If major Canadian landlords continue to take a hard line on rent relief for retail tenants, they run the risk that “there will be tumbleweeds blowing through that mall three months, six months from now,” says Karl Littler, Senior Vice President, Public Affairs at the Retail Council of Canada.
There continues to be growing debate and controversy throughout Canada about major landlords who have not “stepped up” to help retail tenants in a meaningful way survive the growing economic crisis caused by the COVID-19 pandemic.
“Landlords are not in an expressly strong economic position. They may be in a strong strictly legal position but their economic position is pretty weak because in a very, very large swath of retail they have people that are not active in their bricks and mortar which is the asset that is provided by the landlord. They are not going to force everybody into insolvency. They’re going to sit if people ask for it and negotiate. Sure, they’re going to want it to be a deferral and they’re going to want it to be as short as possible but their ability to really do much to force the payment of rent in these circumstances is limited,” said Littler.
“Economically they have an interest in the survivability of all or most of their tenants. Let’s be clear. Some landlords are cutting deals, making deferral arrangements. They tend not to advertise it. But they are doing so. I think most landlords are sane enough to realize that if you kill off your future income source that’s probably not a wise long-term economic decision.”
An executive for a well-known Canadian retail chain said the public relations staff for several major Canadian landlords should be fired for allowing the landlords to handle this crisis the way they have so far.
The executive said those major landlords are well-funded through pension funds for example, and while many retailers closed their doors initially, shopping centres did not.
“You would think they would be stepping up and trying to keep their tenancy as healthy financially as possible and certainly a rent deferral does nothing. Look, if I have zero revenue in a location and I have rent whether I pay that rent now or by year end is irrelevant. I still have zero revenue for two months. It’s a help in the short term for cash flow but it really does nothing,” said the executive.
“At the end of the day the retailer is taking it on the chin and retailers have stepped up. So many of them committed to paying their associates for a period of time. We’re reaching the end of that time now and you’re starting to see layoffs. But where’s the landlord version of stepping up?”
A quarter of Canadian small businesses cannot pay their April rent/mortgage due to the COVID-19 pandemic, according to the Canadian Federation of Independent Business. The organization released results of its latest survey on Monday showing that hospitality is particularly hard hit with 44 per cent saying they cannot meet their rent obligations. Other sectors hard hit include arts, recreation & information (40 per cent), and personal services (32 per cent).
The survey also found:
Only one in five businesses now report being fully open (down from one in three last week);
86 per cent of small businesses believe government should make emergency money available to businesses that have been hard hit by COVID-19 to cover their fixed costs; and
42 per cent of business owners are worried about having to close their business permanently.
The CFIB is asking that the provinces move to protect commercial tenants from being evicted during the COVID crisis. That would be some temporary protection in cases where the landlord is not being reasonable.
CFIB has three main recommendations for governments:
Provincial governments should provide substantial commercial property tax relief for the duration of the crisis (at least 25 per cent reduction in annual total property tax bill);
The federal government should ensure that $10,000 of its Canada Emergency Business Account is forgivable to cover rent and other fixed costs and that eligibility criteria are such that businesses hardest hit and most at risk of closing permanently will have access to the money. The money should be made available as quickly as possible; and
Provincial governments should create a hardship fund with additional emergency money for businesses with significant revenue losses, significant cost increases and/or who are at risk of permanent closure due to COVID-19 (up to $5,000 per month for 3 months) to help small businesses pay rent and offset other fixed costs. Priority should be given to businesses that were forced to close and those not covered by federal programs.
“I am working around the clock assisting parties with these matters. What I’m trying to do is help clients to determine whether or not they wish to take what I think is a sort of more mature long-term view of these situations and not to act expeditiously,” said Wolf.
“What I’m suggesting to landlord clients is that they act reasonably with tenants understanding that the typical rules of rent relief are going to be difficult to apply because the typical rules of rent relief, and every landlord has a protocol for it, they usually involve an application process, and involve the disclosure of a series of business records and other information that is looking backward not looking forward. Prudent landlords are going to judge each case on an individual fact by fact basis and they’re going to determine what level of help does a tenant really need and does the landlord wish to provide that help.”
Wolf has a unique practice. He’s one of a handful of lawyers that does nothing but operational lease enforcement work for both landlords and tenants.
“I have never seen a situation such as this where landlords probably have more rights with less opportunity to actually use the rights,” he said. “It’s a right without any current remedy. Landlords don’t have a lot of mass enforcement options.”
He said a one-size fits all solution is the wrong way to approach this issue.
“Tenants want unconditional forgiveness of rent. Of course landlords don’t want that. They want deferral with interest. In between is going to be the dance around to get to a deal. Who’s going to give what up? Those sorts of negotiations are going to take a long time.”
Wolf said over the next one to six years there’s going to be a number of judicial decisions that will consider concepts in leases and refine them in the context of a pandemic.
Grace Yan, Director of Sales and Marketing, Recruitment for Coldwell Banker Commercial, said she’s spoken with some commercial tenants where the landlord has indicated that while they figure out the relief the rent is still payable.
“There are some commercial tenants that have been offered deferred rent. Overall the big landlord responses vary and are based on a case by case basis. The whole process has been frustrating for all parties involved and unless there is a direct order from Prime Minister Trudeau that all commercial and residential mortgages, rents, utilities and taxes be suspended it will continue to be a disaster. The current plan is inadequate and insufficient.” she said.
Yan said one of her clients is a medical doctor with 15 clinics in Calgary who has been attempting to renegotiate a lease with a major real estate landlord as ratios are not working and a struggle for most tenants.
“While in the middle of negotiating he was 10 days late for the rent – (the landlord) immediately terminated the lease and ordered he remove his belongings in five days. He attempted to remove his belongings and found out they changed the locks. In a time of crisis and global pandemic this is not how we treat people and furthermore medical professionals that we need in this crucial time,” said Yan.
Michael Kehoe, a Lead Ambassador with the International Council of Shopping Centers and broker/owner of Fairfield Commercial Real Estate in Calgary, said current economic conditions have stores and restaurants closed with little or no income.
“The situation is very fluid right now as landlords and tenants alike grapple with the new financial realities. The situation progressively will return to that new normal over time, but retail and food service tenants will need cooperation from their landlords. The weeks could turn into months for people to feel comfortable venturing out for non-essential shopping and restaurant dining. There will likely be an extended ramp-up period after that for any kind of normalcy to set in, with consumers spending freely and away from survival mode,” he said.
“It will be important for retail and food service tenants to be cash flowing in a positive manner with the full ability to pay contracted rents as soon as possible. Proactive landlords and tenants have the communication channels open with each other discussing such options as immediate fixed period unconditional gross or basic rent deferrals with extension of such provisions if needed and lease re-negotiation when and if required. Kick the can down the road, read your lease, talk to your lawyer and hope a clear path forward will emerge.
“It is abundantly clear that landlords need to be compassionate with their retail and food service tenants and the tenants need to be compassionate with their employees. For consumer real estate landlords, I liken it to the Mother Teresa approach versus the General George S. Patton approach where in these uncertain and unprecedented times the legal may be different from the practical when it comes to lease enforcement and tenant relations. Tenant retention is everything right now. The much-coveted shoppers and dining patrons will be watching and will vote with their feet and their wallets. Everyone in the consumer real estate chain should be channeling their inner Mother Teresa right now.”