Carscallen Blog

COVID-19: Commercial lease considerations for Alberta businesses

Posted by Carscallen LLP on Mar 30, 2020 11:33:09 AM

Written by Deirdre Lanigan and Aron Balakrishnan

Due to the COVID-19 pandemic (the “Pandemic”), a number of Alberta businesses have now been ordered temporarily closed by the provincial government, including the majority of retail businesses, all public recreation facilities and private entertainment facilities, all dine-in services for restaurants, cafes and bars, and all personal services businesses.[1]

Many Alberta businesses that fall into these categories pre-emptively closed prior to the formal order to address factors such as:

  • the health and safety of their workforce and public patrons;
  • public perception or public pressure to close (despite previous government restrictions allowing businesses to continue operating with occupancy limits); and,
  • business considerations related to an inability to maintain operating expenses with occupancy restrictions, making it financially unfeasible for many businesses to remain open and operating.

Given that most Alberta businesses have closed and are without operating revenue as a result of the Pandemic, many of these businesses will be unable to pay their commercial rent during their closure, or will otherwise be in default under their leases for failure to satisfy one or more financial or operational covenants.

There are a number of legal considerations for both commercial landlords and tenants in light of the Pandemic and these defaults. First and most importantly, we recommend both sides contact a qualified commercial real estate lawyer to assist them with reviewing their commercial lease agreement(s), the rights and obligations of each party thereto, and to advise them on the relevant terms of their commercial lease.

Force Majeure under a Commercial Lease

For a discussion of force majeure provisions in commercial contracts including leases, please see our previous blog here

Commercial Rent Defaults in Alberta

Unlike British Columbia and Ontario, Alberta does not have a Commercial Tenancy Act. As a result, commercial tenancy disputes are governed by court decisions, referred to as the “common law”. The common law regarding the remedies ordinarily available to a landlord when a tenant defaults under its lease has been clearly established by case law from the Supreme Court of Canada (“SCC”).[2]

According to the SCC, a commercial landlord has the following four options if a commercial tenant breaches/repudiates its lease (for example, by not paying its rent, or ceasing to carry on business). Generally speaking, the landlord must decide between: (i) maintaining the existence of the lease and holding the tenant to its terms and conditions, or (ii) terminating the lease.[3]

Specifically, the landlord can:

  • Maintain the lease and sue the tenant for the amount of rent owed (and any damages), on the basis that the lease remains in force. This does not alter the commercial tenancy relationship between the landlord and tenant.
  • Maintain the lease and advise the tenant that, as landlord, he/she proposes to re-let the property on the tenant’s account and enter into possession on that basis.
  • Terminate the lease and evict the tenant while retaining the right to sue for rent accrued due, or for damages up to, the date of termination for the previous breach of the lease. In this situation, the landlord cannot sue for any prospective damages (future rents).
  • Terminate the lease and provide notice to the defaulting tenant that damages will be claimed for unpaid rent (for the unexpired period of the lease less the actual rental value of the premises for that period).[4]

 

Commercial Tenancy Disputes in Alberta

Commercial tenancy disputes are civil law matters in Alberta, governed by the courts who follow the precedent set by the SCC. Currently, both the Provincial Court of Alberta and the Alberta Court of Queen’s Bench (together, the “Alberta Courts”) have reduced the number of judges and courtrooms that are operational during the Pandemic. Alberta Courts that are still open are restricted to “urgent” or “emergency matters”, which we expect will not include most civil matters such as commercial tenancy disputes (at least initially).

As a result, landlords or tenants that experience a commercial tenancy dispute during the course of the Pandemic will not have immediate recourse in the Alberta Courts and this could continue in the coming weeks or months.

Consequently, the best course of action for both commercial landlords and tenants in these unusual circumstances is to promptly open timely and direct communication with one another and to attempt to negotiate a satisfactory compromise in writing.

Having a qualified commercial real estate lawyer on both sides can also assist the parties with resolving any disputes that may arise during this time and to formalize their desired path forward by written amendment to their lease.

Other Commercial Leasing Considerations

Last week, the government of Alberta announced an order banning residential evictions until at least May 1, 2020 (for non-payment of residential rents). In discussing the eviction ban for residential tenancies, Premier Kenney commented that “landlords and tenants [should] work together to figure out payment plans that help everyone meet financial obligations as we manage COVID-19”, which could also serve as a guiding principle for commercial tenancy relationships during the pandemic.

Commercial tenants that know they will have difficulty paying their commercial rents (including for April 1) should communicate with their landlords immediately, and request certain concessions be made including: (i) a flexible payment plan, and/or (ii) rent abatement for the period of time of the business closures with such amount added to the end of the lease through an extension of the term of the lease. 

Above all, however, it is vital that all parties communicate in a timely and respectful manner, with civility and reasonableness governing actions on all sides. The detrimental effects of the Pandemic will be felt by all Albertans, and it is important that landlords, tenants and their legal counsel/representatives act respectfully and with a view to working together to weather this economic storm.

Given the financial difficulties facing nearly every business as a result of the Pandemic, we expect the federal and provincial governments will implement further measures to help small to medium businesses “get back on their feet” and recover from this economic crisis. Although many businesses may be able to defer their rent payments for several months, this will not alleviate the ultimate financial burden being experienced by small and medium businesses with no revenue, particularly in Alberta which was already experiencing a downturn in the economy.


Carscallen LLP’s Commercial real estate and leasing expertise

We understand that the rapid emergence of COVID-19 means that many businesses are dealing with a myriad of legal issues. Please contact us if you have any legal questions about your commercial real estate and leasing obligations in connection with COVID-19, or any other business or commercial real estate law matters. Our lawyers routinely work remotely and will continue to do so during this time. We remain available to provide legal advice and guidance to clients for all issues that may arise during the Pandemic.

For more updates related to COVID-19, please visit our resources page and follow us on LinkedIn.

Visit COVID-19 Page

 

As this is an ongoing situation of a global nature, the information provided herein is current as of the publishing date of this blog.

 

*This update is intended for general information only on the subject matter and is not to be taken as legal advice.

 

[1] See: https://www.alberta.ca/restrictions-on-gatherings-and-businesses.aspx#toc-2
[2] See Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., [1971] SCR 562 [Highway Properties].

[3] Highway Properties at p 576.

[4] Highway Properties at p 570.

Topics: Covid-19, Commercial Real Estate and Leasing

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