Defaulting Commercial Tenants
COVID-19 Pandemic – Commercial Retailers Defaulting Rental Payments Increases
In the face of the global COVID-19 pandemic that is currently plaguing the world, some commercial retailers have been forced to close their doors. With no income, the likelihood of these commercial retailers defaulting on their rental payments increases. What should the commercial landlord do with the defaulting tenant taking into account the world at large?
The commercial landlord has many options available. The landlord should first provide a default curing period. Often there are stipulations in the tenancy agreement itself which supply the curing period, but if there isn’t, the landlord should consider extending a curing period unless the landlord seeks to immediately terminate to regain possession of the premises.
The landlord should also consider a variety of tenant concessions unless as stated previously, the landlord wants to regain possession of the premises. Some examples of concessions would include:
- Basic Rent abatement or deferral;
- Basic Rent suspension for defined periods (i.e. 3-6 months or longer depending on the nature of the tenancy);
- Basic Rent deferrals for a defined period and a corresponding increase in Basic Rent at a point in the future to make up for the Basic Rent deferral;
- Either eliminating or reducing the obligation to pay Basic Rent and replacing it with the requirement to pay Percentage Rent for a defined period of time;
- Abating or suspending both Basic Rent and Operating Costs. Typically landlords like to recover at least their out of pocket expenses such as realty taxes, insurance, utilities still and maintenance costs;
- Reduction or elimination of administrative fee and/or management fee component of operating cost charge;
- Reduction or elimination of promotional and marketing fees;
- Reduction of services offered and performed at the property to effect a reduction in operating costs to be charged to tenants during the COVID pandemic;
- Depending on the size of the property, number of tenants and nature of the tenancies in a given property, a landlord can consider a reduction of services provided to tenants during the state of emergency, which would potentially reduce operating costs;
- If the landlord would rather that a particular tenant vacate its premises, then the landlord may consider building in an automatic termination or an option to terminate for the landlord.
- Ensure that any concession you agree to clearly provides the following:
- a consideration clause;
- when the concession expires;
- that the lease is otherwise in full force and effect and remains unamended;
- time shall continue to remain of the essence;
- the concession is not a waiver of any other clause in the lease;
- an indemnitor signature, if applicable.
Further options available to the landlord include terminating the lease, suing for arrears and distraint.
If the landlord elects to terminate the lease, the tenant will have to vacate the premises. This remedy would not be advisable if the landlord wants the tenant to remain in the premises, does not have a replacement tenant for the premises or if the landlord does not intend to use the premises themselves.
If the landlord sues for arrears, this action affirms the tenancy meaning the landlord can’t sue for arrears and then terminate the lease for failure to pay those same arrears.
Distraint allows a landlord to seize the tenant’s goods on the premises with a view to eventually having those goods sold to pay for the arrears of rent. There are special rules that a landlord must adhere to when exercising their right of distraint. They must only seize and sell those goods necessary to pay the rent arrears, there has to be an appraisal of the goods and the goods that are seized have to be the tenant’s goods. Also, similar to suing for arrears, if this option is chosen, then the lease will have been affirmed and the landlord cannot terminate for that same breach.
If you need legal advice with regard to a commercial tenancy please contact Heath Law LLP at 250-753-2202.