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Bulletin: Rent Deferral and Rent Abatement Agreements

Apr 08, 2020

By: Commercial Leasing Group

April 1st has come and gone and landlords are now faced with the question of what to do with tenants who have not paid April rent. Some tenants are trying to rely on force majeure clauses to excuse the payment of rent. A force majeure clause does not excuse the tenant from paying rent, except in an exceptional circumstance where it expressly provides that a force majeure event does excuse the tenant from paying rent. Consequently, virtually all tenants will be in default under their leases unless their landlords have offered or agreed to some form of rent relief.

What landlords can do with tenants who have not paid rentThe two most common types of rent relief are rent deferral and rent abatement. Under a deferral, the payment of rent is postponed until an agreed upon date, at which time the tenant must repay the deferred amount to the landlord. In the case of an abatement, the tenant’s obligation to pay all or part of rent is temporarily suspended.

Below are some landlord and tenant considerations when deciding the terms of any rent relief:

  • Tenant’s Specific Circumstances – Although many tenants are suffering financially at this time, some tenants are maintaining a reasonable level of business activity, and a few are actually experiencing stronger sales. As a result, relief should be granted on a case-by-case basis. Landlords should request and review tenants’ financial statements (including its monthly operating statements) before granting any relief.
  • Type of Relief – Is the landlord forgiving rent (i.e., abatement) or only agreeing to a deferral of rent? Should relief be granted for the entire monthly rent or just a portion thereof? It is important when landlords are determining the amount of relief to keep in mind that although a landlord may benefit from COVID-19 mortgage deferrals, common area maintenance expenses and realty taxes will likely not be deferred and may, in fact, even be higher due to the additional costs of disinfecting and cleaning upgrades. Although they may be sympathetic to the plight of their tenants, landlords should ensure that they have sufficient cash flow before agreeing to any form of relief.
  • Repayment Terms – If a deferral is granted, when is repayment required? Will interest accrue on the deferred amounts, and if so, at what interest rate? Will repayment be amortized over a certain period or payable as a lump sum? Amongst our retail tenants, we are seeing some major landlords offer deferrals with repayment in installments during the fall months when tenant’s sales are generally stronger. From a landlord’s perspective, it is important that repayment of any deferred rents be scheduled well before the end of the term, as the threat of termination for non-payment of rent is less effective closer to the expiry date.
  • Payment on Demand – Although there may be a repayment plan expressly contemplated in the rent deferral agreement, it is important that the landlord has the right to demand immediate payment of the deferred rent if the tenant is in default under the lease, if the lease is terminated for any reason whatsoever (including, for example, damage and destruction), upon a transfer of the lease, if the tenant becomes bankrupt or insolvent, or if the landlord believes that the tenant’s ability to repay the deferred rent or to perform the terms of the lease is impaired. Given that rent is not being forgiven in these circumstances, the landlord needs to be able to recuperate the deferred rent where repayment appears to be at risk.
  • Confidentiality – Given that rent relief should be determined on a case-by-case basis, landlords should ensure that tenants keep the terms of their rent relief confidential. One way to motivate tenants to abide by this term is to require immediate repayment of the rent relief, together with interest, if the tenant fails to respect the confidentiality provision.
  • Landlord Incentives – Unless deferral or abatement is expressly provided under the lease, most tenants are at the mercy of their landlord when asking for relief. As a result, tenants may wish to offer some incentive to the landlord such as extending the term of the lease by the same number of months as the abatement, offering additional security such as a personal indemnity or general security interest, agreeing on the landlord’s right to terminate early for sale or demolition, or deleting special rights of the tenant such as the right to renew or expand.
  • Landlord Termination Right – In some cases, landlords may already have a poorly performing tenant and the pandemic has only exacerbated the tenant’s dire financial situation. However, given the difficulty in leasing space in this economic climate, the landlord may be willing to grant a struggling tenant a rent deferral in exchange for securing an early termination right, which may be exercised in the future once the landlord is able to find a more suitable tenant.

At Minden Gross LLP, we are sympathetic to both landlords and tenants during these unprecedented times and are happy to do what we can to assist with finding a win-win solution for both parties. If you have any questions regarding commercial landlord and tenant issues, please contact any member of the Commercial Leasing Group.

Stephen Posen
Chair – Commercial Leasing Group
e: sposen@mindengross.com
p: (416) 369-4103

Michael Horowitz
Partner - Commercial Leasing Group
e: mhorowitz@mindengross.com
p: (416) 369-4121

Christina Kobi
Partner - Commercial Leasing Group
e: ckobi@mindengross.com
p: (416) 369-4154

Boris Zayachkowski
Partner - Commercial Leasing Group and Commercial Real Estate Group
e: bzayachkowski@mindengross.com
p: (416) 369-4117

Benjamin Radcliffe
Partner - Commercial Leasing Group
e: bradcliffe@mindengross.com
p: (416) 369-4112

Melodie Eng
Associate - Commercial Leasing Group
e: meng@mindengross.com
p: (416) 369-4161

Steven Birken
Associate - Commercial Leasing Group
e: sbirken@mindengross.com
p: (416) 369-4129

Leonidas Mylonopoulos
Associate - Commercial Leasing Group
e: lmylonopoulos@mindengross.com
p: (416) 369-4324

Catherine Francis
Partner - Litigation Group and Bankruptcy and Insolvency Group
e: cfrancis@mindengross.com
p: (416) 369-4137

Ian Cantor
Partner - Litigation Group
e: icantor@mindengross.com
p: (416) 369-4314

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