Late last week Prime Minister Justin Trudeau provided some insight and details into the Canada Emergency Commercial Rent Assistance (CECRA) program which was initially mentioned on April 16th. During the Prime Minister’s daily address on April 24, 2020, he announced that the Government of Canada had reached agreements with all provinces and territories to lower rent by 75% for small businesses that have been strongly affected by Covid-19. The Government of Canada has been working to develop this program to assist qualifying small businesses with their rental obligations for the months of April, May and June. The Prime Minister published his press release about CECRA providing some additional detail.
Premier Doug Ford, Minister of Finance, Rod Phillips, and others provided a little insight into the how the partnership between the federal government and the province would work when they announced the OCECRA program. The Office of the Premier of Ontario also published its own press release on August 24, 2020 specific to OCECRA.
Below are some of the initial details that we have learned thus far, but there will need to be clarification on a number of items before OCECRA (including CECRA) is made available in mid-May 2020:
What is the program?
The OCECRA program will allow certain commercial property owners in Ontario experiencing potential rent shortfalls, to apply for forgivable loans of up to 50% of the rent (excluding the landlord’s profit) payable by qualifying small business tenants during the months of April, May and June 2020 (the “Applicable Months”). Premier Doug Ford announced that “[t]he Ontario Government is committing $241 million to partner with the federal government and deliver more than $900 million in urgent relief to small business and their landlords through the new program…”
Once eligibility of the landlord and tenant parties (requirements listed below) has been ascertained, the program requires the landlord to determine its pre-profit rent amount (the “Pre-Profit Rent”) for each lease situation during the Applicable Months, and then, once the other requirements (described below) are fulfilled, the landlord may, but is not required to, apply for a forgivable loan of up to 50% of the Pre-Profit Rent amount for some or all of its qualifying leases.
The initial announcement and media coverage of CECRA (announced prior to OCECRA) focused on the fact that the federal and provincial governments were going to assist small business tenants with a 75% reduction in rent for 3 month. This would leave the tenants only having to cover up to 25% of their rent for the Applicable Months. However, it was not made obvious to the public just how much of the cost burden was going to be placed on the landlord until the Premier released his press release a little later on April 24, 2020.
We now understand the breakdown of the shared costs is going to be that:
- the Government of Canada covers 37.5% of Pre-Profit Rent;
- the Ontario Government covers 12.5% of Pre-Profit Rent;
- the tenant covers up to 25% of Pre-Profit Rent; and
- the landlord is expected to cover at least 25% of Pre-Profit Rent plus all of its usual profit for the Applicable Months.
Below is an example of how the cost sharing arrangement is supposed to work under the OCECRA program assuming the tenant’s monthly rent is $35,000 per month and $5,000 (or 14.29%) of that monthly rental amount is considered profit for the landlord:
|Government of Canada
|$33,750 (3 X $11,250)
|$11,250 (3 X $3,750)
|$22,500 (3 X $7,500)
|$37,500 (3 X [$7,500 + $5,000])
As you can see, in this example the landlord could end up covering the largest share of the cost savings for the tenant. As presently contemplated, this program puts a significant financial burden on commercial landlords and not all commercial landlords can sustain this type reduction to rents.
Due to the fact that this is not a mandatory program, it will require both the landlord and the tenant to decide if it is in their best interests to move forward with an application under the OCECRA program. Landlords will have to look at each of their eligible leases on a case-by-case basis and carefully consider the alternatives before they decide to opt into the program. It is likely that many landlords will feel that other alternative arrangements will better meet their needs.
- The landlord must be the registered owner of the commercial property.
- The commercial property may need to be subject to a mortgage. However, it has been reported that the Federal Finance Department has advised that assistance will be available to commercial property owners who do not have a mortgage.
- If the property is residential or mixed-use, the commercial component must be at least 30%.
- The tenant pays monthly rent not exceeding $50,000 in gross rent payments; and
- The tenant must be a non-essential small business that:
- has temporarily closed; or
- is experiencing a 70% drop in pre-Covid-19 revenues (the drop in revenue can be determined by comparing revenues during the Applicable Months to the same months in 2019 or to the average revenues for January and February 2020).
- Not-for-profit and charitable organizations will also be considered.
- The following small business tenants are excluded if:
- they were already in a lender’s special accounts or restructuring group prior to March 1, 2020;
- they are owned by individuals holding political office;
- they promote violence, incite hatred or discriminate on the basis of race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.
The landlord and tenant must enter into a rent forgiveness agreement which:
- reduces the tenant’s monthly rent to no more that 25% of the Pre-Profit Rent; and
- provides a moratorium on eviction for the Applicable Months.
Administration of the Program:
The OCECRA program is expected to be operational by mid-May and will remain open to accept applications until September 30, 2020. Landlords will submit their applications under the OCECRA program, and if the application is accepted the loan(s) will be administered and delivered by the Canada Mortgage and Housing Corporation to the landlord’s mortgage lender (although this will most likely change if the requirement for a mortgage disappears).
Notwithstanding the fact that there will be a several month period between the estimated mid-May start date and the September 30, 2020 close of the OCECRA program, there are still a number of questions that need to be addressed and plenty of work for the landlord and tenant to undertake to determine whether this program is right for them both. Some of the issues/questions are:
- There will need to be clarification on what can and cannot be included in the Pre-Profit Rent calculation (administrative or management fees, etc.). Landlords will likely find this a calculation a tedious and time consuming task.
- Will landlords need to make an application for each small business tenant lease scenario or will there be a more blanket type application?
- What if the landlord is not the registered owner of the property and title to the property involves a trustee or nominee arrangement?
- What if the premises have been leased to a subtenant?
- What if the landlord holds a long ground lease for the property and is not the registered owner?
- Does the moratorium on eviction still apply if a tenant fails to pay its 25% of Pre-Profit Rent or defaults on a non-monetary provision under the lease?
- Is the landlord required to verify whether the tenant has experienced a 70% decline in revenues?
- What if the small business is considered an essential service, but still experiences a 70% decline in its revenue?