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Apr 30, 2020

Rent Relief Update - The Canada Emergency Commercial Rent Assistance Program

By Monty Warsh, Kenneth Pimentel, Marco Gammone and Faruk Gafic

The Canada Mortgage and Housing Corporation (“CMHC”), the Crown Corporation responsible for administering the Canada Emergency Commercial Rent Assistance Program (“CECRA”) in partnership with the provincial and territorial governments, has released a publication that provides clarification on the details of CECRA. The publication can be accessed by clicking here. While CMHC has clarified certain aspects of CECRA, full details of the program (including how funds will be disbursed and how landlords can apply) are still being finalized.

Some of the main points of clarification include the following:

Rent Forgiveness

While previous government announcements have either been less than clear on the calculation of “Rent” or have expressly stated that landlords would not be entitled to include any profit component in the calculation of rent (meaning landlords would only be able to recover 75% of fixed costs as rent), the recent announcement from CMHC suggests that the calculation of rent for the purposes of CECRA means gross rent (being what is normally understood to include basic/minimum rent/net rent and additional rent). This change would not only simplify the calculation of rent for the purposes of CECRA, but will likely encourage many more landlords to opt into the program.

In addition, landlords who have collected any rent from their tenants in respect of the months of April, May or June 2020 in excess of the 25% of rent payable under CECRA would be required to refund the excess rent to the tenant, unless the landlord and tenant agree to apply the difference to the tenant’s rent account and credit such amounts to future rent owing as they come due.

The requirement that the landlord and tenant enter into a rent forgiveness agreement was confirmed by CMHC. However, CMHC has made clear that, in order to be eligible for CECRA, the landlord must not seek to recover the abated rent once the program is over.

While the details provided to date confirm that a rent forgiveness agreement must be signed and include certain provisions in order for the landlord to qualify for CECRA, it is unclear whether a template form of rent forgiveness agreement will be provided to landlords. A government-approved standard form of rent forgiveness agreement would streamline the approval process and not leave landlords guessing whether their form of rent forgiveness agreement complies with governmental requirements. If a standard form of agreement is not provided, landlords will need to take care in drafting their rent forgiveness agreements so as to ensure that all requirements are met, failing which they may inadvertently find themselves as being ineligible to have the loan granted under CECRA forgiven.

Eligibility

CMHC’s recent announcement has clarified certain of the eligibility requirements of CECRA. In particular, CMHC has confirmed that landlords must have a mortgage loan secured by a commercial property occupied by one or more small business tenants in order to be eligible for the loan. In addition, the landlord must have declared rental income on its tax return for tax years 2018 and/or 2019. This latter requirement could be interpreted to mean that landlords of properties that were acquired in 2020 may not be eligible for CECRA, though further clarification on this point is required. Nevertheless, CMHC has confirmed that alternative mechanisms will be implemented for those property owners without a mortgage on their property (though it is unclear whether owners of properties acquired in 2020 will also have alternative options available to them in the event that they are ineligible for the program).

Definition of “Impacted Small Business Tenant”

The definition of an “impacted small business tenant” has also been clarified. To qualify as an impacted small business tenant, the tenant must:

  1. pay no more than $50,000 in monthly gross rent per location;
  2. generate no more than $20 million in gross annual revenues, calculated on a consolidated basis (at the ultimate parent level); and
  3. have temporarily ceased operations or experienced at least a 70% decline in pre-COVID-19 revenues.
 

Clearly, CECRA is geared towards providing relief in relation to smaller businesses and not large retail tenants.

Our Commercial Leasing Group will continue to monitor developments and any new information that may arise in connection with CECRA. We are always available to assist landlords and tenants in navigating successful completion of relief under CECRA and to help overcome the hurdles presented by COVID-19. We are committed to keeping clients informed on matters pertaining to commercial leasing, including providing continued updates on interpreting CECRA as more details become known.

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