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Lease Options for Commercial Tenants

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Covid-19 has been a great disruptor in the world and one area that this has shown itself most clearly is in the many businesses that are struggling to survive. Many businesses operate as a “Tenant”, leasing the space from which it conducts its business (their “Premises”), and it is obligated each month to pay rent based on what is set out in the Lease for the Premises. A Tenant’s obligation to pay rent, in most cases, is not based on the actual business activity in the Premises, so even if a Tenant is not using their Premises, or the Tenant no longer has customers coming to the Premises, the Tenant is still obligated to pay their full monthly rent.

 

Different levels of government have offered different forms of support to struggling businesses such as the Canada Emergency Commercial Rent Assistance (CECRA) for small businesses and other forms of assistance but some business owners still feel that they cannot continue with the Premises that they have and continue to pay all or part of their rent.

 

When a business owner as a Tenant is looking to get out of its Lease for a Premises there are a few things to consider. First, the best option is often to open discussions with the Landlord for the Premises about the Tenant’s situation. Landlords often have their own incentives to try to keep a Tenant in good standing due to the effect of vacancies on a Landlord’s ability to refinance or sell a property, and because re-leasing the Premises can be difficult, especially in the present economic environment that we are in with Covid-19. If a Tenant is in arrears, or likely cannot pay rent for upcoming months, a Tenant may be able to enter into either a rent abatement agreement with the Landlord to forgive and/or reduce rent, or a rent deferral agreement with the Landlord to postpone the payment of rent to a future period.

 

The next possible option is to obtain the Landlord’s consent to assign or sublease the Premises or part of the Premises to a new Tenant. Landlords may be open to this option if the Tenant is willing to do the work to secure a new Tenant for the Premises or part of the Premises. It is important to note though that under a sublease the original Tenant is still responsible for the payment of rent and other obligations under the Lease, and under many assignments the original Tenant is also not released from their obligations under the Lease for the Premises which means that if the new Tenant defaults then the original Tenant could also be liable for the default.

 

Another option is to enter into a surrender of lease agreement. The Landlord may allow the Tenant to end the Lease for the Premises before the expiry of the term if the Tenant perform certain tasks, which may include the payment to Landlord of a surrender payment. For a business, it may make more business sense to pay the Landlord a surrender payment, even if it is a large sum of money, upfront than default under the Lease and be liable to the Landlord for all damages and costs that would result from the default.

 

The final option is for a Tenant to default under the Lease for the Premises which is always not recommended as the Tenant and any indemnifiers would be liable to the Landlord for all damages and costs that would result from the default in accordance with the Lease.

 

For all of the options outlined above, it is always best for a Tenant to first consult with a lawyer familiar with commercial leases before making any decision based on the Tenant’s  personal circumstances.

 

 

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Spencer S. Duggan Spencer S. Duggan is an Associate with Kormans LLP. His practice areas include employment issues, the purchase and sale of businesses, mergers, joint venture agreements, organizing business structures, shareholder agreements, re-organizing existing businesses and corporate structures, leasing, commercial real estate, debt finance and dispute resolution. You can reach Spencer at sduggan@kormans.ca.

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