On April 16, 2020 Prime Minister Justin Trudeau introduced the Canadian Emergency Commercial Rent Assistance (CECRA) program to help landlords and tenants weather the impact of the COVID-19 pandemic. At that time, program details were limited because the federal government was still in the process of negotiating the CECRA program with the provinces and territories, who would be backing the program as partners.
On April 24, 2020, further details of the CECRA program (known in Ontario as the Ontario-Canada Emergency Commercial Rent Assistance (OCECRA)), were announced in a press release from the Canada Mortgage and Housing Corporation (CMHC) on April 29, 2020 (Note: we will use the term "OCECRA" hereinafter):
- the OCECRA program will be administered and delivered by CMHC based on a collaboration between the federal, provincial and territorial governments. The Ontario government will be partnering with the Government of Canada to implement these rent relief measures through the new OCECRA program and has committed to contribute $241 million towards the program and deliver more than $900 million in urgent relief to small businesses and their landlords;
- the government will offer forgivable loans to qualifying commercial landlords to cover 50% of the monthly gross rent payable by eligible tenants for the months of April, May and June 2020. The forgivable loans would be disbursed directly to the mortgage lender;
- these loans will be forgiven if the landlord agrees to reduce the eligible tenants' rent by at least 75% for the three months of the agreement. The tenant would be responsible for covering no more than 25%, the landlord no less than 25%, and the federal and provincial governments would share the remaining 50%. The Ontario government has said that this type of rent sharing agreement would apply only to before profit costs (i.e. to "fixed" costs), and landlords are required to forego profits during the three-month period;
- landlords and tenants must sign a rent forgiveness or reduction agreement in which the landlord agrees to reduce the eligible tenant's rent in accordance with the above and must include a moratorium on evictions for the time the program is in effect;
- in order for the loan to be forgivable, the landlord must comply with all applicable program terms and conditions, including an obligation not to attempt to recover rent abatement amounts after the program is over;
- commercial landlords who have not offered rent reductions of at least 75% for April and May will be able to do so retroactively to qualify for OCECRA. Landlords must refund amounts paid by tenants for April, May or June, however, if rent has been collected for that three-month period at the time of approval, a credit to the tenant for future months rent is acceptable (provided the same is agreed upon by both the landlord and the tenant);
- landlords must apply by August 31, 2020.
Eligible landlords for the purposes of OCECRA:
- landlords who are the registered owners of commercial real property in Ontario that generates rental revenue. Landlords of commercial properties with a residential component and residential mixed-use properties with commercial tenants are also eligible, however, for the purposes of OCECRA, these properties must include at least a 30% commercial component to be eligible;
- landlords who have a mortgage loan secured by the commercial real property (however, landlords without a mortgage also qualify for rental assistance and an alternative mechanism will be implemented and outlined in the near future);
- landlords who have declared rental income on their tax return (personal or corporate) for the 2018 and/or 2019 tax years.
Eligible tenants for the purposes of OCECRA:
- Small business tenants who are paying less than $50,000 per
month in gross rent (as defined by a valid and enforceable lease
agreement) and who have temporarily ceased operations (i.e. are
generating no revenues) or experienced a drop of at least 70% in
revenues. For the purposes of OCECRA, the Ontario government has
mentioned the small business must be "non-essential",
though no similar language was used in the CMHC release so the
applicability of this criterion is yet to be determined. The
$50,000 monthly rent cap applies per location and not across all
outlets of a chain, but the tenant must not generate more than $20
million in gross annual revenues, calculated on a consolidated
basis (at the ultimate parent level).
- A business' decrease in revenues is determined by comparing revenues in April, May or June to the same month in 2019 or to average revenues in January and February 2020. While Industry Canada defines small-sized businesses as those with between five and 100 paid employees, it is unclear if the CECRA program will follow a similar definition;
- Non-profit and charitable organizations are also considered eligible tenants;
- Further details about rent relief for larger tenants who do not meet these criteria will be announced at a later date.
Tenants excluded for the purposes of OCECRA:
- Entities owned by individuals holding political office;
- Entities that promote violence, incite hatred or discriminate on the basis of race, national or ethnic origin, color, religion, sex, age or mental or physical disability; and
- An entity in the Lenders special accounts or Restructuring Group prior to March 1, 2020.
The OCECRA program is not mandatory and does not impact the ability of landlords and tenants to reach alternate agreements. Ultimately, it is in the discretion of landlords to apply for relief through this program.
Program details including how funds will be disbursed and how to apply are being finalized and will be available soon, and individuals can sign up to receive these details as they become available on the CMHC website.
