Bryce Kustra, Luke Stretch, Lisa Wang
Jun 23, 2020
Last updated August 16, 2020
On July 23, 2020, the Commercial Tenancies Protection Act (the CTPA) came into force. This Act protects eligible commercial tenants from evictions, late penalties and rent increases. It is retroactively effective from March 17, 2020 until August 31, 2020.
The CTPA 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. The CTPA indirectly encourages participation in the federal program by substantially limiting the remedies available to landlords in the short term.
The CTPA joins similar provisions that have been passed or proposed in other provinces in response to the financial impact of the pandemic on small businesses. Ontario’s Protecting Small Business Act updates the Commercial Tenancies Act and is retroactively effective from May 1, 2020, onwards. Québec’s An Act to restart Québec’s economy and to mitigate the consequences of the public health emergency declared on 13 March 2020 because of the COVID-19 pandemic will address the time period from March 13, 2020 onwards once it passes. British Columbia’s Commercial Tenancy (COVID-19) Order (Ministerial Order No. M179) and Emergency Program Act also imposes a moratorium on eviction for tenancy agreements; however, it is only effective from May 29, 2020, onwards.
Act and regulation details
Any non-compliance by the landlord to the CTPA will be regarded as a substantial breach of the tenancy agreement itself and tenants may bring action accordingly. The main points of the CTPA [PDF] are outlined below:
- Application: The Act only applies to specific types of commercial premises as prescribed by the accompanying Commercial Tenancies Protection Regulation [PDF]. There are two main types of commercial premises that the Act applies to. First, the CTPA applies to commercial premises where the tenants and landlords are eligible for CECRA but are not part of the program for the sole reason that the landlord has not, as required to be eligible for the program, entered into a rent reduction agreement with the tenant that includes a moratorium on eviction. 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 impacted by COVID-19. “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 70% decline in pre-COVID-19 revenues.
Second, the CTPA applies to any commercial premise where the rent is less than $50,000 per month, the tenant’s gross annual revenue is less than $20 million (including revenue from all foreign jurisdictions and consolidated at the ultimate parent level), and the tenant either experienced a “substantial loss of revenue” in April, May, and June 2020 or received a public order or enactment to close the premises pursuant to the public health emergency. A “substantial loss of revenue” is defined as at least a 25% decrease in the tenant’s total gross revenue or monthly revenue in April, May and June 2020 as compared to the applicable base period (at the tenant level – not consolidated with its parent). The 25% threshold is lower than the 70% threshold under the CECRA, thus expanding the pool of landlords and tenants that the CTPA applies to.
Further, the definition of a tenant includes an occupant under a sublease, meaning the Act applies to not only conventional commercial landlords, but also non-real estate companies that have subleased excess space. The CTPA does not apply to lease agreements entered after March 17, 2020 (subject to certain unique exceptions).
- When: The CTPA applies 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 Act 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 the CTPA are void during this period. Evictions or terminations before June 16, 2020, are not reversed by the CTPA.
- Exceptions: A landlord may still evict a tenant or terminate a lease for non-COVID-19-related reasons as set out in the CTPA. 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. 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/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 which 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. If such rent increases were paid by the affected tenant after March 17, 2020, then the affected landlord must refund 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 CTPA and Regulation are ambiguous on what happens if the landlord and tenant are unable to agree on the payment plan. 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
The CTPA has the greatest impact on commercial landlords who have not enrolled in the CECRA program. Landlords previously reluctant to enter the CECRA may now be pushed to submit applications, as remedies otherwise available become severely limited. Because of the CTPA’s retroactive application, landlords must consider previous dealings with small business tenants and evaluate whether any actions taken fall under those prohibited by the Act. Furthermore, landlords sometimes issue a notice of default but reserve the exercise of further remedies while determining the optimal business outcome. This Act restricts 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 CTPA restricts 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 Act.
The application of the CTPA 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.