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When the business is shut, but the rent is due during COVID-19

A commercial lease lawyer lays out the lay of the land
William Holder. Photo courtesy of Clark Wilson LLP

April's rent is due and businesses across the board are temporarily shuttered in Squamish or operating at a fraction of their capacity due to pandemic protocols that have rocked this town and the globe.

What are Squamish business owners and landlords to do?

The Chief caught up with William Holder, a senior litigation lawyer with Clark Wilson LLP who specializes in commercial leasing, commercial real estate and business litigation, for a conversation about the lay of the legal land when everything is so uncertain.

What follows is an edited version of that conversation.

Q: Let's start with the basics. What are the differences between a residential lease and a commercial lease?

A: They are under two different arenas. The residential tenancies are covered by the province's Residential Tenancy Act—that is a guide that sets out how renters and landlords deal with the rental of units.

Commercial tenancies, of course, take place in the business arena and those are governed by both legislation and the common law. For instance, there's a Commercial Tenancy Act, a Rent Distress Act—various pieces of commercial legislation relate to commercial leasing. But then there is the common law that has developed over time, based on decisions from the courts.

Q: So, looking at what is happening right now, is it possible for businesses to defer their rent?

A: Of course. The starting point in commercial tenancies is that the rent usually has to be paid. Most commercial leases provide that rent must be paid "without set-off or abatement," but it is always open to a landlord and a tenant in a commercial situation to craft their own agreement. They are contracting parties and they can reach a fresh understanding, based on their needs.

What I am hearing right now, and I am very happy about this, is most of the landlords and tenants that I deal with are communicating and trying to get through the current situation with COVID-19. That can take a whole number of forms: It can be an abatement, where the landlord forgives the rent. More commonly, I am hearing about deferral agreements, where the landlord and the tenant agree that the rent for April 1, for example, doesn't have to be paid right away, though it will have to be paid eventually. How you defer, is also up for negotiation. It can be tacked on to the end of a lease, or as soon as the business gets back up to speed. Or maybe you are going to take the month's rent and spread it out over many months of the lease. It is up to the parties to come up with an agreement that both can live with.

Q: But is there any way out of a lease payment because of the pandemic? Can the payments be forced on the renter, even though this is happening to them, if an agreement is not reached?

A: Ultimately, unless the lease has some specific wording that would relieve the tenant from paying rent in a situation like this, the tenant is going to have to pay and if the rent is not paid, the landlord has the usual legal remedies to try to collect that rent.

Q: How common are those clauses in commercial leases that would address this pandemic?

A: The clause in question is a force majeure. Those clauses have different wording depending on the lease.

Generally speaking, the clauses that are typically in commercial leases will not assist a tenant in the current pandemic. It is not impossible, there might be very robust language, but it is rare.

Q: Obviously, this pandemic isn't something any of us were expecting. Do you think it will change how leases are written up in the future?

A: I think it may well do so. One of the great things about commercial law—and common law especially—is that contracting parties can adapt over time. We have seen this time and time again.

For example, contracts didn't use to have wording about emails. These days, you will see in commercial contracts that the parties may provide notice to each other via email. That didn't exist 20 years ago. So, are we going to see clauses dealing with pandemics in the future? I would guess we probably will. What those look like will be up to the parties. They will have to negotiate.

Q: The reality is, we are seeing the possibility of some businesses perhaps having to move out, which is not ideal?

A: Yes, it is a difficult situation. For the most part, landlords want to see their places rented—they are in the business of renting and they don't like to have empty space. Tenants themselves want to continue in business if they can, especially after a situation like we are currently facing. They want to return to the same location that they put so much blood, sweat, and tears into establishing. Both sides, I think, have common ground to talk to each other. I don't think they need to put an agreement in place that tackles all possible foreseeable situations in this pandemic. If I were giving a recommendation right now, I would say why not try to reach an agreement concerning April's rent and then agree to revisit things a month from now. It is quite possible by then we will see things a bit more clearly in terms of what is happening with the pandemic.

Q: Without speaking of specific clients, what else generally are you currently hearing about commercial leases?

A: It is mostly about April's rent. I don't hear many people getting on their high horse and forcing a contract to the letter. It is worth remembering that right now our courts are actually closed, except for emergency applications. So, even if you wanted to start a court action to enforce a contract or a lease, that is going to be a difficult proposition. As a lawyer, I can file the documents for you, but it doesn't mean that case is going to proceed very quickly. I would be surprised if we weren't through the pandemic, before it made it to court.

Therefore, it is more about keeping the lines of communication open and seeing what you can do for now. The only other advice I am being asked about right now is when the landlord and the tenant do reach some agreement, they are calling me to document that agreement for them. It is important that whatever agreement they get in place, that it is recorded. Most leases require that the recording be in writing, be signed by the parties and so on. I am not saying you need a lawyer to do that for you every time. It may be a simple agreement to postpone the rent and when you are going to pay it in the future, but it still should be something you do in writing.

Q: I hear you saying that the tenant and landlord should definitely be talking to each other about this. Any other advice?

A: Every contractual relationship is different. I am really heartened that in almost every case I have dealt with in the last couple of weeks the parties are trying to work with each other. It is important to remember that landlords have costs too. We tend to focus on the tenants being in dire straits, but landlords have operating costs no matter what. They pay to heat the building, for security, the mortgage, and on it goes. Those costs aren't going anywhere. So again, have an honest discussion. I have seen situations for example, where the base rent might be deferred, but the tenant will agree to keep paying a share of the operating costs. I think it is a matter of being open and creative.