Guidance for Commercial Tenants
With COVID-19 continuing to spread, layoff numbers increasing, and world leaders unable to advise on when business will be back to normal, it is no wonder why movements such as the “Keep Your Rent Movement” are gaining popularity for tenants.
Although it may be appealing to jump on the “Keep Your Rent Movement” bandwagon, tenant’s need to carefully consider the potential consequences associated with this decision, as well as spend some time considering the other options available to them.
What Happens if I don’t Pay?
Subject to the specific terms and conditions of your lease, if you fail to pay the Landlord will be permitted to:
- sue the tenant for default, as well as any personal guarantor (if provided);
- distrain assets; or
- evict the defaulting tenant and find a new tenant. Notwithstanding the government’s Residential Tenancy Branch’s halt to evictions, this halt is for residential tenants, not commercial tenants.
But what about Force Majeure?
Force majeure clauses, often listed under the “miscellaneous” section at the back of the lease, are now becoming the forefront of legal conversations. A force majeure clause is a contractual provision that addresses extraordinary events that are beyond the parties’ control. These clauses typically provide that, to the extent the force majeure clause event renders performance impossible, or results in a delay in performance, the affected party’s obligation to perform under a lease may be suspended temporarily or executed altogether.
As force majeure language varies from contract to contract, tenants and landlords will need to carefully review their lease’s specific language. However, even if COVID-19 qualifies as a force majeure event, rent will still likely be due, as often these clauses excuse the performance of the parties, excepting only the payment of rent.
Options for Tenants:
Regardless of what the parties contractual rights are under the lease, when deciding how to proceed, parties should consider practical realities. With the courts closed (with the exception of emergencies) it remains unknown how the government and the courts will respond to these challenging times. In the meantime, parties need to be flexible and work together to try to minimize each other’s damages and work together to get through this challenging time.
- Communication During this time of uncertainty, great value can come from openly communicating with your landlord. If you anticipate having challenges paying rent in the near future, perhaps have a frank and candid conversation about what hard costs the landlord has, so that both parties may experience empathy for one another. Together, with your landlord, you may be able to come up with a payment plan to ensure both parties needs are being met.
- Sublease Consider remedies available under the lease such as subleasing all or a portion of the space.
- Attempt to Mitigate Given how overwhelming the current COVID-19 situation is, tenants may be tempted to sit back and let the chips fall as they may; however, landlords will likely not look favourably upon these actions. Try to take steps to show the landlord that you are doing everything possible to try to make rent (i.e., government assistance programs, adaptations to your business, etc.). Showing that you are genuinely trying to meet your financial obligations may encourage the landlord to provide rent deferrals or a rent reduction.
- Rent Deferral or Rent Reduction Consider requesting a temporary rent deferral or rent reduction from your landlord during this time of crisis. The amount of reduction or deferral could be paid back gradually during the remainder of the lease, or from monies received as rent relief from the government.
- Security Deposit Consider suggesting the application of all or a portion of your security deposit to the upcoming rent payment to pay for any shortfall. Confirm with your landlord that you will replenish the security deposit once the crisis is over.
- Utilities Consider contacting BC Hydro to request deferred bill payments or arrange for flexible payment plans with no penalty. Grants of $600 are also currently available to BC Hydro customers experiencing job loss, illness or lost wages due to COVID-19.
While during this time of crisis, it may be easy to view the landlord as Scrooge McDuck, it is important to appreciate that the landlord has their own fixed costs, which may depend upon the rent to service. A tenant’s default may in turn result in the landlord’s default with their lender. Ideally, during this time of crisis, landlords and tenants are able to communicate and come up with a practical payment plan to ensure both parties needs are being met.