COVID-19 and Your Commercial Lease (for Tenants)
To account for the uncertainty around COVID-19 and the impact of building closures and social-distancing on your business, landlords and tenants should review their leases carefully to determine their rights and obligations and/or attempt to negotiate solutions that address the challenges currently faced by both parties. Parties may agree upon such things as increased cleaning services, specific opening hours, changes in rent and/or a surrender of the lease.
Can I terminate my lease because of COVID-19?
Some commercial contracts include force majeure clauses which address the parties’ rights and obligations, including surrender of a lease, in the event of pandemic or other emergency. It is important to review your lease for such a clause and seek legal advice regarding its application. Wrongful termination of your lease can lead to costly and time-consuming litigation proceedings.
My business was deemed “non-essential”. Do I need to pay rent?
Regardless of whether you or your landlord were forced to close your premises following a direction from the government, if you fail to comply with any provisions of your lease, including ceasing to make rental payments, you could be in breach of your contract, and your landlord may have the right to terminate the lease and evict you and/or claim damages. We recommend that you review your insurance policies to determine whether you have business interruption insurance and whether it covers a pandemic like COVID-19.
Some leases contain a clause in the tenant’s favour allowing a reduction in rent and other payments if the tenant cannot reasonably access or use the premises. These clauses may only apply when specific damage has made the building inaccessible or unfit for occupation, which may or may not align with being locked out due to threat of disease.
A tenant may have a claim for rent relief or other protections depending on the extent to which the landlord has acted reasonably in deciding to close the premises and whether the closure or restricted access is due to a lawful direction or requirement of a government authority. If you feel that your landlord has not acted reasonably or in accordance with a government requirement in closing the premises or restricting your access, you should seek legal advice to determine whether you have a claim against your landlord for breach of your right to quiet enjoyment.
Negotiating with your landlord
If your lease does not offer you relief under the current circumstances, you may consider negotiating with your landlord to fix a reasonable period of time in which you will be relieved of rental payments. This agreed-upon period may involve a complete shut-down of your business with restrictions on sales. You may remain responsible during this period for things like taxes, maintenance and insurance or your landlord may agree to a period of total abatement and a subsequent recovery term during which you are responsible only for taxes, maintenance and insurance before resuming regular rental payments.
In exchange for this relief, you might agree to increased rental rates after the grace period, a longer rental commitment and/or the inclusion of a percentage rent clause in your lease by which your landlord is entitled to participate in the rebound of your sales for a certain period of time. If your lease is already a percentage lease, you might agree to lower the set amount of gross sales to be met for the percentage rent to kick in or increase the percentage of gross sales to which the landlord is entitled for the remainder of the term.
Negotiations can have a variety of outcomes and often depend on the landlord’s perception of the creditworthiness and long-term viability of the tenant and what concessions the landlord can make based on its obligations to third parties like municipalities and lenders.
It is important to document all negotiations and agreements on paper and to agree upon clear dates or specify a timeframe such as “when the state of emergency is lifted”; state whether basic rent, additional rent or all rent is being deferred or abated and describe how deposits, if any, are to be applied. If you are not in default under the lease, pre-pandemic, consider including a clause in your new agreement that confirms this. If you are in default under the lease, pre-pandemic, the landlord will reserve its rights in default under the original lease. Negotiations can have a variety of outcomes and often depend on the landlord’s perception of the creditworthiness and long-term viability of the tenant and what concessions the landlord can make based on its obligations to third parties like municipalities and lenders.
Whether you are a landlord or tenant, you should stay informed of the requirements of authorities to report infectious diseases, close for quarantine periods or clean the premises; think about actions you can take to help prevent the spread of COVID-19; keep your landlord or tenants updated as the situation progresses; keep clear records of all communications, particularly involving changes to lease terms; review your insurance policies; and for any new leases, carefully consider clauses dealing with infectious disease, harm to health, access and suspension and reduction of rent.
When in doubt or if you require assistance interpreting your lease, we encourage you to contact us for legal advice before making decisions, such as ceasing to pay rent or attempting to terminate your lease. We are also available to assist you with drafting new commercial leases to ensure that your interests are protected in the event of a future pandemic or other circumstance in which your contractual rights may be compromised.