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May 21, 2020
Rent Relief Update #2- The Canada Emergency Commercial Rent Assistance Program
By way of update to our latest publication entitled “Rent Relief Update – The Canada Emergency Commercial Rent Assistance Program,” the Canada Mortgage and Housing Corporation (“CMHC”) has released an updated publication that provides further clarification on the details of CECRA and template forms that landlords can utilize when applying for the program. The publication and templates can be accessed through this link.
Some of the main highlights from CMHC’s publication include the following:
The eligibility requirements originally released by CMHC continue to apply. However, CMHC has clarified the following:
- CECRA will not apply to properties owned by federal, provincial and municipal governments, subject to certain exceptions where there are long-term leases with third parties to operate the property (such as airports, post-secondary institutions, hospitals, a pension fund, First Nation and any indigenous organizations and governments, Crown corporation with limited appropriations, designated as eligible under CECRA by CMHC);
- Small businesses that opened on or after March 1, 2020 are not eligible for CECRA;
- Property owners with or without a mortgage are eligible for CECRA; and
- CECRA will also apply to impacted tenants operating under a sublease.
What is included in and excluded from “Gross Rent”?
A significant issue that arose when CECRA was first announced was how “Rent” would be defined for the purposes of applying to the program. CMHC previously clarified that “Rent” for the purposes of CECRA means gross rent (being what is normally understood to include basic/minimum rent/net rent and additional rent). CMHC has provided further clarification on what is and is not included in the definition of gross for the purposes of CECRA.
The following is included in gross rent:
- Net rent/minimum rent/base rent
- Regular monthly instalments of operating costs
- Regular monthly instalments of property taxes payable to the landlord
- Regular monthly instalments of other additional rent amounts payable to the landlord (such as maintenance costs, repairs, utilities, management fees, etc.)
- Gross rent (in a gross lease)
- Percentage of sales rent paid (if applicable)
The following is excluded from gross rent:
- Indemnity payments
- Payments arising due to tenant default/landlord enforcement
- Payments arising due to landlord exercise of self-help remedies
- Interest and penalties on unpaid amounts
- Fees payable for discrete items or special services (for example: fees to landlord for reviewing plans, supervising work, considering requests for consent, performing exceptional tasks at tenant’s request)
- Reconciliation adjustment payments
- Amounts required under the lease agreement to be paid separately by the tenant to third parties (such as property taxes, utilities, insurers)
- Costs of non-monetary obligations (such as repairs and maintenance)
- Insurance proceeds or proceeds from other rent subsidy programs
When can landlords apply?
The application portal will be opening on May 25, 2020. As part of the application process, landlord must provide copies of the required rent reduction agreements and landlord and tenant attestations. The information released by CMHC indicates that landlords will need to first register for CECRA using the online portal and then subsequently file their applications. In anticipation of receiving a large volume of applications, CMHC is taking a staggered approach to registration, meaning registration will be open to landlords in various provinces at different times and will be fully open over a period of five days. The deadline to apply for CECRA is August 31, 2020.
CMHC has provided template forms that landlords can use (and in the case of the forgivable loan agreement, must use) when applying for CECRA. The templates include the following:
- Tenant or Subtenant’s Attestation (to be executed by a tenant or subtenant): The tenant attestation includes various statements that speak directly to the eligibility requirements of CECRA (such as confirmation that the tenant has experienced a 70% loss in revenues and does not generate more than $20 million in gross annual revenues). It also includes statements confirming that the tenant has pursued insurance proceeds available to it in respect of its losses and that it is not the subject of any actual or pending insolvency proceeding.
- Property Owner’s Attestation (to be executed by the landlord): The landlord attestation also includes statements to confirm eligibility for CECRA and the landlord’s alternative efforts to recover its losses from its insurer. However, it also contains language confirming that the landlord has delivered a rent roll to CMHC.
- Rent Reduction Agreement (to be executed by the landlord and tenant): The rent reduction agreement template is the key document in the CECRA application process and the one document that seems to have raised many questions from landlords and tenants. The template agreement prepared by CMHC provides that the reduction in rent is conditional on the landlord’s CECRA application being approved by CMHC. In addition, it provides that the landlord shall have no recourse to recover any of the rent being forgiven. This would extend to any subsequent reconciliation of additional rent payable by the tenant during the applicable reduction months where the landlord ultimately determines that the actual additional rent payable by the tenant exceeded the landlord’s original estimates. In those cases, the landlord cannot claim the full amount of the deficiency applicable to the forgiveness period. It must reduce the amount payable during the forgiveness period to align with the 25% cap in the rent reduction agreement (though it is not clear whether the landlord can claim an additional 50% through CECRA once reconciliations have been completed). Furthermore, the rent reduction agreement provides that the landlord will not serve any notice of default or seek eviction where the default relates to COVID-19 during the period commencing on April 1, 2020 and ending on the later of: (i) three months after the date of the landlord’s CECRA application; and (ii) the date that the tenant is no longer receiving any rent reduction (presumably June 30, 2020). This language seems to go a bit further than the requirements under CECRA, which simply require a moratorium on eviction. In addition, the moratorium on the delivery of any default notices for a period that could extend well beyond June 30, 2020 (if the landlord files its application on August 31, 2020, the moratorium would extend to November 30, 2020) also looks to be beyond the CECRA requirements previously announced by CMHC.
- Forgivable Loan Agreement (the terms of which must be agreed to by the landlord): The loan agreement requires that any amounts received by the landlord be applied first to reimburse tenants for rent paid in excess of the 25% required to be paid under the rent reduction agreement and second to costs relating to the property. The loan will not accrue interest and will not be repayable unless an event of default occurs. The loan agreement also contains a similar prohibition on the landlord’s ability to deliver notices of default and terminate the lease of the impacted tenants during the relevant period where the basis of the default notice is a lease default arising from COVID-19.
CMHC has not stated that the template forms must be used when applying for CECRA. Landlords and tenants are free to prepare their own form of agreement or modify the template agreements to suit their particular circumstances (save and except for the forgivable loan agreement, which appears to be mandatory and not subject to change). However, substantive changes to terms that are expressly required to be included in any agreement or document could result in an application being denied so care should be taken to ensure that the basic CECRA requirements are satisfied if anything other than the template forms are utilized.
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.