It is definitely not “business as usual” for many commercial landlords and tenants given the challenges faced by ongoing costs, business closures, and the changing economic landscape. While parties to a commercial lease could adopt a strictly legal posture to their contractual relationship, early evidence suggests that the prudent course of action is to work together by taking a longer view of the leasehold arrangement. Landlords prefer to see their premises rented and tenants, who may currently be closed, hope to return to their established location when COVID-19’s issues have been resolved.
1. Access To Premises:
As a starting point, tenants are allowed access to their premises as provided for under their lease. A landlord is required to provide that access unless it is forced to reduce or eliminate same by operation of law. Some leases may provide a Landlord with the ability to establish reasonable rules relating to the use of the premises or the manner of accessing same. After checking the particular provisions of a given lease, a landlord and tenant would be best advised to discuss matters such as opening hours and access to the tenant’s premises in order to reach a common understanding and agreement on these issues.
2. A Tenant’s Obligation To Remain Open For Business:
The majority of commercial leases will include a provision requiring a tenant to remain open for and carry on business during the term of the lease. That said, it is unlikely that a landlord would be able to obtain a mandatory injunction so as to force a Tenant to honor those obligations. Rather, it is almost certain that any steps taken by a Landlord to enforce the tenant’s covenant in the courts would simply result in an award of damages. These are early days in Canada’s response to the COVID-19 crisis and we are seeing many businesses closing down or being forced to close down by order of the government. Although matters will need to develop in order for both landlords and tenants to gain a firm understanding of their rights and obligations, it is most likely that a governmental order requiring the closing of a business would take precedence over a tenant’s promise to remain open.
3. Payment of Rent:
Generally speaking, tenants will be required to pay rent under their lease in the normal course. Most commercial leases provide that rent must be paid without abatement or set-off. It is worth noting, however, that leases can vary widely in their terms and it is important for both landlords and tenants to review their particular contract to see whether a situation like the current pandemic is addressed. For example, a given lease may have a force majeure clause which might address the highly unusual situation now faced by most small business tenants. A word of caution, however, the wording of these types of clauses will not usually assist a tenant facing COVID-19 like business interruptions. The specific wording of such a clause should be checked and, in all likelihood, run past a lawyer for his/her opinion.
There is also the possibility of an argument for some form of relief being asserted by a landlord or a tenant under the legal concept known as the doctrine of frustration. The doctrine is usually referenced in a provincial statute (e.g. British Columbia’s Frustrated Contract Act). Again however, previous cases in this area of the law do not appear to support an argument for avoiding the contractual obligations of a lease due only to the type of issues we are now seeing raised by the pandemic.
Despite what appears to be an ongoing requirement for landlords and tenants to continue to perform their lease obligations, anecdotal evidence at this time suggests that many are dealing with their issues together. To be specific, tenants are typically facing a requirement that they pay rent on the 1st of the month. This can, of course, be a very difficult proposition if their business is closed. The following is a “mini check list” which parties might consider when they seek a temporary resolution to address rent concerns:
- Check the lease – leaving aside the issues of force majeure and frustration noted above, are there any provisions that might be of assistance to the parties? At the least, the parties’ agreement will likely specify that any changes to the lease must be in writing and signed by both parties. It is strongly recommended that any agreement with respect to a change in the payment of rent should be documented;
- Buy time – our current response to the COVID-19 pandemic may or may not see business return to normal operations in the near future. For now, parties to a commercial lease may simply wish to deal only with the matter of next month’s rent coupled with an agreement to re-visit the issue in a month’s time. Circumstances are changing rapidly and parties should consider whether it is in their best interests to simply defer the negotiation of a long term solution until more is known about the prospects for a return to “business as usual”. The prospect of government support may also argue for a short term arrangement; and
- Deferral versus abatement – Landlords and Tenants should consider whether the payment of rent for a given month or months should be forgiven (fully abated) or simply deferred. Each tenancy is, of course, unique and parties are able to craft a solution that best addresses their needs. In the case of a deferral of rent, consideration should be given as to when the postponed rent will be paid and how. For instance, deferred rent can be paid in a lump sum or, perhaps, be blended into future rental payments over the balance of the term of the lease. As a possible incentive, the parties could also consider whether the term of the lease might be extended. Lastly, it is worth remembering that landlords continue to face operating costs in connection with their premises. In recognition of these ongoing expenses, it may be appropriate to negotiate a partial payment of rent rather than a full abatement or deferment of same.
As mentioned above, any changes to a lease agreement should be recorded between the parties in writing. Legal counsel can certainly assist in that regard if needed. Likewise, it is worth remembering that while our courts are closed for all but emergency matters, disputes which cannot be resolved directly between the parties might yet be settled through the use of a mediator. The process of mediation can be called upon even when formal litigation has not been commenced and presents the possibility for a speedy and cost effective solution by which parties can maintain their commercial relationship and continue in business together.
William D. Holder is a partner in the law firm of Clark Wilson LLP in Vancouver, BC. His practice includes providing assistance to both landlords and tenants in commercial leasing matters. He is also a qualified mediator and a member of the Civil Roster of Mediate BC. Mr. Holder’s contact information can be found in the following link.