Bryce Kustra, Luke Stretch, Lisa Wang
Jun 23, 2020
On June 16, 2020, the Alberta Legislature introduced Bill 23: Commercial Tenancies Protection Act. This bill aims to protect eligible commercial tenants affected by the COVID-19 pandemic from evictions, late penalties and rent increases. If passed, it will be retroactively effective from March 17, 2020, until August 31, 2020. The bill is expected to not only protect small tenants that fit into the Canada Emergency Commercial Rent Assistance program, but also larger tenants that have been negatively affected by the COVID-19 pandemic.
Bill 23 supplements the Canada Emergency Commercial Rent Assistance program (CECRA), a federal program announced April 24, 2020. CECRA provides financial support to small businesses negatively affected by the COVID-19 pandemic by providing forgivable loans to their commercial property owners to offset 50% of rent payable for the months of April, May and June 2020. To qualify, commercial landlords and tenants must enter an agreement reducing rent for the applicable months by 75% and precluding evictions during that period.
Due to perceived administrative burden and risk, applications for support through CECRA have been much lower than expected. Bill 23 indirectly encourages participation in the federal program by substantially limiting the remedies available to landlords in the short term.
Bill 23 joins similar provisions that have been proposed in other provinces in response to the financial impact of the pandemic on small businesses. Ontario’s Bill 192: Protecting Small Business Act updates the Commercial Tenancies Act and will be retroactively effective from May 1, 2020, onwards. Québec’s Bill 61 will address the time period from March 13, 2020, onwards. British Columbia’s Ministerial Order No. M179 under the Emergency Program Act also imposes a moratorium on eviction for tenancy agreements; however, it is only effective from May 29, 2020, onwards.
Any non-compliance by the landlord to the bill will be regarded as a substantial breach of the tenancy agreement itself and tenants may bring action accordingly. The main points of Bill 23 [PDF] are outlined below:
- Application: The bill will only apply to specific types of landlords and tenants as prescribed by regulation (not yet released as of this Update). We assume it will, at a minimum, affect tenants and landlords that are eligible for CECRA but are not yet part of the program. CECRA eligibility includes the following (without listing the other program participation requirements):
- The landlord must own “commercial real property” occupied by one or more small businesses affected by the COVID-19 pandemic. “Commercial real property” is defined as any commercial property with small business tenants, even if there are residential or mixed-use tenants present.
- The tenant must be an affected small business, paying no more than $50,000 in monthly gross rent per location and generating no more than $20 million in gross annual revenues (consolidated at the ultimate parent level), which has experienced either a business shut-down or at least a 70% decline in pre-COVID-19 revenues.
The Press Release accompanying the bill suggests that it will apply to a broader set of tenancy agreements than those eligible for CECRA, including businesses that have lost 25% or more revenue due to the pandemic. Further, the definition of a tenant includes an occupant under a sublease, meaning the bill may apply to not only conventional commercial landlords, but also non-real estate companies that have subleased excess space. Notably, the bill will not apply to landlords and tenants that are not in the classes listed in the regulations. Further, the bill does not apply to lease agreements entered after March 17, 2020 (subject to certain unique exceptions).
- When: The bill will apply to the time period from March 17, 2020, until the “emergency end date,” currently defined as August 31, 2020 (the Emergency End Date).
- Prohibition on evictions and terminations of tenancy agreements: Until the Emergency End Date, affected commercial landlords are restricted from taking the following actions with respect to an affected tenant:
- issuing a notice of default (retroactive to March 17, 2020 — previously issued notices of default to affected tenants will be void);
- distraining for rent (retroactive to March 17, 2020 — previously completed instances of distraint will be void — the bill is unclear on how a landlord is supposed to “unwind” the distraint if the seized goods have already been sold to a third party);
- evicting a tenant or otherwise terminating a tenancy agreement; and
- employing other remedies;
in response to incidents or actions caused by the COVID-19 pandemic. These include non-payment of rent (including operating costs), application of a force majeure clause, frustration of contract and breach of any continuous occupancy clause. Provisions in a tenancy agreement that are inconsistent with this bill would be void during this period. Evictions or terminations before June 16, 2020, will not be reversed by this bill.
- Exceptions: A landlord may still evict a tenant or terminate a lease for non-COVID-19-related reasons as set out in the bill. Examples include
- damage to the premises, or
- failing to vacate the premises after a tenancy has expired for a reason unrelated to the COVID-19 pandemic.
- No late fees or penalties: Retroactive from March 17 until the Emergency End Date, affected landlords cannot charge any penalties or fees for late or non-payment of rent from affected tenants. It is unclear whether this is also intended to prohibit market-rate interest on late payments. Subsequent readings of the bill may clarify this ambiguity. If such fees were paid by the affected tenant after March 17, 2020, then the affected landlord must refund the fees or provide the tenant a credit for that amount. No deadline for the refund is specified.
- No rent increase: Retroactive from March 17 until the Emergency End Date, affected landlords cannot increase rent in a current tenancy agreement with an affected tenant or one that expired or terminated during the time period and was re-entered into later. It is unclear whether this is also intended to prohibit pre-negotiated rent increases that were to automatically come into effect on a specific date, which is arguably a mutual agreement to increase rent, not the landlord unilaterally imposing a rent increase. Subsequent readings of the bill may clarify this ambiguity. If such rent increases were paid by the affected tenant after March 17, 2020, then the affected landlord must refund the difference in rent or provide the tenant a credit for that amount. No deadline for the refund is specified.
- Mandatory rent payment plan: If an affected tenant is unable to pay rent because of COVID-19-related reasons, the landlord and tenant are both required to enter into a payment plan. The bill is ambiguous on what happens if the landlord and tenant are unable to agree on the payment plan. Subsequent readings of the bill may clarify this ambiguity. This payment plan may extend beyond August 31, 2020.
- No waiver: An eligible tenant cannot waive the above rights or protection. Any release or waiver is considered void.
Implications for commercial landlords
Bill 23 is expected to have the greatest impact on commercial landlords that have not enrolled in the CECRA program. Landlords previously reluctant to enter CECRA may now be pushed to submit applications, as remedies otherwise available become severely limited. Because of Bill 23’s retroactive application, landlords must consider previous dealings with small business tenants and evaluate whether any actions taken fall under those prohibited by the bill. Furthermore, landlords sometimes issue a notice of default but reserve the exercise of further remedies while determining the optimal business outcome. This bill would restrict this option for affected landlords until August 31, 2020, thereby limiting their strategic planning with a defaulting tenant.
Affected landlords will want to carefully review the provisions of the relevant lease before applying the deposit to arrears of rent. Specifically, the bill would restrict an affected landlord’s ability to exercise remedies, so landlords will want to consider whether the lease provisions simply allow the application of the deposit to arrears as a payment mechanism (the more common approach) or whether the application of the deposit is a specific landlord remedy under the lease, in which case it may be prohibited by the bill.
The application of the bill to subleases is not surprising but potentially onerous given that tenant/sublandlords may be subleasing the space because they are, themselves, in financial distress. Sublandlords may in some cases find themselves caught in the middle.
Finally, landlords may need to consider and plan for the possibility of payment plans with tenants should the need arise. In connection with that, landlords should consider any consents for voluntary abatements of rent or workout plans that may be required from the landlord’s mortgage lender under the mortgage loan documents.