Commercial landlords, tenants both suffer.
Co-operation, compassion the best course
The economic fallout from COVID-19 is unprecedented. Worldwide, no fewer than 1.6 billion workers could soon be facing a financial disaster, with many already there. The situation in Canada is no different. A recent survey of business conditions by Statistics Canada revealed that more than 45 per cent of businesses reported laying off 80 per cent or more of their employees in March.
Employment uncertainty and reduced cashflows impact the ability of households and businesses to honour their contractual agreements to landlords and mortgagees. More than half of the businesses Statistics Canada surveyed reported at least a 20-per-cent decline in quarterly revenues yearover-year.
Canada’s housing markets have seen a drastic fall in the number of transactions, but prices have not been affected as much. The jump in activity that usually comes in April has not materialized and instead, residential sales volumes are expected to be lower than in March.
For now, housing price declines are low- to- moderate. The lower average price is not necessarily because of individual dwellings losing value; instead, it could be a result of sales activity being dominated by smaller, lower-priced homes.
Economy-wide layoffs and restricted cash flows are likely to set off chain reactions, resulting in adverse outcomes across the board. If the economic downturn continues with no end in sight, housing prices might also plunge, which will wreak havoc on the massive real estate portfolios held by large banks.
The need to tread with care is more acute now than before.
Governments have acted promptly to prevent households from defaulting on their mortgages or rents. Similarly, the recent announcement of rent relief for small businesses will help stave off sudden defaults leading to evictions or lockouts.
Yet the measures announced to date are for a limited period. What happens after is anyone’s guess. By mid- June, the lockdown would have lasted for almost three months. At 13 weeks, employers will have to determine what happens to the millions who have been laid off.
Under employment law in Ontario, for instance, an employee could be laid off for a maximum of 13 weeks in a consecutive 20- week period ( though if certain conditions are met, longer layoffs are permitted). Technically, employment contracts must specify a layoff clause in advance. According to Andrea Sanche, a partner with Rickets Harris LLP, if the “employees are not recalled after the permitted period for layoff, the employment of the employee is deemed to have been terminated. In Ontario, on termination, employees are entitled to notice of termination ( or payment in lieu thereof ) and severance pay ( which is paid in a lump sum), if applicable.”
By mid- June, therefore, large and small businesses facing acute cash- flow challenges because of the lockdown could be exposed to additional problems as they may be required to pay, as per employment contracts or the applicable statutory requirements, substantial sums in settlement for a significant number of employees. Commercial leases, especially for small businesses, could, therefore, be exposed to additional vulnerability as a result.
Essentially, the inability to pay rent is no reason to release parties of their contractual obligations. As we have discussed earlier in this space, force majeure provisions are not available in the specified forms for real estate transactions. Often when such clauses exist, they are intended to protect the landlord’s interests. Tenants, commercial or residential, are required to fulfil their contractual obligations regardless.
Alternatively, the doctrine of frustration might be invoked when certain developments, beyond the control ( or fault) of either party, prevent the contract from being executed. For temporary relief from mortgage or rent payments, “frustration would not likely help as its effect is to relieve the parties of their further obligations to perform, from the time of the event,” Sanche explained.
Legal principles and doctrines reflect the realities of their time. However, unprecedented developments, such as famines, pandemics and wars, create circumstances where strict legal doctrines may have to give way to compassion and co- operation. Such approaches are preferred for economic reasons as well.
Statistics Canada’s survey of business conditions found that 69 per cent of accommodation and food services businesses have laid off 80 per cent or more of their workforce. Evicting a tenant who might have defaulted on rent in such times makes it very unlikely that another tenant will be readily available to take the space.
Thus, working with struggling tenants and availing the government- sponsored rent relief programs is likely to deliver better economic and societal outcomes.