaching landlords about negotiating rents. When a business closes suddenly, even if it’s temporarily, the tenant cannot produce rent, meaning a landlord may have difficulty paying a mortgage (if there is one). There are no winners in this situation. Here are some viable alternatives to mitigate this issue:

• Rent Reduction. The landlord can reduce the tenant’s rent for a portion or all of the term left on the lease. The usual forms of rent reduction are to reduce the base rent, operating expenses, or both. In regard to retail, it is possible to convert base rent to percentage rent.
• Rent Deferral. In this case, the landlord can defer a portion of the tenant’s rent but would require them to repay the rent deferred at a later time, either in a lump sum or by increasing subsequent payments. A variation of rent deferral could be to cap or set a base year to operating expenses for a short or extended period of time.
• Rent Abatement. If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of the past due rent if the tenant remains current thereafter.
• Loan Conversion. Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time. The tenant would, however, continue to pay the current rent. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.
• Application of Deposit. If the landlord holds a deposit, this amount could be credited against the tenant’s current obligations.
• Subletting. Bringing in a new tenant (for part of or all of the rented space) could reduce or eliminate the rent obligations while replacing revenue for the landlord.

How Tenants Can Respond

• Review your lease to see if your rent is simply base rent or it includes pass-through expenses. How much are these expenses and are they set to increase?
• When does your lease end? What renewal options are available?
• What constitutes a default of the lease? What tools are available to the landlord in such a case (penalties, eviction, interest, etc.)?
• Does your landlord hold a security deposit? If so, how much is it?
• Is there a guarantor obligated to pay your short fall? Have you informed your guarantor of your situation?
• Review operating covenants and co-tenancy.
• Speak to your insurance agent to see what coverages are maintained by each party. Know your options to file a claim under existing insurance.
• Does the lease include force majeure, excusing a party’s performance due to outside circumstances?
• Explore governmental relief programs, which may be popping up quickly, for tax relief, access to loans, relaxed restrictions/regulations, etc.
• Consider consulting a lawyer to know your options in limiting your financial obligations.
• Based on our current financial position, understand what concessions you would need from your landlord in both best- and worst-case scenarios related to COVID-19.
• Contact your landlord and specifically outline how your business is being impacted by the COVID-19 pandemic. Arrange a meeting and be prepared with data to have an open conversation to identify a solution or combination of solutions.

Examining 2022 Challenges Faced by Different Market Sectors

Contributors, CBRE Media Relations and Avison Young