CMHC began accepting applications for the Canada Emergency Commercial Rent Assistance (“CECRA”) program on May 25, 2020. As such, we are writing to supplement the material we circulated on April 29, 2020 when the CECRA program was first announced (which can be accessed here).
Since we distributed our last CECRA program materials, new details have emerged that address some of the questions we posed previously, while also raising new ones. We outline and discuss some of these questions below.
Q: How does a commercial property owner apply for CECRA?
If a commercial property owner believes one or more of its tenants are eligible and wishes to participate in CECRA, the owner must submit a single application per property on or before August 31, 2020. Each application must include:
- Prescribed form attestations sworn by each “Impacted Tenant” (may be a tenant, subtenant, licensee or franchisee, as long as they fit the CECRA criteria) and the “Property Owner” (may be the fee simple owner or a tenant under a long-term registered ground lease). These attestations will outline the factual background of the tenancy, including confirming CECRA eligibility criteria;
- Rent Reduction Agreements entered into between the Property Owner and each Impacted Tenant (and if applicable, a Rent Reduction Agreement entered into between a sublandlord and subtenant, to the extent the subtenant is an Impacted Tenant), that:
- forgives at least 75% of the gross rents payable for April, May and June 2020;
- provides for a moratorium on evictions for the prescribed period; and
- confirms the gross revenues payable for April, May and June 2020.
Note: the Rent Reduction Agreement accessible to Property Owners once they apply suggests the form can be amended, as it is provided in word format as opposed to a fillable .pdf (as are the Attestations). Provided the Rent Reduction Agreement satisfies the requirements set out for it under the program, it appears an amended form will be acceptable;
- Forgivable Loan Agreement entered into between the Property Owner and CMHC. Note: while the Loan Agreement is not currently available for download, we assume the form will be a prescribed non-negotiable form;
- Property information, including:
- Property address;
- Property type;
- Property tax statement;
- Current rent roll; and
- Number of commercial units within the property;
- Applicant information, including:
- Banking information (including bank statement);
- Property owner contact information;
- Co-ownership information; and
- Contact details for co-owners;
- Tenant information, including:
- Tenant contact information;
- Registered business name;
- Number of employees;
- Lease area; and
- Monthly gross rent for the period of April, May and June 2020.
Q: Who receives the loan proceeds? Are there any restrictions on the use of the loan proceeds?
While earlier information available on the CMHC website suggested that the property needed to be subject to a mortgage and loan proceeds were to be paid directly to the mortgagee, both of these requirements have been dispensed with. While the loan proceeds will be paid to the Property Owner, there are prescribed disbursements that will need to be made, in a particular order, namely:
- firstly, to reimburse Impacted Tenants in respect of any rent paid by them during April, May and June 2020 that exceeds 25% of the gross rents due during that time, unless the Impacted Tenant elects to apply such excess as a credit against future rents owing; and
- secondly, towards any costs and expenses relating directly to the property, including any debt service (principal and interest) payments in connection with any financing held by the Property Owner, operation, maintenance and repair obligations, property taxes, insurance and utilities.
As Property Owners are required to use the funds to offset costs and expenses incurred in relation to the particular property that is subject to the CECRA application, loan proceeds cannot be used by Property Owners to try to shore up their balance sheets, nor can Property Owners look to consolidate the proceeds from several CECRA loans and utilize them for other purposes.
Q: How is the 70% reduction in the tenant’s revenue calculated?
A: To measure reductions in revenue, tenants who were operating during April, May and June of 2019 are to calculate the three-month revenue average from April, May and June 2019, and compare that against the three-month revenue average from April, May and June 2020 (June revenues to be based upon a forecast made by the tenant, if necessary, depending on the timing of the application). For businesses that were not in operation during April, May and June 2019, tenants are directed to calculate the two-month revenue average from January and February 2020, and compare that against the three-month revenue average from April, May and June 2020. Note: tenants who commenced operating on or after March 1, 2020 are not program eligible.
Q: Is the moratorium on evictions limited to monetary defaults, or does it apply to all defaults?
A. It applies to any eviction, the basis of which is a default by the Tenant arising from non-performance of an obligation due to the COVID-19 Emergency. The duration of the moratorium is from April 1, 2020, to the date the Impacted Tenant ceases receiving rent reduction, forgiveness or credit under its Rent Reduction Agreement.
We expect that the question of whether or not the non-performance of an obligation by a tenant was a result of a “COVID-19 Emergency” will arise. For example, if an Impacted Tenant fails to repair or insure the leased premises, is that failure attributable to a reduction in the tenant’s revenue brought about by COVID-19 (i.e. they simply cannot afford to make the repairs, or pay their insurance premiums)? Potentially, but it will depend on the specific circumstances of that tenant, moreover, while a landlord may be able to avail itself of its self-help remedies under the lease, this remedy is often useful only insofar as the tenant has the cash flow to reimburse the landlord for costs it incurs in curing the tenant default. Given what we understand to be the underlying rationale for the CECRA program, a moratorium on gross rent defaults during the currency of the Rent Reduction Agreement makes sense. However, we do question the rationale for precluding evictions for reasons that go beyond gross rent defaults.
Q: How does a successful CECRA Application impact those deferral arrangements I’ve already entered into with my tenants?
