CLIENT UPDATE – May 27, 2020 Canada Emergency Commercial Rent Assistance Application & Updates

The application process for the Canadian Emergency Commercial Rent Assistance (“CECRA”) program is now open. 

Landlords must agree to reduce the rent to at least 75% of the monthly payment. In summary:

• The tenant will pay up to 25% of the rent
• The CECRA will provide up to 50% of the rent
• The landlord will forgive the remaining portion of the rent

The program is available in respect of eligible tenants that are for-profit, not-for-profit and charitable organizations that were open before March 1, 2020. In order to qualify, the tenant must have no more than $20M of consolidated gross annual revenues, have experienced at least a 70% decline in aggregate revenues in April, May & June 2020, and have had a valid and enforceable lease agreement in place at April 1, 2020 with no more than $50,000 of monthly rent per location. The 70% revenue test is conducted by comparing the total April, May and June 2020 revenues with the same period in 2019. If the business was not open during 2019, the average gross revenues can be compared with the average revenues in January and February 2020. 

Whether or not a landlord and tenant apply for this program is at the discretion of the landlord. Certain opposition parties have been pressuring the federal government to allow tenants to access the funds directly. While we have not seen any information that would indicate changes are coming, we may see changes or expansions to the criteria if the other COVID-19 response programs enacted by the government are any indication.

Landlords must apply through the Canada Mortgage and Housing Corporation (“CMHC”) website which can be accessed here. There are several attestation documents that will need to be signed by both landlords and tenants which can be accessed through the application portal. The applications can be submitted retroactively, and the application deadline is August 31, 2020.

Additional details include:

• The initial Ontario government press release indicated that landlords would be required to have a mortgage loan secured by commercial rental property and that small businesses must be considered “non-essential”. The new requirements released by the CMHC do not list these requirements.
• If rent has already been paid for the April, May and/or June, the rent forgiveness can be applied by the landlord as a refund or as a credit to future rent payments.
• In general, rent will include the base rent and regular monthly operating costs in a net lease and the gross rent in a gross lease. Certain extraordinary expenses are specifically excluded from the $50,000 rent amount as well as any amounts required by the tenant to be paid to third parties. For more details, see the CMHC website.
• Sub-tenant arrangements can meet the definition as long as they meet all requirements of the CECRA program.
• Forgiven rent cannot be recovered by the landlord after the program is over (i.e. through cash payments or disproportionate future rent increases).
• Landlords and tenants that are not at arm’s length can qualify as long as all requirements are met and there is a valid and enforceable lease in place with rent at market rates.
• Unlike the 75% wage subsidy, applications are made once for the entire three-month period. The revenue test is considered for the entire three-month period and not each month individually.
• If applications are made before the end of June, tenants can use forecasted June revenues when determining whether or not a 70% revenue decline has taken place. At this point, it is not clear whether the there will be any implications if actual June revenues are significantly higher than the forecasted figures such that the 70% revenue reduction test is not met.
• If the small business or its parent company produces consolidated statements, the tenant must use the consolidated statements for the purpose of the $20M revenue test.
• The CECRA funding will be provided to the landlord as an interest free loan that will be forgivable on December 31, 2020 if all requirements are met.
• If the landlord files for bankruptcy, restructures or dissolves its business before December 31, 2020, it will be required to repay the loan.
• Certain federal, provincial or municipal owned properties are excluded from this program. 

The CMHC has stated that the funds must be used solely for the following purposes:

1. Reimbursing impacted tenants for any rent paid in excess of 25% unless the tenant chooses to apply the previously paid rent to a future rent payment; and,
2. To cover the costs and expenses relating directly to the property, including financing held by the property owner, operational costs and maintenance obligations.

The restricted use of the funds raises questions and may encourage landlords to delay applications until after the June rental payment and then use the CERCA funds to reimburse the tenants in order to maximize the benefit from the program in the event that the costs relating directly to the property do not exceed 50% of the rent.  While landlords will have an understandable incentive to maximize the benefit available to them under the program, it is our hope that additional clarity will be coming from the CMHC on this matter to allow landlords to maximize their benefit without feeling like they need to “game the system” in any way.

We will continue to provide updates for any changes to this program. While this bulletin provides a summary of the CECRA program, some of the finer details relating to the qualification criteria and the application program can be found on the CMHC website. As always, we are happy to discuss any questions you may have about these matters.

To review any of our previous updates on COVID-19 please see our website.

This summary deals with proposed matters that are complex and may not apply to particular facts and circumstances. As well, the material and the references contained therein reflect laws and practices which are subject to change. For these reasons, this material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter.
 
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