For most business owners, entering into and abiding by a commercial lease is a standard part of running a business. Most business owners have seen their businesses through ups and downs, times of boom and times of bust – these are simply part of running a business, resourceful business owners are able to find their way out. However, the shut down we’re currently witnessing presents real problems that even the most resourceful business owner won’t be able to navigate – how is anyone supposed to cover their lease payments when they’re not able to operate their business?
As a result, we anticipate that many business owners will struggle to cover monthly commercial lease payments as they come due in April and May. We provide here a quick guide to commercial leases – bad news, good news, and what options to consider.
As you know (see the disclaimer) we do not write these blogs to provide legal advice – every circumstance is different and you should call your lawyer for advice on your specific situation. However, I will give you this piece of advice if you anticipate not being able to cover your monthly lease payment – whatever you do, do SOMETHING. This should start with an in-depth review of your lease, or a call to your lawyer to go through it with you. Then, once you understand the important provisions of your lease, you should take some kind of action – we will discuss the options for action below. Keep in mind that failing to pay the monthly rent is a breach of your lease, and you are potentially liable for any reasonable damages that stem from that breach, up to and potentially including the remaining value of the lease.
THE BAD NEWS
The first bad news is that failure to pay the monthly rent is a breach of your lease agreement – once a contract is breached, you can be liable for the amount of money up to and including the amount due under the lease for the remainder of your lease term.
The second bad news is that most commercial leases are heavily in favour of the landlord. Here are a few common terms in most commercial lease agreements:
- Requirement to Stay Open: most leases, especially for locations with walk-by traffic like main streets, or in shopping malls or shopping plazas, will have a requirement that you keep your store open during specific business hours. Any failure to do so triggers a set of consequences for the tenant.
- Ability for Landlord to Re-Enter: If a rent payment is missed and such amount is not paid within a certain period of time (often 5-10 days after the due date), then the landlord will have the right to re-enter the property, change the locks, and evict you from the property.
- Leasehold Improvements: a standard part of most commercial leases is that if the landlord re-enters and re-takes control of the property, they take ownership of any leasehold improvements or fixtures on the property.
- Distress Against Assets: Another right that landlords have if they re-enter is to take control of any of the business’s assets that are not leasehold improvements (ie. equipment, inventory, etc.) and sell them to recover any amounts due under the lease.
- Personal guarantee: most commercial tenancy agreements will require the owner to give a personal guarantee to cover their liabilities – in other words, if their company can no longer pay, the landlord may come after other property to make up the shortfall, including the business owner’s vehicle, investments, or even their house.
THE GOOD NEWS
While the consequences of non-payment of rent can be potentially severe, there are avenues you can take to deal with the inevitable.
Firstly, you will want to call your commercial insurance agent to inquire as to whether you have business interruption insurance that might cover such a situation as a pandemic or government-mandated shutdown. The chances of this are low, as most policies do not contemplate a situation like this and so most claims are being declined. However, if you are covered, your troubles may stop there – the insurance may cover your expenses until you are able to recommence work.
Second, you will want to check whether you have a “force majeure” or “Act of God” clause in your agreement. If so, depending on how the clause is drafted, it may include (either specifically or by implication) a pandemic or government-mandated shutdown. These clauses often cover such occurrences as environmental disasters, war, general strikes, or a variety of other major disruptions. If you have a force majeure clause that covers a government-mandated shutdown, you may be able to invoke this clause to postpone your obligations under the lease.
Lastly, finding commercial tenants is often very difficult, expensive, and time consuming – commercial property may sometimes sit vacant for months or even years waiting for the right tenant. A landlord may dread the prospect of losing a consistent, reliable tenant and may decide that it is easier and cheaper to postpone or waive payments than to risk a reliable tenant going out of business and vacating their property. Due to this, tenants may potentially have leverage in any negotiations. This is especially true right now – even if a landlord were to re-enter and evict a tenant, it would be very difficult to find a new renter in the current economic climate.
DO SOMETHING – AND DO IT NOW
No matter what your circumstances, if you are anticipating not being able to make your lease payments, make sure you do something immediately AND make sure you get it in writing.
Option 1 – Insurance: If your commercial insurance will carry you through with business interruption insurance, ensure that you know what must be done to claim under your policy and when the payment will arrive. You will want to notify your landlord of any delays in payment and get any consents to those delays in writing.
Option 2 – Force Majeure: If your lease has a “force majeure” clause that you think applies to the disruption around the current pandemic, you will want to discuss the matter with your landlord, express your intention to invoke the clause, and get their agreement to its application. Again, be sure to document any consents, or any agreement in writing. If your landlord disagrees and insists upon payment, you will want to discuss your next steps with a lawyer.
Option 3 – Negotiate: If you anticipate not completing payment, you will want to try to negotiate with your landlord for a grace period, a postponement in rent payments. Again, any consents must be in writing.
Option 4 – Final Settlement: If you anticipate breaching and your landlord refuses to give a grace period or postponement, closing your doors may be your only option. In this case, you will want to negotiate a final settlement with your landlord, such as a final lump sum payment or a deal to hand over business equipment/assets in exchange for a final settlement so that you don’t wind up being liable personally. Again, this settlement should be in writing.
If you are uncertain about any terms in your lease, are uncertain as to which option you should pursue, or have any other questions regarding how the COVID-19 shutdown could affect your business, please don’t hesitate to get in touch with the writer at firstname.lastname@example.org.
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