COVID-19: Rent Relief For Small Businesses

Introduction

The federal government has announced a plan to help small businesses experiencing financial hardship due to COVID-19 with rent relief through the Canada Emergency Commercial Rent Assistance (CECRA) program.

What Type of Relief is Offered by the CECRA?

The CECRA program will reduce the commercial rent of eligible small businesses (including non-profits and charities) by at least 75% for April, May, and June of 2020. The tenant will be required to cover the balance of the monthly rent, up to a maximum of 25%.

The 75% reduction in rent for tenants is calculated as follows: the CECRA program will provide forgivable loans to commercial property owners to cover 50% of gross monthly rent, and the property owner will be responsible for 25% of gross monthly rent. So, for example if a tenant’s monthly gross rent is $1,000, then the property owner will receive:

• $500 through the CECRA,
• $250 from its tenant; and
• The remaining $250 will be covered by the property owner.

The CECRA is administered by the federal Canada Mortgage and Housing Corporation (CMHC) in cooperation with each province and territory. CMHC has engaged MCAP, an independent mortgage finance company, to deliver the CECRA to small businesses. The commercial property owner, not the tenant, is responsible for applying to the CECRA program for rent relief.

Who is Eligible for the Relief?

The CECRA program is administered to commercial property owners, rather than providing financial relief directly to commercial tenants. In order to be eligible for the program, the property owner must:

• own commercial real property which is occupied by one or more impacted small business tenants;
• enter (or have already entered) into a legally binding rent reduction agreement for the period of April, May and June 2020, reducing an impacted small business tenant’s rent by at least 75%;
• ensure the rent reduction agreement with each impacted tenant includes:
  • • a moratorium on eviction for the period during which the property owner agrees to apply the loan proceeds, and
    • a declaration of rental revenue included in the attestation
• not be, and must not be controlled by, an individual holding federal or provincial political office.

In late May, the federal government added some further restrictions to the
CECRA program relating to government-owned properties, where the government is the landlord of the small business tenant (although some specific exceptions to those restrictions apply).

There are also restrictions on the type of tenant that is eligible for the program. Eligible tenants are businesses (including non-profits and charities) who:

• pay no more than $50,000 in monthly gross rent per location (as defined by a valid and enforceable lease agreement);
• generate no more than $20 million in gross annual revenues, calculated on a consolidated basis (at the ultimate parent level);
• have experienced at least a 70% decline in pre-COVID-19 revenues; and
• have been operating since before March 1, 2020.

Canada Mortgage & Housing Corporation: CECRA for small businesses

Tenants and property owners are required to sign separate attestations confirming their eligibility for the program. In addition, the government has now provided a separate forgivable loan agreement to be executed by the property owner.

Issues

Both property owners and tenants have raised concerns about the design of the CECRA program.

When the CECRA was initially announced, property owners had sought clarification on how the forgivable loan structure would work in practice. The federal government has now provided more details on the loan structure, including: (1) that the loan will be interest free; (2) that the loan will be forgiven on December 31, 2020 (if all program requirements have been met); and (3) that the loan is unsecured. The loan will need to be paid back if the property owner files for bankruptcy, restructures, reorganizes or dissolves is business or acts in contravention of any of the program rules.

Property owners had also initially expressed concern about the requirement that the commercial property be mortgaged, but the updates to the CECRA in late May have removed that requirement.

For their part, tenants have expressed concern that the application to the CECRA can only be initiated by the property owner, which leaves tenants with no recourse if the property owner decides the application process is too onerous or does not want to cover 25% of the gross monthly rent. The federal government has compiled a list of reasons why property owners should apply to the CECRA, but it has not changed the design of the program to allow for tenants to apply directly to the CECRA for rent assistance.

When Does the Program Start?

The CECRA is now open for applications. The end date for applications to the CECRA is August 31, 2020. Property owners may apply retroactively for rent assistance for the months of April, May and June 2020, so long as they complete the application before August 31, 2020.

Conclusion

Help is on the way for small businesses experiencing financial hardship due to COVID-19 through the CECRA program. The CECRA will provide welcome financial relief to small business tenants struggling with their monthly rent payments. We will be monitoring the status of this program, and will amend this blog post as more information becomes available.