On Friday, April 24, 2020, Prime Minister Justin Trudeau announced that the federal government had reached an agreement in principle with all provinces and territories to implement the Canada Emergency Commercial Rent Assistance (CECRA) program to provide rent relief for small and medium-sized businesses that have been impacted by the COVID-19 crisis.
CECRA promises to lower rents for eligible tenants by 75 per cent for payments due in April and May, retroactively, and June.
While the announcement was expected, full details of the program were not disclosed, and as such, commercial landlords and tenants are left with many questions as to implementation and eligibility. This bulletin is intended to review what we know about the program as well as bring to light some of the issues that both landlord and tenants need to be aware of.
As a starting point, it is important to highlight that even if all eligibility criteria are satisfied, CECRA is not a mandatory program. In other words, it appears that both landlords and tenants will need to cooperate with each other and jointly elect to shelter under the program in respect of the relevant premises. Needless to say, prior to opting in, both landlords and tenants will need to carefully consider whether the CECRA program adequately meets their needs or if alternative arrangements (outside of the program) would be preferable. This analysis should be conducted on a lease-by-lease basis, as the answer may differ from one tenant to another and from property to property.
WHAT WE KNOW SO FAR
Announced details of the CECRA program include:
The government will provide forgivable loans to qualifying commercial landlords that cover 50 per cent of the rent they are owed for April, May and June if the landlord agrees to drop rents by at least 75 per cent. However, this may be subject to the qualification noted below regarding the foregoing of profits by landlords.
Tenants and landlords will each cover 25 per cent of the costs, with the provincial and federal governments sharing the remaining 50 per cent. In other words, subject to the profit qualification, if the landlord agrees to absorb (waive) at least 25 per cent of the rent, the provincial and federal governments will provide 50 per cent of the rent to the landlord by way of a forgivable loan.
The Canada Mortgage and Housing Corporation will administer and deliver the program.
The loans will be contingent on the signing of rent forgiveness agreements between tenants and landlords that must include a moratorium on evictions for the three months the program is in effect.
Eligible tenants are those that pay less than C$50,000 per month in rent and have either temporarily ceased operations or have experienced a decline in pre-COVID-19 revenues of 70 per cent or more. No guidance has been provided as to how these criteria are to be applied to tenants (or groups of tenant affiliates) that have multiple locations, including locations with rent payments exceeding the threshold and other locations falling below the threshold, or locations where operations have ceased and other locations where they have not.
The program will also be available to non-profit organizations and charitable entities.
The Prime Minister has indicated that more news on potential support for larger businesses will follow in the coming days.
The program is expected to be operational in mid-May, with commercial property owners lowering rents for the months of April and May, retroactively, and June. Program applications will be accepted until September 30, 2020.
Additional details will be shared once final terms and conditions are available.
NO PROFIT? WHAT’S NOT SO CLEAR
In Ontario, the provincial government has clarified that government funding and the remaining monthly tenant rent-payment obligations (i.e., 25 per cent) will not cover the property owner’s profits derived from rental income. Therefore, according to the Government of Ontario, in applying for this program, the property owner must agree to forego profit for the three-month period. It is not clear how this aspect of the program will be applied or if it will somehow affect eligibility or the quantum of loan funding made available to the landlord. We will simply have to wait for further details.
Although the remaining provinces and territories have not released details on this specific point, a similar approach may taken in other jurisdictions.
The CECRA program appears to have been allocated approximately C$900-million in government funding. It is unclear what happens if total applications received exceed this amount. One possible outcome is that the available funding will be distributed on a pro-rata basis to all applicants. This would serve to reduce the payment a landlord is otherwise expecting to receive. Another possible outcome is that the program will be closed once funding is tapped out, such that landlords who are late in applying will not receive any loan proceeds despite the fact they may have already irrevocably committed themselves to waiving rent for April, May and June.
For further information, please contact a member of our Commercial Real Estate group.
Please visit our COVID-19 Resource Centre to learn more about how COVID-19 may impact your business.
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