Due to the significant economic impacts of COVID-19, many commercial tenants may be struggling to make monthly rent payments. It is therefore important for landlords to be aware of the remedies that may be available to them in the event that a tenant defaults in their payment obligations.
Commercial leases are often customized to address the particular circumstances of a landlord-tenant relationship; as a result, the provisions of commercial leases often vary significantly from one lease to the next. It is now more critical than ever for landlords to review their leases in their entirety and consider obtaining legal advice to determine the best course of action in the event that a tenant has failed to pay rent.
Common Landlord Remedies
Certain remedies may be available to a landlord when tenants fail to make rent payments or are otherwise in breach of their lease obligations. In assessing potential remedies available to them, landlords should be mindful of the reduced market for commercial premises as the economy continues to suffer from the effects of the COVID-19 crisis.
Common remedies that a landlord may consider include:
Application of Security Deposit to Arrears:
Many lease agreements allow a landlord to apply the tenant’s security deposit to missed rent payments, provided that the tenant replenishes the security deposit afterwards. This potential solution acts as a de facto deferral of rent for the tenant and provides the landlord with immediate access to existing funds in order to satisfy current rent obligations or arrears. This option presents a cash benefit to the landlord, but also a risk that the tenant does not replenish the security deposit or fails to make future rental payments before the security deposit is replenished.
Termination of the Lease:
Landlords almost always have the right to terminate the lease in the event of non-payment by the tenant; typically by providing written notice to the tenant. Often, the lease will allow for a “cure period”, which is a period of time in which the tenant is entitled to cure its breach by paying any rental arrears. If the tenant is able to pay the rental arrears during this cure period, the termination does not take effect; however, if the tenant fails to pay the rental arrears during this cure period, then the lease can be formally terminated. The landlord may elect to terminate the lease with or without reserving its right to claim damages on the basis of a present recovery of the rent due for the unexpired term of the lease. This requires issuing proper notice to the tenant reserving those rights.
Suing for Arrears:
Whether or not the lease is terminated, the landlord may be able to sue the tenant for rental arrears. If the lease has been terminated, the landlord may sue for arrears owing up to the date of termination, and possible for present recovery of the rent due for the unexpired term. If the lease has not been terminated, the landlord may sue on the basis that the lease agreement remains in effect, with each rent default constituting a breach of its terms. This is an important distinction and may impact a landlord’s overall recovery. For that reason, each landlord should consider these options – including the effect of terminating the lease before making a formal decision. We can provide advice to assist when making this decision.
Suing for Other Damages:
If the lease has been terminated, the landlord may be able to claim damages for the lost benefit of the balance of the lease term. A landlord taking such steps should be aware that it is required to make reasonable efforts to mitigate the losses that would otherwise result during the remainder of the lease term. Often, this is achieved when a landlord re-lets the premises to another tenant for the duration of the term. In the current economic environment, a landlord should be wary of the potential difficulties it may face securing a new tenancy to try to offset/replace the lost rental revenue.
A landlord will have an obligation to mitigate in all situations where the tenancy is not resumed, whether because the lease was terminated by the landlord or the tenant permanently vacated the leased premises.
Distraint (or Distress):
Many commercial lease agreements provide the landlord with a right of distraint (or distress), which is a right to seize the tenant’s assets located at the premises, and to sell those assets to recover unpaid rent. It is important for the landlord to be aware of any technical or legal requirements to seize property, which can be found in both the provisions of the lease agreement and applicable legislation. A landlord should also be aware of the potential effects distraint may have on other legal rights as part of assessing this option for recovery. As an additional practical consideration, a landlord may have difficulty finding a buyer for the seized assets in the current economic environment, and this may limit a landlord’s recovery through the distraint process, but may nonetheless cause the landlord to incur the associated costs.
Re-Entry and Repossession:
In the event of a tenant’s failure to pay rent, a commercial lease agreement may also provide the landlord with the right to re-enter and repossess the premises for the purpose of re-letting, or to obligate the tenant to sublet the premises to a third party. A landlord should note any requirement to provide the tenant with notice of its intention to exercise its right of re-entry, if it contemplates pursuing this remedy.
In consideration of the difficulties facing a landlord during the current pandemic, careful consideration should be given to whether there is any market to allow the landlord to re-let or sublet the premises to a third party.
Enforcement Against Security:
Some lease agreements require the tenant to pledge or grant a security interest in its property for the purpose of securing the tenant’s obligations to the landlord (such as the payment of rent). Where this provision is included in a lease agreement, the landlord has the additional option to enforce against the tenant’s property. A landlord who may wish to enforce such security interest should seek legal advice to ensure that the enforcement is done properly, in accordance with the terms of the lease agreement and any applicable legislation.
Provisions Affecting Remedies:
All landlords should consider whether any of the above remedies are affected by other provisions in their lease agreements. Provisions in a lease agreement relating to breaches, defaults, termination rights, distraint and re-entry may clarify or limit the rights and obligations of the landlord in pursuing any of the remedies listed above.
Other key issues for review and consideration include:
- Force majeure clauses, which may excuse the parties to the lease agreement from failing to perform some or all of their obligations under the lease if an unforeseeable event (such as a flood, disaster or act of God) renders it impossible to perform those obligations. In most cases a force majeure clause will not apply to the obligation to make current rent payments, but the wording of each such clause must be considered carefully to determine its effect on the legal rights of the parties. For more information on force majeure clauses, please see: https://www.mltaikins.com/corporate-commercial/questions-and-answers-regarding-force-majeure-clauses/.
- Dispute resolution clauses, which will identify the agreed mechanism for handling disputes arising from a commercial lease. Common mechanisms include requiring the parties to negotiate in good faith, to proceed to mediation, to proceed to arbitration, or to bring matters before a Court of competent jurisdiction. A landlord should be aware of any binding dispute resolution requirements as part of determining which course of action it wishes to pursue.
- Limitation periods, which may bar the landlord from recovering against a tenant. All landlords should be aware of any limitation periods applicable to a dispute as stipulated by provincial legislation (and as may be modified by the lease agreement) to ensure that they do not wait too long to sue a tenant for rent arrears.
Rent Waiver or Deferral:
As landlords and tenants continue to navigate the challenges of the COVID-19 pandemic, landlords may wish to consider opportunities to take a flexible approach to rental obligations in an effort to preserve long-term relationships with desirable tenants. Accordingly, a landlord may consider alternative options to enforcing strict compliance with a lease agreement, including waiving a portion of the tenant’s rent, waiving a portion of the tenant’s rent in exchange for an extension to the lease term, or allowing a brief deferral in the payment of the tenant’s rent, to be repaid after the pandemic passes. A landlord may also consider whether it might have to waive or reduce interest charges on late or deferred rent payments. Landlords may wish to obtain legal advice as part of any negotiated solution, and should ensure all such terms are properly documented and signed by the parties.
Particularly relevant to these decisions are:
- Whether there is a reduced market for commercial premises due to COVID-19;
- The applicability and effect of the Canada Emergency Commercial Rent Assistance subsidy announced Friday, April 24, 2020 – see information about the subsidy. Read the MLT Aikins analysis in our Canada Emergency Rent Assistance for Commercial Tenants blog.
Note: This article is of a general nature only and is not exhaustive of all possible 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.