A: The form Rent Reduction Agreement available to CECRA applicants (which again, may be subject to amendments made and agreed-upon by the parties) suggests that any previous deferral or abatement arrangement is essentially amended so as to be consistent with the provisions of the Rent Reduction Agreement, and any conflicts between the two are to be resolved in favour of the latter. As such, the Rent Reduction Agreement will reduce the rent, but the deferral agreement will remain in effect such that the reduced rent will not immediately be payable. For CECRA applicants that have previously agreed to defer rents for Impacted Tenants and would now like the reduced rent payable in April, May and June 2020 (as opposed to being deferred), we would suggest this will have to be appropriately addressed within the Rent Reduction Agreement.
Q: Do I need the consent of my mortgagee in order to be eligible to make a CECRA application?
A: To the extent consent is required pursuant to the lender’s security, yes. Property Owners will have to attest to any required consents being obtained as part of the Property Owner Attestation.
Q: Should I explore other options to recover rent before making a CECRA application?
A: Yes, this is actually a requirement of the CECRA program. In addition to lender consent, Property Owners must attest that they have made efforts to obtain proceeds in respect of their insurance policies covering loss of rental revenue, and exhausted other available avenues of government assistance, the extent to which received by the Property Owner will reduce amount of loan proceeds advanced to the Property Owner.
Practically speaking, landlords who are in a position to collect proceeds from rental income insurance may be unlikely to even apply for the CECRA program. However, we question whether it is appropriate to have the proceeds from this insurance reduce the loan amount while landlords are still expected to cover 25% of the gross rents.
Q. Will the Property Owner be liable if a tenant makes a misrepresentation in its Attestation?
A: No. So long as the Property Owner has no knowledge, acting reasonably, and without investigation, of any falsity or misrepresentation in the Impacted Tenant’s Attestation, the Landlord can rely upon its contents in support of its CECRA application. While a false statement in an Impacted Tenant’s Attestation will not constitute an event of default pursuant to the Loan Agreement, Property Owners are required to immediately notify CMHC if they become aware that an Impacted Tenant’s Attestation contains a statement that is false or misleading. If the loan has already been advanced, the Property Owner is obligated to use commercially reasonably efforts to recover the full amount of the forgiven rent from the Impacted Tenant, and any funds received by the Property Owner in this regard are to be paid to CMHC on account of the loan.
Q: What are the consequences of the Property Owner defaulting under the Loan Agreement?
A: The loan amount, plus interest at the rate stipulated in the Loan Agreement, will have to be repaid by the Property Owner. Although the loan is unsecured, CMHC can assign the loan to CRA, and CRA can then utilize the general collection and enforcement mechanisms available to it (including asserting its super-priority and employing deemed trusts) to recover the principle and interest owing from the Property Owner pursuant to the Loan Agreement.
Q: Do I need to ask my tenants if they are an Impacted Tenant?
A: The Property Owner Attestation defines an Impacted Tenant as one “which, to the best of the Property Owner’s knowledge, acting reasonably and without investigation, is eligible to receive benefits under and subject to CECRA Program requirements”, and then goes onto say that the Property Owner has entered into a Rent Reduction Agreement with “each Impacted Tenant”. In other words, Property Owners are not able to pick and choose Impacted Tenants and must ensure that an application contains each and every Impacted Tenant they are aware of in that particular property. That being said, there is no onus on the Property Owner to make further investigations as to whether its tenants are Impacted Tenants.
While knowledge of an Impacted Tenant can be derived from conversations with the tenant or the contents of the Impacted Tenant’s Attestation, certainly it can be derived from other sources. Landlords know the gross monthly rents payable by their tenants, and information previously obtained by the landlord may speak to annual gross revenues generated by the tenant and/or its parent (i.e. financial statements obtained when assessing the covenant of a tenant or guarantor/indemnifier). Moreover, if a tenant has been mandated to cease operating altogether from the leased premises for an extended period of time during April, May and June, might a reasonable inference be that that tenant might meet the revenue reduction threshold?
In light of the fact that making a misstatement in a Property Owner Attestation would constitute a default under the Loan Agreement, we would suggest that if a Property Owner is applying to CECRA, it contact those tenants who are below the $50,000.00 per month gross rent threshold who they reasonably believe could be an Impacted Tenant based on knowledge, information and belief. If a tenant is of the view that it satisfies the balance of the eligibility requirements, the Property Owner should have the tenant complete and return an Impacted Tenant Attestation and include that tenant in its application. The Property Owner can then rely on the Tenant Attestations to support its application provided it has no reason to believe, without due investigation, that the Impacted Tenant’s Attestation contains a falsity or misrepresentation. We believe this properly puts the onus on tenants who believe they are eligible for rent assistance to ensure they are included in the Property Owner’s application.
Q: How are operating cost reconciliations addressed?
A: Operating cost reconciliations are not included in the definition of gross rents under the program. Consequently, should an Impacted Tenant be required to pay to a Property Owner an operating cost shortfall after a reconciliation is completed, no additional loan proceeds will be provided to cover a portion of the shortfall to be paid to the Property Owner.
If you have any further questions about the CECRA program or dealing with tenants during the COVID-19 crisis, we invite you to reach out to one of the members of the Brownlee LLP real estate group to discuss.