Commercial lease considerations in Alberta – rent and much more

COVID-19’s impact on the economy is causing significant strain on the lease of commercial premises in Alberta, as landlords and tenants attempt to manage ongoing liabilities – including rental payments and the consequences of non-performance – within the confines of the commercial lease agreement and provincial laws. Each lease may be different; therefore it is of utmost importance to review the specific provisions of each commercial lease carefully. Consider the following in the context of the current pandemic and specific federal and provincial governmental orders and directives.

Does the lease address health emergencies and/or force majeure instances of pandemics or such emergencies?

It is common for leases to contain a form of force majeure clause that provides specific grounds for suspending certain obligations under the lease. Note that such clause is often slightly different than in other commercial contracts – typically the lease clause will not permit the termination of the lease, rent abatement or rent deferral.

Typically the lease requires the landlord and the tenant to comply with all applicable laws, which most often includes reference to any governmental directives and orders or those from other authorities having jurisdiction such as health authorities. Given the constantly changing landscape of directives and orders being issued, it is incumbent on the landlord and tenant to stay current with each of these to ensure ongoing compliance.

Can the landlord and/or the tenant be excused from performing their respective obligations if the lease does not contain a force majeure clause?

In the rare situations where a lease does not contain any form of force majeure clause, a court may fully excuse both parties from their contractual lease obligations where performance of the lease becomes legally or physically impossible or where the lease is “frustrated” without fault of either party.

The threshold for establishing the frustration of a lease is very high and will not be achieved where it is simply more expensive or onerous for the parties to perform their obligations or if the triggering event results in a delay but does not completely impede performance of the lease obligations – performance of the lease obligations must be rendered impossible.

Has the tenant asked for some financial relief in the context of the pandemic, a local health emergency and/or certain governmental directives/orders?

Although many businesses are affected by the current pandemic, not all are affected in the same way and each tenant request for financial relief under a lease should be considered in the context of the landlord’s and tenant’s specific situations:

• Do the leased premises remain accessible and in the tenant’s control (i.e., does the tenant still have quiet possession of the premises)? Is the tenant still occupying some or all of the leased premises?
• Can the tenant still conduct some business either online or remotely?
• Is the tenant’s business cyclical or seasonal and if so, where is the impact of the health emergency in the context of the tenant’s business cycle?
• Are government financial relief programs available to either the landlord or the tenant (some are discussed below) and what is the effect of any such program?
• Is the request for forgiveness of rent or temporary deferral of rent?
• Should any rent relief apply to the entire rent or just to base rent with operational costs and other additional costs included in rent still paid by the tenant?
• Is interest payable on any deferred rent?
• Has the tenant shown how rent relief (or the absence thereof) and other available forms of financial relief (including any government financial relief) are expected to affect its overall financial health?
• Are there any relevant third parties (such as lenders or investors) whose rights need to be considered, or from whom consent may be required, in connection with any rent relief?

Where the rent deferral concept is acceptable to the landlord and the tenant, the parties should also address when such deferred rent will be payable: periodic installments over a particular span of time or as a lump sum.

GST CAUTION: Remember that GST on commercial rent is payable by the tenant, and collectible by the landlord, on the earlier of the day the rent is due and the day the rent is paid. Therefore, when structuring a rent deferral arrangement, consider changing the date rent is due under the lease so that deferral applies to the tenant’s obligation to pay GST on the rent as well as the rent itself. To defer the landlord’s obligation to remit the GST, it is necessary to change the rent due date; however the landlord will want to be careful that such a change does not result in giving up other important rights it may have under the lease.

If the landlord and the tenant agree to modify rent payment obligations, the parties need to consider whether the lease requires such amendments to be in writing and signed by both parties as is typically the case. The tenant wants to ensure the relief provisions will be enforceable immediately and the landlord wants to ensure it is not obliged to remit GST on rent that has been deferred, and the payment obligations at a later date are also enforceable at such later date.

Is the landlord or the tenant, or both, eligible for any governmental financial relief or any other forms of financial relief?

Each of the landlord and the tenant has ongoing business liabilities including payroll, benefits, equipment rental payments, secured/unsecured debt financing, taxes and insurance payments to name a few. To date, government financial subsidy programs have been announced, certain governmental authorities have implemented payment deferral programs such as property tax deferrals, and financial institutions are considering requests for loan payment deferrals or alternate loan payment arrangements. 

Of particular significance for commercial property owners, the federal government has announced its intention to introduce the Canada Emergency Commercial Rent Assistance program for small businesses. This program will seek to provide loans, including forgivable loans, to commercial property owners who in turn will lower or forgive rent payable by small business tenants for April (retroactive), May and June. Please click here for more information regarding government relief programs.

What are the risks of non-performance (i.e., non-payment of rent by the tenant, abandonment of leased premises by the tenant, interference with quiet enjoyment by the landlord, failure to maintain the leased premises or the common areas)?

Leases will typically define specific events of default and set out remedy provisions if such an event of default occurs; however many of these lease provisions are limited to tenant defaults. These provisions must be read in conjunction with any force majeure clauses to determine consequences.  

Tenants must consider potential consequences of their actions or omissions to avoid any unintentional breach or default. Similarly, leases will commonly address waiver of breaches or non-compliance and landlords must be aware that certain communications and actions may be deemed to be a waiver of their strict legal rights under the lease unless a contrary intention is documented and communicated to tenants. 

Note that if a right has been waived, the party that waived such right can retract its waiver by giving reasonable notice to the other party setting out its intention to insist upon the strict enforcement of its legal rights and providing the other party with a reasonable period of time to cure the breach.

Even if a landlord has terminated a lease for an event of default, courts have discretion to grant the tenant relief from forfeiture if such relief would be fair and just in the circumstances. Courts will consider all facts surrounding any termination of lease, including the conduct of the parties, the history of the relationship between the parties and the gravity of the breaches. Keep in mind that courts across the country are also affected and have limited matters that will be heard to emergencies. 

Consider whether or not other rights granted to the tenant in the lease may be affected by a tenant event of default occurring, such as a lease renewal or extension, a right of first refusal or a right of first offer.

If the tenant’s operations in the leased premises cease (i.e., the business is closed temporarily) or the landlord shuts down the building in which leased premises are located as a result of the current pandemic, are there any insurance requirements the parties need to comply with?  

• Is there an obligation to notify the parties’ insurers?
• How frequently do the premises need to be inspected?

Does the landlord’s or the tenant’s insurance policy address force majeure and if so, does the current pandemic constitute a force majeure event? Specifically, is rental interruption coverage available to the landlord? Is business interruption coverage available to the tenant?