Canada Emergency Commercial Rent Assistance Program – an Overview

Published on: May 2020 | What's Trending

A wooden plank balancing equally with one side having a sack on with the word rent and the other side a wooden block house

After the announcement of the Canada Emergency Commercial Rent Assistance program (the “Program”) in late April, the details of the Program have now been released and the application portal for the Program has opened as of May 25, 2020.

The Program is being administered on behalf of the federal and provincial governments by the Canada Mortgage and Housing Corporation (“CMHC”) and allows property owners to apply for an interest-free (but only if the loan is forgiven) forgivable loan equal to 50% of the monthly rent payable by a qualifying tenant for the months of April, May and June 2020 (the “Eligible Period”), provided that, among other things, the property owner has entered into a rent reduction agreement with a qualifying tenant that, among other things, reduces the tenant’s monthly rent throughout the Eligible Period by at least 75%.

Property owners are under no obligation to participate in the Program (even though government leaders are encouraging them to do so) and so tenants are left at the mercy of their landlords as to whether or not they will be allowed to participate in the Program. Many property owners have already opted to grant rent deferrals to their tenants, with the deferred rent having to be paid back by the tenant at some future date(s). For property owners willing to provide financial assistance to their tenants as a result of the COVID-19 pandemic, rent deferrals will likely remain the preference for many of them. The incentive for property owners to provide some form of financial assistance to their tenants is that without it, many tenants will be unable to pay their rent (and other bills) and will go bankrupt and/or have their leases terminated leaving property owners:

  • with no further income from those tenants;
  • having to decide whether to sue tenants (at least those who do not go bankrupt) and any guarantors/indemnifiers for the lost rent and damages, which is a slow and costly process and one which may result in the property owner winning the lawsuit but recovering nothing because the tenant/guarantor/indemnifier has no assets;
  • with premises sitting dark and generating no income for potentially long periods of time before they are re-leased, possibly at lower rents than what the previous tenant was paying; and
  • still having to pay their bills.

Eligibility for the Program

Both property owners and tenants have to meet certain requirements in order to be eligible for the Program, including:

(a) in the case of a tenant:

  • it must have opened for business prior to March 1, 2020;
  • its monthly gross rent for each location must not exceed $50,000.00;
  • its gross annual revenues from all locations and sources cannot exceed $20,000,000.00, calculated on a consolidated basis at the ultimate parent level. If the tenant or its ultimate parent does not produce consolidated statements, the annual revenues of the tenant will apply;
  • it must have experienced at least a 70% drop in revenues during each month of the Eligible Period when compared with either the same months in 2019 or the average of revenues earned in January and February 2020. The revenue decline is determined based on declines that have actually occurred up to the date of the application and which the tenant forecasts for the period after the date of the application up to June 30, 2020. In determining revenue:
    • only revenue earned from ordinary activities in Canada is included;
    • it is to be calculated using the tenant’s normal accounting method;
    • revenues from extraordinary items are exempted; and
    • in the case of registered charities and not-for-profit organizations, revenues from non-arm’s length persons are excluded
  • certain businesses are automatically excluded, such as: (a) those owned by individuals holding public office; and (b) those that incite hatred, are quasi-criminal in nature, or discriminate on the basis of any grounds enumerated in section 15 of the Canadian Charter of Rights and Freedoms.

(b) in the case of a property owner:

  • it must own commercial property with at least one qualifying tenant. A mixed-use property with a residential component is eligible with respect to the qualifying tenants;
  • it has declared commercial rental revenue from the property on tax returns for its 2018 and/or 2019 taxation years or the property has commenced generating commercial rental revenue in 2020
  • it is not owned or controlled by an individual holding federal or provincial political office;
  • the property is not owned (in whole or in part) by a federal, provincial or municipal authority (with pension funds or Crown corporations designated as eligible by CMHC being excepted).

There is no longer a requirement that the property owner has to have a mortgage registered on title to the property in order to qualify for the Program.

(c) the property owner and the tenant must have entered into a rent reduction agreement with the following minimum requirements:

  • the monthly gross rent for each month during the Eligible Period must be reduced by at least 75%;
  • a prohibition on the property owner trying, directly or indirectly, to recover any portion of the reduced rent;
  • the agreement must set out the original monthly rent as well as the reduced monthly rent and the square footage of the property;
  • a prohibition on the property owner serving the tenant with any default notice or evicting the tenant during the period from the date of the application until the later of (a) 3 months thereafter; or (b) the date on which the tenant is no longer receiving a rent reduction or forgiveness or rent credit under the rent reduction agreement, where the basis for such default notice or eviction is a lease default due to the COVID-19 emergency.

Applications for the Program

Applications for the Program are to be done by property owners online and are to include:

  • a copy of the rent reduction agreement;
  • a loan agreement between the property owner and the CMHC;
  • an attestation signed by the property owner (together with an integrity declaration) confirming, among other things, that the information relating to the property owner and the property provided in the application is correct and confirming that it meets the Program’s requirements. It is important for property owners to carefully review the attestation to ensure that all of the statements in it are true;
  • an attestation signed by the tenant (together with an integrity declaration) confirming it meets the Program’s requirements, including confirming that a 70% decline in its revenue has occurred. It is important for tenants to carefully review the attestation to ensure that all of the statements in it are true;
  • information relating to the property, including the latest rent roll for the entire property, property type, property tax statement, number of employees and the number of commercial units.

The Loan and Forgiveness

While the amount of the loan to property owners is to equal 50% of the monthly rent payable by the qualifying tenants for the months of the Eligible Period, there will be deducted from the loan amount a pro rata portion of any:

  • insurance proceeds available to the property owner in respect of any impairment of the rental revenue from the property; and/or
  • non-repayable proceeds of any other government programs (other than the Program) targeted at commercial rent assistance instituted in response to the COVID-19 emergency,

received or receivable by the property owner in respect of the Eligible Period.

