Landlords: How do you Spell (Rent) Relief?
Alberta is now in its fifth year of a depressed economy, and the misery has recently been significantly worsened by the double blows of a severe drop in oil prices and a pandemic. Many Alberta businesses and non-profit organizations are suffering, and we expect a major surge in lease defaults and tenant requests for rent relief in the coming months.
As a landlord of commercial premises (or landlord advisor such as a commercial property manager or commercial property broker), you must carefully navigate the tricky waters of lease default, enforcement, insolvency and bankruptcy, while attempting to reconcile the goal of full lease compliance with the harsh business realities now facing many commercial premises tenants.
If you have a tenant defaulting on rent, your first major decision is whether you should terminate the lease, or work with the tenant to keep the lease in place on some altered basis. We can guide you through the stay/go decision-making process, and will devote a separate article to it. This article, though, assumes you have chosen the path of keeping the lease and tenant in place.
How should you deal with tenants seeking rent relief? We have some suggestions:
- Vigilance – Diligence – Prudence – not a police force motto, but it should be your motto. Be proactive. Get onsite. Meet your tenants. Look for telltale signs of business distress. Don’t wait until your tenant comes knocking, seeking rent relief. (Or, worse yet, to drop off the keys).
- Stay true to the Lease – struggling tenants might be slow with the rent, or might make only partial payments. Not wanting to be heavy-handed, you’ve let things slide. A pattern of late payment, or part payment, or both, develops over the months. You reach a limit and take steps to enforce or terminate the lease, but the tenant disputes your right to do so, based on your “kind condoning” of the pattern of slow/part rent payment. At law, because your course of conduct has deviated from the lease, you might be prevented (estopped) from promptly and strictly enforcing the lease. In some cases, you might lose your right to enforce the lease for the breaches that have occurred.
TIP # 1: Enforce the Lease. Always give notices of payment default. Follow up with progressive lease enforcement. While the exact steps will differ from lease to lease, you should take diligent, escalating steps to preserve and promote the landlord’s rights and remedies.
TIP # 2: Document lease breach waivers. If you are willing to permit a late payment (or some other breach), then document the breach and your waiver of it. This prevents the tenant from asserting that you have waived or condoned the breach, and preserves your right to rely on the lease provisions for future breaches. Your kindness can’t be used against you.
- Knowledge is Power – Is the business viable? Would it be viable at a lower rent? Should the lower rent be temporary, or permanent? Should it be a rent abatement, or a rent deferral? Under what circumstances will you recapture deferred rent? To make an informed decision, you need information.
TIP # 3: require the tenant to provide full financial disclosure. This disclosure can include annual financial statements, year-to-date financial statements, lists of accounts receivable and accounts payable, a summary of secured creditors (amounts, security held), cash flow projections and business plans. If there are indemnitors, get personal financial information from them as well.
- It’s a two way street – We’re not suggesting exploiting a vulnerable tenant – that’s hardly helpful to a viable longer term relationship. But, beyond the immediate goal of tenant financial stability (or viability), you should look past the immediate crisis to the longer term success of your property development. Can the lease be amended to reflect changes in the development or your future plans for the development?
TIP # 4: Consider your changed circumstances. Review the lease. Consider the future of the development. If the lease relationship is to be reset, consider changes to the permitted use, removing an exclusivity provision, removing or amending expansion options or rights of first refusal, adding a right of early termination, and similar strategic business terms, so that he tenant’s lease is more attuned to the present and future of your development.
TIP # 5: Consider the tenant’s changed covenant. The lease might reflect concessions made to a tenant with a stronger financial covenant -- concessions you wouldn’t make to a financially weaker tenant. If the lease relationship is to be reset, tailor the business terms and concessions to the tenant as it now is.
- Get your lender on board – if your development is subject to mortgage financing, involve your lender. Reduced rent = reduced cash flow. Can you stay onside your borrower covenants? Do you need lender consent to lease amendments touching on rent?
- Document the Deal – It’s best practice to enter into a lease amendment agreement which documents the defaults, the waivers, the rent relief, and other concessions. Such an agreement removes all doubt about the scope and terms of the “deal”.
You’re not alone. We can help! We can advise and assist at every step:
- situation analysis – keep the tenant, or evict? We can walk you through the analysis factors.
- enforcement options – it seems every lease is different. Does the lease require notice of rent default? Is there a cure period? How do you give notice? Can you accelerate rent? What about rent distress? (Did you know you can’t distrain AND terminate at the same time?) Don’t blow yourself up. We can guide you through this minefield.
- enforcement process – we can prepare and serve the notices (and instruct the bailiffs, and assist in repossession and termination, if necessary).
- documents – we can prepare the waivers, notices, amendment agreements, financial disclosure forms, security agreements, et cetera. We can properly document every aspect of the process.
And, should there be a tenant bankruptcy or insolvency, we can guide you through your rights and options there as well.
For more information, contact a member of our Commercial Real Estate Law Team.