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Federal government ready to implement commercial rent relief program for small businesses

Prime Minister Trudeau announced on April 24 that the government is ready to implement its commercial rent relief program for small businesses.

The proposal sounds promising, but of course, the devil’s in the details. The prime minister explained that the government would pay 50 percent of a qualifying small business’s rent for April, May, and June, while the business and the landlord must each kick in 25 percent.

It remains to be seen how many businesses will be able to make use of this program. While some may be able to take advantage of yet another government program offering $40,000 in loans to qualifying businesses, these businesses still have other ongoing expenses, and many are also being forced to absorb the cost of spring inventory that they are unable to sell. While companies do routinely plan for downturns in the market, a downturn to absolute zero is something wholly unexpected. Asking the businesses to pay 25 percent of the cost of their rent, in addition to maintenance and insurance fees, may well be too much for months when their sales have entirely disappeared.

This leaves landlords holding the bag. Those who believe they have the capacity to bring in a new tenant whose business is presently operating, such as a supermarket or drugstore, may be able to simply evict tenants who are unable to pay their rent, just as they would have done in pre-COVID-19 times. Landlords whose properties are zoned for industrial tenants may be able to do the same, potentially bringing in a manufacturer of personal protective equipment, or some other COVID-19-friendly product, should the pandemic persist through the summer months.

But landlords whose properties have predominantly attracted tenants in retail industries such as fashion, home furnishings, and cosmetics will face a serious problem. These tenants may be unable to pay 25 percent of their rent, or they may simply refuse to pay, and the landlord may be unable to attract tenants to replace them anytime in the foreseeable future.

In addition, landlords must make their mortgage payments, and of course not all landlords are alike. Some are national companies with large real estate holdings who may well be able to weather the economic shutdown. Others are local owners with a suburban shopping plaza or two, while still others are families who live above a single downtown storefront on whose rent they depend. This latter group is as much in need of relief as any tenant. And while many tenants will be looking for their rent to be waived completely during this period, rather than deferred, banks do not have to waive the landlords’ mortgage payments. At best, the banks may allow a borrower to defer payments on the principal, but this will require the owner to carry on with interest payments and will result in it having to renew the mortgage for a higher principal amount at the end of its term.

One exception to all of this might be commercial leases, or perhaps even mortgage agreements, with a force majeure clause. Some such clauses contain a list of “force majeure” events, which may or may not include a pandemic, while others leave it silent and the definition needs to be worked out. Traditionally, force majeure has been said to be akin to an “act of God”, the meaning of which has kept theologians busy for millennia.

In Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Ltd., [1976] 1 SCR 580, the owner of a pulp paper mill cancelled its long-term contract for the supply of fibres needed to operate the mill. When its supplier sued, the mill defended on the basis of a force majeure clause in its contract, arguing that its own marketing forecasts had proved faulty, and that U.S. and European consumers of its product had turned away from Canadian producers. A trial judge in New Brunswick found that the disappearance of the mill’s market constituted force majeure, and therefore relieved the mill of its obligation to purchase more raw materials. The Supreme Court of Canada overturned this finding, however, and found that the mill “could not rely on a condition which it brought upon itself”. In essence, the mill had miscalculated its own market and had based its purchases of raw materials on what turned out to be erroneous forecasts.

The COVID-19 pandemic does not seem to fit the Supreme Court’s description. No market forecasts would have taken into account the prospect of a complete societal lockdown. The Supreme Court saw the paper mill’s problem as caused by the mistakes of a full-sized marketing department and not by the works of a microscopic virus. One is visible to the human eye, the other is not.

While force majeure has not been heavily litigated in Canada, the few precedents in the law reports hold out some promise. Commercial tenants needing an escape from a lease, and possibly commercial landlords needing an escape from a mortgage, should take a careful look at any such clause to consider whether it provides them relief.

Email: jbrodski@pacelawfirm.com
Direct: (416) 342-5531