Canada: Update On Rent Relief For Canadian Small Businesses

On Friday, April 24, 2020 Prime Minister Trudeau announce more information regarding the Canada Emergency Commercial Rent Assistance ("CECRA") program. When it was initially announced on April 16, 2020, little more was known about the CECRA program than that it would assist small businesses with rent for April, May and June. See our blog post regarding the initial announcement here.

What do we know Canada Emergency Commercial Rent Assistance program?

The new details about the CECRA program announced by Trudeau on Friday were confirmed in a news releases from the Prime Minister's office. The focus of the announcement was that the CECRA program will lower rent for small businesses that have been affected by COVID-19 by 75%. However, the additional details announced reveal that 75% lower rent for eligible businesses may be an oversimplification of what the program will offer.

The additional details announced are as follows:

• The program will provide forgivable loans to qualifying commercial property owners to cover 50% of three monthly rent payments that are payable by eligible small business tenants who are experiencing financial hardship during April, May, and June.
• The loans will be forgiven if the mortgaged property owner agrees to reduce the eligible small business tenants' rent by at least 75% for the three corresponding months under a rent forgiveness agreement, which will include a term not to evict the tenant while the agreement is in place. The small business tenant would cover the remainder, up to 25% of the rent.
• Impacted small business tenants are businesses paying less than $50,000 per month in rent and who have temporarily ceased operations or have experienced at least a 70 per cent drop in pre-COVID-19 revenues. This support will also be available to non-profit and charitable organizations.

A separate news release from the Office of the Premier of Ontario, Doug Ford, confirms and expands upon these additional details. Notably, it adds that the CECRA will be administered by the Canada Mortgage and Housing Corporation (CMHC) and that it will be available until September 30, 2020. It also provides some additional details regarding the eligibility criteria for tenants and property owners, at least in the Province of Ontario.

What does the CECRA mean for eligible small business tenants?

Although the CECRA program will be administered through property owners, the criteria for qualification is partially based on the tenant. To qualify, as an eligible small business tenant the following conditions must be met:

• Be paying less than $50,000 per month in rent; and
• Be a non-essential business that has either:
  • Temporarily ceased operations due to COVID-19; or
  • Experience at least a 70% drop in pre-COVID-19 revenue (determined by comparing revenues in April, May or June to the same month in 2019 or alternatively compared to average revenues for January and February 2020).

While non-profits and charitable organizations will also qualify for the CECRA program, it remains unclear whether they will have to meet the same conditions.

Since qualifying as an eligible small business tenant is only part of the criteria, meeting these conditions does not mean a business will be able to access the CECRA program. Indeed, the program is administered through property owners and contingent upon their cooperation. In order to participate, property owners will have to forego at least 25% of the regular rent for the months of April, May and June.

Therefore, some eligible small business tenants may not be able to access the CECRA program. A CBC article released shortly after the announcement noted that this aspect of the program was subject to immediate criticism from several fronts.

What does the CECRA mean for commercial property owners?

The news releases from the Prime Minister's office indicate that the CECRA program will provide qualifying property owners with forgivable loans that will cover 50% of the rent payments payable by eligible small business tenants for the months of April, May and June.

Both the federal announcement and the provincial announcement in Ontario confirm that a component of the CECRA program will be a condition that property owners must enter into a rent forgiveness agreement with the eligible small business tenant whereby they agree:

• to reduce the rent by at least 75% for April, May and June; and
• not to evict the eligible small business tenant while the agreement is in place.

The details announced be the federal government seem to indicate that the loans will be available to any commercial property owner with an eligible small business tenant, and that that the rent forgiveness agreement conditions are only required in order for the loans to be forgiven. However, the announcement from Premier Ford's office is clear that the rent forgiveness agreement conditions are a pre-requisite for obtaining the loans. Given the lack of clarity in the details announced by the federal government, it is more likely that rent forgiveness agreement conditions will be a requirement for obtaining a loan in the first place. Assuming this is correct, all of the CECRA loans would be forgiven if the commercial property owners enter into and respect the terms of the rent forgiveness agreements.

It follows, that in order to participate in the CECRA, commercial property owners must be willing to forgo at least 25% rent payable by eligible small business tenants for the months of April, May and June.

Where a property is secured by a mortgage, the details announced by the federal government indicate that the loans will be disbursed directly to the mortgage lender. Their announcement was unclear with respect to whether and how the program would apply to property owners without a mortgage. However, there is some indication in Premier Ford's news release that those property owners will not be left out:

If a property owner does not have a mortgage secured by a commercial rental property, the property owner should contact CMHC to discuss program options, which may include applying funds against other forms of debt facilities or fixed cost payment obligations (e.g. utilities).

What questions remain?

Here are some of the questions that remain unknown:

• When will applications open and what will the application process look like? CMHC has yet to publish anything about the program.
• Will non-profits and charitable organizations have to meet any eligibility criteria?
• How will rent for the months of April, May and June be calculated where it is not a fixed amount (e.g. percentage rent, common area maintenance charges)?
• Will the program be available to all commercial property owners that don't have a mortgage and, if so, what options will there before for disbursement of their loans?
• Will commercial property owners be required to provide this program, and if so how will that be enforced?
• As the loan is forgivable only if the program terms are complied with, what happens if a tenant fails to qualify but misleads their landlord with regards to qualification?