On April 24, 2020, the Ontario government announced that it would be partnering with the Government of Canada to implement certain rent relief measures through the Ontario-Canada Emergency Commercial Rent Assistance Program (OCECRA).
What is the OCECRA Program?
Under the OCECRA program, eligible commercial property owners experiencing potential rent shortfalls are entitled to apply for a forgivable loan of up to 50% of rent payable by their small business tenants during the months of April, May and June 2020. The definition of "Rent" for the purposes of the program is not clear. However, the Government of Ontario has indicated that OCECRA will only reimburse landlords for rent that relates to fixed costs, which is calculated by factoring out any profit received from the landlord on the rent payable. In other words, landlords are to forgo any profits from their rent during the eligibility period. However, it is expected that the calculation of rent for the purposes of OCECRA will prove difficult for landlords as it will be challenging for landlords to ascertain the quantum of rent attributable to profit at a specific point in time. For example, is an administrative or management fee charged to tenants profit or a fixed cost, particularly where those costs are charged to allow a landlord to recoup costs incurred for managing, administering, maintaining and operating a shopping centre? How should administration or management fees be factored into the calculation of pre-profit rent if the landlord makes a profit from such fees? These issues are not clear from the information currently made available by the Ontario government or Government of Canada
In order to qualify for OCECRA, landlords are required to reduce the rent payable by the tenant to 25% of the rent that relates to fixed costs and to forgive the remaining 75% of the fixed-cost rent payable (in addition to forgoing any profits that would have been received as part of the rent payable). In addition, landlords are required to enter into a written agreement with their tenant whereby it agrees to forgo any right to terminate the lease for a period of three months (though it is unclear whether landlords are require to forgo all enforcement action and remedies under the lease), commencing as of April 1.
It is not currently apparent whether property owners must have a mortgage registered on title to the property affected by the lease in order to qualify for OCECRA or whether government funds are distributed to property owners or their lenders directly. The Ontario government has, however, confirmed that further options may be available to property owners that do not have financing in place for the affected property (which may include the option to apply funds against other debt facilities or fixed-cost obligations, such as utilities), which would indicate that OCECRA is geared to property owners that have mortgages registered on title to their properties. Nevertheless, property owners without a mortgage on title to the affected property are encouraged to contact the Canada Mortgage and Housing Corporation to discuss the options available to them.
Who is Eligible to Apply?
Commercial property owners (including owners of mixed-use developments with a commercial component comprising at least 30% of the development) with small business tenants, being a tenant that:
- pays a gross rent of $50,000 per month or less; and
- is a non-essential small business that has temporarily closed, or that is experiencing a 70% decrease in revenues as a result of COVID-19 (which is determined by comparing revenues to either revenues for the same period in 2019 or to average revenues for January and February 2020).
Not-for-profit and charitable organizations will also be considered for the OCECRA program.
The property owner must be the registered owner and landlord of the property. This could create issues for landlords that hold title to their properties through a trustee or nominee or have a leasehold interest in the property through a ground lease (as opposed to an ownership interest).
Considering the evidentiary requirements imposed with respect to the financial impact of COVID-19 on small business tenants, landlords and tenants will need to work together to ensure that proper financial disclosure is made to allow a landlord to determine whether the tenant qualifies as a small business tenant.
Is OCECRA Mandatory?
OCECRA does not require that landlords apply for the program or reduce the rent payable by tenants. It is an alternative arrangement that landlords can elect to participate in.
What is the Impact of OCECRA on Existing Rent Deferral Agreements?
Many landlords and tenants have already negotiated rent deferral agreements as a result of COVID-19. OCECRA has no impact on these agreements. A landlord may decide that OCECRA may be a better option than a previously negotiated rent deferral agreement, in which case it may decide, with the agreement of its tenant, to terminate the rent deferral agreement and opt to apply for OCECRA. However, OCECRA does not require a landlord to forgo its rent deferral agreement in favour of OCECRA. In fact, landlords will likely prefer deferral arrangements with their tenants, where the landlord will at some point be made whole, over any arrangement that would require it to forgo rent.
There remain many unanswered questions about how OCECRA will work in practice and whether it will provide an incentive for landlords to forgive rent rather than negotiate real deferral agreements or enforce the remedies available to them in their leases. However, our Commercial Leasing Group will continue to monitor developments and any new information that may arise in connection with OCECRA and is always available to assist landlords in facilitating rent relief under OCECRA and to help navigate through the hurdles arising from COVID-19. We are committed to keeping clients informed on matters pertaining to commercial leasing, including providing continued updates on interpreting OCECRA as more details become known.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
