Authors: Saravan Veylan, Tessa Rowland
As businesses navigate the effects of COVID-19 and persist in protecting their profitability and sustainability, they do so under simultaneous pressure to protect the interests of their employees, customers and other stakeholders.
In light of our shared obligation to prevent the spread of the virus, businesses must take steps to reduce unnecessary employee contact in mild instances and ultimately close in extreme instances. The pressure of COVID-19 is especially felt in the context of commercial lease agreements, which rarely contemplate a pandemic of the nature we are currently facing.
Relevant Lease Provisions and COVID-19
COVID-19 presents new legal territory in the interpretation of commercial leases and a landlord’s decision to enforce obligations should be carefully considered in light of the language of the lease and other relevant factual circumstances. Tenants are highly discouraged from taking unilateral action such as withholding rent or vacating the premises without (a) first carefully reviewing the lease, and (b) consulting with a lawyer as they may find themselves unintentionally in breach of their obligations.
A force majeure provision suspends certain obligations in defined unforeseeable circumstances of a transient nature beyond the control or cause of any party involved where performing the obligations would be commercially impracticable. A force majeure provision will typically not permit the lease’s termination, it may however result in either a suspension of a tenant’s obligation to pay rent or the abatement of rent.
Whether COVID-19 falls within the parameters of any given force majeure provision depends entirely on the drafting of language, as these provisions are typically interpreted narrowly. Tenants must exercise extreme caution when reviewing any force majeure language to ensure their circumstances are covered.
The continuous operating covenant
In retail leases, such as those used by shopping malls, the tenant is under obligation to remain operational during standard business hours. Failure to do so is often defined as an event of default in the lease and will grant the landlord certain rights and remedies in light of the default.
Compliance with applicable laws
Commercial leases typically bind the tenant to comply with all applicable municipal, provincial and federal laws. The rapidly escalating circumstances surrounding COVID-19 have presented a challenge to both tenant and landlord, who must both adapt to new government orders on short notice. When conflicts arise between government orders and an obligation specified in the lease, the compliance with applicable laws provision requires either the tenant or landlord to prioritize compliance with law. A ready example is a restauranteur operating within a shopping mall who becomes required by law to cease operations. In this instance, the government order would supersede the tenant’s lease obligations.
A landlord’s covenant of quiet enjoyment grants a tenant freedom from the landlord’s disturbance or substantial interference in their possession of the leased premises for as long as they fulfill their obligations under the lease. Quiet enjoyment provisions are typically drafted to be subject to the terms and conditions of the lease, terms that may require the landlord to comply with applicable laws or act in certain ways in case of emergency. Therefore, a “breach” of a tenant’s quiet enjoyment will likely not be found if a landlord is compelled by the government to close their building for COVID-19-related reasons.
Health directives of the landlord
It is increasingly common for commercial leases to include a requirement by which the tenants are obligated to comply with health and safety directives as specified by the landlord. These health directives serve the purpose of protecting everyone in a building and can range from limiting visitors to restricting the number of occupants in an elevator at any given time.
One crucial question
The impact of COVID-19 on the Canadian economy as a whole means that many businesses have ceased operations without a date to resume, putting their ability to pay rent in jeopardy. This affects not only tenants but also landlords who rely on monthly additional rent to satisfy a building’s operating costs such as property taxes, utility payments and other payments contributing to the overall maintenance of the building.
While some commercial leases may provide clear grounds for a tenant to suspend payment of rent and/or cease normal operations, the majority are drafted in the landlord’s favour meaning these rights are either difficult to interpret or non-existent. Tenants experiencing disruptions to business due to COVID-19 should investigate any available government assistance to support rent payments. Not to be overlooked, insurance policies may help cover losses that result from business interruptions. Although policies are usually limited to property damage interruptions, some policies may cover government-ordered closures. In the spirit of co-operation, landlords should examine their own insurance policies to determine whether they are covered for loss of rent; this may alleviate the disproportionate burden on tenants.
If the lease provides little guidance on present circumstances, one option for negotiation is a rent deferment agreement. Under a rent deferment agreement, a tenant is able to defer rent payments for a specified period. Typically the agreement only abates a portion of basic or minimum rent and the tenant must continue to pay additional rent required by the lease to cover the landlord’s operating costs. At the end of the specified time, the tenant must resume paying rent in addition to paying the deferred rent in staggered installments. It is important for the tenant to recognize that rent deferral necessitates payment at a later date, it does not forgive rent payment.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.