Outstanding Questions:
Despite the announcement of further program details, there remain many outstanding questions about the structure and administration of the CECRA program, including:
- No evictions - presumably this is limited to termination of the lease for non-payment of rent, though it is unclear if it would preclude a landlord from terminating for non-rent defaults or pursuant to other contractual rights under the lease. What if the tenant fails to pay its 25%? Can landlords use other remedies provided under their lease or by law, such as distress? It is possible that the mandatory moratorium is an absolute prohibition with respect to all remedies for all defaults, however, more guidance is required from the government.
- Must the rent forgiveness or reduction agreement only include the requirements prescribed by the government? Or can the agreement include other provisions such as amendments to the lease or the inclusion of a personal indemnity? Can a provision be included that allows for the termination of the agreement? Will a copy of the agreement be required to be sent to CMHC?
- What happens if the landlord's application is ultimately rejected after it has forgiven the tenant's rent?
- Is the $50,000 rent threshold inclusive or exclusive of HST? If rent is forgiven, how will HST payments be affected? Since the threshold is based on gross rent, will it be based on current estimates for additional rent? What happens if later reconciliations drop the number below $50,000? Given that the program is retroactive, if the number drops, it appears that landlords can apply at a later date. However, a more potentially-problematic issue arises where a tenant's rent falls below the threshold, but later reconciliations raise the rent payable above $50,000.
- Is the landlord obligated to verify that the tenant complies with the eligibility requirements? To whom does the tenant have to demonstrate its eligibility? Will the government later be auditing applicants? What if the tenant misrepresents and ultimately does not qualify for the program after the landlord has forgiven their rent? Will the landlord be liable to repay the loan?
- Will landlords be restricted from suing for arrears while agreement is in place (for pre-existing arrears or if the tenant fails to pay the 25%)?
- What if the lease has already been terminated? Can the parties reinstate it and take the benefit of this program?
- What if the parties have already agreed on a rent deferral agreement for these months - is the $50,000 rent threshold based on pre-deferral or post-deferral amounts?
- How is before-profit rent to be calculated for the purpose of a rent sharing agreement under the program? Are the landlord's administration costs considered to be before profit rent? What does it mean for a landlord to forego profit during the three-month period? Are property management costs considered profit?
- Must landlords and tenants comply with the eligibility requirements for the full three-month period? Or can the parties be eligible for select months? Will the approach be similar to the Canada Emergency Wage Subsidy, where if you qualify for the first month you automatically qualify for the second month? What if rent increases under a lease agreement in the middle of the three-month period allowing you to qualify only for part of the period?
- With respect to the limit of $20 million in gross annual revenues, what does it mean to calculate gross annual revenues on a consolidated basis (at the ultimate parent level)? What if there are locations outside of Canada? How does this apply to franchisors/franchisees? Who is the ultimate parent of the business? It is likely that the $20 million gross annual revenue threshold applies to whoever is on the lease (i.e. is it the franchisor or the franchisee who is the direct tenant). Will the gross annual revenues be based on 2019 revenues, or will they be calculated from March 2019 to March 2020? What if a tenant has not been operating for more than a year, will there be an attribution rule?
- How will the requirement with respect to tenants having no revenue or a revenue decline of at least 70% be calculated for tenants with multiple locations? Will this requirement be applied per location like the $50,000 gross rent cap?
- How will the requirement with respect to declaring rental income on tax returns for the 2018 and/or 2019 tax years apply to landlords who purchased a property in 2020? Must landlords have declared rental income for all properties they own or only the property they are requesting rent relief for?
- How do the eligibility requirements apply with respect to subtenants? Are they eligible if the head tenant is not? It is unlikely that the head tenant (i.e. sublandlord) can apply for relief through the program; the head landlord (the "property owner") would have to apply and the head tenant would have to be eligible.
- What happens if the total applications for OCECRA exceed the amount of funding for the program? Will the funding be distributed on a pro-rata basis to all applicants? Will the program be closed once funding runs out and will the landlords who are late to apply not receive any loan proceeds even if they have already waived rent for April, May and June?
- If landlords defer realty taxes will this affect the rent abatement granted to the tenant pursuant to OCECRA? Will rent be lowered due to tax deferrals?
- What is a "non-essential small business"? Does this mean that if a business is included on Ontario's list of essential workplaces that it does not qualify for the program? Some clarification needs to be made between the inclusion of this qualification in the Province's press release but its omission from CMHC's release.
- Given that landlords must be the registered owner of the property to apply, are landlords who hold title to their properties through a trustee or nominee or have a leasehold interest in the property through a ground lease ineligible?
- What does it mean to be an "entity in the Lenders special accounts or Restructuring Group"? Special accounts refers to a bank's collections/delinquent loans department, and it is likely that a lender's "Restructuring Group" is related to the department that deals with the Companies' Creditors Arrangement Act (CCAA), bankruptcy, receiverships and/or proposals.
- What will the rental assistance be for landlords without a mortgage?
Please continue to check this article as we will be updating it as more information on CECRA becomes available.
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.