While there are currently no other government programs targeted at commercial rent assistance, it is possible (although unlikely) that insurance coverage could be available under a property owner’s rental income or business interruption insurance. Since the property owner’s attestation includes a statement that the property owner “has sought to obtain any insurance proceeds available to it in respect of any impairment of the rental revenue from the [P]roperty”, some effort has to be made by property owners to see if insurance proceeds are available. While no guidance is provided on the extent of the efforts that a property owner has to make, at a minimum, there should be some written correspondence (even if just emails) between the property owner and its insurer or its insurance broker demonstrating that the property owner has made enquiries as to whether or not it has insurance coverage as a result of tenants failing to pay rent because of the COVID-19 emergency and has received satisfactory responses to those enquiries.

A similar statement is included in the attestation to be provided by the Tenant.

Note that if either the property owner or tenant subsequently receives any such monies, there is an obligation on the part of the property owner to report this to CMHC, presumably with the intent that the monies are to be paid to CMHC, although this is not clearly stated.

The terms of the loan agreement provide that the loan proceeds may only be used by the property owner to:

  • firstly, to reimburse the tenant for any rent paid by it during the Eligible Period above the 25% due and payable by the tenant during the Eligible Period, unless the rent reduction agreement states that the excess is to be applied against future rent; and
  • secondly, towards any costs and expenses relating directly to the Property, including mortgage payments, realty taxes, insurance costs and costs and expenses attributable to the operation, maintenance and repairs to the property,

and that the property owner is to maintain proper and detailed records and statements of account and other documents related to such uses. It is not clear:

  • if these costs are only those related to the Eligible Period;
  • how property owners are to keep track of whether the loan proceeds are used to pay a particular expense or whether other monies available to the property owner were used to pay a particular expense;
  • what happens to the loan proceeds if the property owner uses its other monies to pay for the expenses described above?

The terms of the loan agreement provide that the property owner is required to repay the loan on December 31, 2020 unless the loan is forgiven by CMHC on that date. CMHC is required to forgive the loan on December 31, 2020 unless an “Event of Default” has occurred, which is defined as:

  • the property owner having failed to comply with the terms of the Program, the loan agreement or the rent reduction agreement;
  • the property owner or its representative make any false or misleading statements, including in the application or the attestation made by the property owner;
  • CMHC determining that fraud or misconduct on the part of the property owner has occurred;
  • the property owner (a) avails itself of any laws governing its bankruptcy, restructuring, reorganization, dissolution, winding-up or arrangement; (b) a 3rd party initiates proceedings under any such laws against the property owner; or (c) a receiver, interim receiver or trustees is appointed with respect to the property owner or its property.

If an Event of Default has occurred by December 31, 2020, CMHC has the right to recover the full amount of the loan from the property owner. The terms of the loan agreement provides that the loan can be recovered by the Canada Revenue Agency.

It is not clear what happens if an Event of Default occurs after December 31, 2020, but it appears that even if the loan is forgiven on December 31, 2020, certain events will allow CMHC to recover the loan from the property owner, such as, by way of example, the property owner trying to recover the reduced/forgiven rent from the tenant after December 31, 2020.

Other Matters to Note:

Some other items of note related to the Program:

  • the rent reduction agreement may be conditional upon the property owner’s application being approved;
  • it appears that all tenants for whom rent relief is to be provided must be included on a single application. It is not clear if this means one single application per property or one single application per property owner;
  • subtenants qualify for participation in the Program, as long as they meet the conditions of the Program. In that case, it appears that the property owner still has to apply and there will need to be two rent reduction agreements, one between the property owner and the tenant (who does not appear to have to qualify if its subtenant qualifies and the amount of the rent reduction is equal to the rent reduction being given the subtenant) and one between the tenant and its subtenant;
  • property owners need to review their financing documents to ensure that there is nothing in them prohibiting them from giving rent reductions to tenants, otherwise they risk being in default of their financing arrangements by participating in the Program;
  • if a property owner and its tenant have previously entered into some type of rent relief/deferral agreement but now agree to participate in the Program, then the previous agreement will have to be terminated. This can be done in the rent reduction agreement that the property owner and the tenant enter into for the purposes of the Program;
  • if, after receiving the loan, the property owner becomes aware that anything stated in the tenant’s attestation is false or misleading in any respect, it must promptly report this to CMHC and make “commercially reasonable efforts” to recover rent amounts previously forgiven under the rent reduction agreement (this being an exception to the rule prohibiting a property owner from attempting to recover such amounts from the tenant) and pay any amounts so recovered to CMHC. It is not clear if:
    • this applies after December 31, 2020 and the loan was forgiven on such date;
    • if the property owner is entitled to deduct from the amount that it has to pay CMHC, the costs that it incurred in recovering the forgiven rent from the tenant. If not, then will a property owner have satisfied its obligation to make “commercially reasonable efforts” to recover such forgiven rent from the tenant if it does little more than make a written demand on the tenant to pay the forgiven rent?
  • it is not clear if the prohibition on terminating the lease applies to a tenant’s failure to pay the 25% of the rent payable by the tenant. In any case, property owners should consider insisting on the 25% payment for all 3 months of the Eligible Period be paid at the same time that the tenant signs the rent reduction agreement;
  • when leases come up for extension/renewal, will property owners be faced with tenants alleging that some portion of the rent increase being sought by the property owner is an attempt by the property owner to indirectly recover some portion of the rent that was forgiven and threatening to report the property owner to the CMHC unless the property owner agrees to a lower, or no, increase? If CMHC receives such a report, how will it react? Will the CMHC allow itself to effectively be used by a tenant as a hammer in a rent negotiation?