Default Tug-Of-War Landlords Vs. Tenants
Narrator: You’re listening to season two of WeirTalking Leasing, a podcast series from WeirFoulds LLP’s Commercial Leasing Lawyers in Ontario, Canada. In part two of the
season, our lawyers and guest speakers discuss key topics through the lens of the COVID-19 pandemic, such as navigating the real estate market, landlord and tenant issues, and how to prepare for future crises. Let’s get to it.
Caitlin Steven: Hi, I’m Caitlin Steven, and I’m here with Krista Chaytor.
Krista Chaytor: Hi everyone. Welcome back. This is the third podcast that Caitlin and I have done together on leasing issues. And hopefully you like this one.
Caitlin Steven: We’re recording this podcast at the end of September, 2020, about six and a half months after the Ontario government made an emergency declaration regarding the COVID-19 pandemic. The pandemic itself, plus the government’s relief programs and legislation has had direct and indirect effects on commercial landlords and tenants across the province. In this podcast, we’re going to discuss a situation that many landlords and tenants are finding themselves in. That situation involves the tenant being in default of rent, but the landlord being unwilling or legally unable to terminate the lease because of that default.
Caitlin Steven: So we’ll start with explaining the situation where a landlord is not legally permitted to terminate a lease. This situation comes as a result of the government’s relief programs and related legislation targeted towards small businesses and the landlords of those small businesses. So earlier this year, the government introduced a program called Canada Emergency Commercial Rent Assistance program. And that program gave rent relief to landlords that had small business tenants that met certain requirements.
Caitlin Steven: Shortly after that, the government introduced legislation that would prevent landlords from terminating the leases of small business tenants that met the requirements for the program, even if that landlord had not actually applied for the program. The government’s currently in the process of expanding this legislation to apply until October 30th, 2020. So this put some landlords in a position where their tenants have not paid the full amount of rent, but the landlord can’t actually terminate the lease because of that default.
Krista Chaytor: That’s right, Caitlin. And there’s also some situations where even if a landlord is legally able to terminate a lease, the landlord may not want to because it’s difficult to re-lease space in the current market. So they may not want that space back at the moment.
Caitlin Steven: Right. So these are two situations that takes us to a position where a landlord is not legally allowed to terminate a lease, or where a landlord may decide he doesn’t want to terminate the lease in the circumstances, but thankfully for the landlord and I guess not so thankfully for the tenant, landlords have other options to enforce their rights under a lease. So we know that tenants can also face some other consequences if they don’t pay the rent under the lease and they could lose some special rights that are provided for in the lease. Krista, can you kind of explain how that could happen?
Krista Chaytor: Sure. So first of all, what are we talking about when we say special rights? So there are some rights and leases that tenants have that are more than just the right to occupy the
premises. For example, a tenant may have a right to renew or right to extend the lease. In other cases, particularly in the retail context, you’ll find that a tenant may have an exclusive right, which means that the landlord is not allowed to lease space to another tenant who is conducting a certain type of business, certain type of restaurant, another pharmacy business, something like that.
Krista Chaytor: Some tenants really care about there being signage access and no build areas so that they have access to the street or certain parts of the parking lot. And they’ll want particularly again, in retail for the landlord not to be able to build in certain areas of a shopping center. And then another time when there’s special rights that’s come up a lot lately is when there’s a previous deferral of rent or abatement of rent and that deferral or abatement will be conditional on something else, such as paying the rent going forward in the future.
Krista Chaytor: So those are sort of some examples of the types of things we’re talking about when we say special rights. Often those special rights are tied to the tenant not being in default of the rent or other lease provision going forward. So they’re conditional in that sense on not being in default. And if the tenant is in default than a landlord who doesn’t want to terminate a lease for non-payment of rent may look to these special rights to say, can I take away these special rights or take back some of the rights given to a tenant now that the tenant is in default of the rent or some other provision of the lease. But in this case, particularly right now, payment of rent is a big thing.
There’s different things the lease can say, different clauses the lease might have that will dictate whether or not a landlord can take back these rights. Some kinds of clauses that I’ve seen, some wording that I’ve seen is for example, whether or not rent has been regularly and duly paid. Another clause I’ve seen is a clause that says if the tenant is not then in default. Another clause I’ve seen is if the tenant is not in default after being given notice to cure the default.
Krista Chaytor: So if you’re looking to take back, if you’re a landlord looking to take back some special right in a lease, or if you’re a tenant, wondering if you can get away with extending your rent and not paying right away, the first thing you should do is go look at the particular clause in your lease. Regularly and duly paid rent or complied with obligations during the term of the lease is perhaps the most strict of these clauses. This means that if at any point, the tenant has not complied with its obligations, and particularly if that has been a history of default. So for example, rent, hasn’t been paid several months in a row. Then a landlord may take the position that the tenant has not met the condition for these special rights and the landlord can take them away. And that’s a very powerful right, obviously because sometimes a tenant really depends on an exclusive and of course, renewables, extensions when you’re a tenant, those are king. So you really do want to make sure that you protect those things.
Krista Chaytor: Another clause is not then in default, and this is a more forgiving clause. In that kind of clause if the tenant has been in default of rent in the past, but before they choose to renew or extend, they bring the rent back up-to-date and then exercise an option to renew or extend then they should be able to renew or extend in most instances. But not then in default clauses are a bit more tricky when it comes to other rights such as exclusives or no build areas, but that kind of clause you see most often when it’s dealing with the right to renew or right to extend.
Krista Chaytor: Another type of is one that landlords should really be careful about looking at and making sure they understand. And that’s a clause that says if the tenant has not been in default after being given notice to cure. And the reason why that one can be tricky is if you know that you’re not going to terminate a lease, then as a landlord, you may not bother to deliver a notice of default, but really those types of clauses and the way they’re worded suggests that a landlord should give a notice of default. And then if the default hasn’t been cured, the remedy isn’t necessarily to terminate the lease if that’s not what the landlord wants, but instead the remedy would be to take away one of these special rights in the lease.
Krista Chaytor: So again, special rights are important rights for tenants. And if the landlord cannot terminate a lease and can’t take that action, if there’s default for arrears of rent, then a landlord can look to these special rights in some instances, and look at whether or not it can take action against a tenant in connection with those special rights.
Caitlin Steven: So Krista, in that situation, does a landlord have to give a tenant notice that it’s taking away some of those special rights?
Krista Chaytor: Good question, Caitlin. Again, that depends on the lease. In some instances, at least may say that it requires notice to the tenant, but even if it doesn’t, if I’m a landlord and I’m looking at these special rights, I would certainly give a tenant notice of an intention to take away the special right. And then a notice that I have in fact, taken away that special right as a result of the tenant not meeting one of these conditions in the lease with respect to performing the tenants obligations.
Caitlin Steven: Okay. So speaking of special clauses in a lease, some leases have an acceleration clause that permits the landlord to declare that certain amounts due under the lease later in time are payable immediately upon the occurrence of a default under that lease. So Krista, in situations where the landlord is not legally allowed to terminate the lease, can the landlord still invoke that acceleration clause?
Krista Chaytor: Again, this depends on the wording of the lease, but often yes, often the lease will say that the landlord at its option can accelerate rent if the tenant is in default of paying rent. Usually most of the clauses I see are structured so that the landlord must first give a notice. If the tenant doesn’t cure the default, then the landlord at its option can accelerate rent. Most often the acceleration cause I see is three months, that three months relates back to some insolvency legislation, which is why it’s usually that. We won’t get into that today. That’s another podcast, Caitlin, make a note of that. [Humorously] Quick, quick! Make a note! Don’t forget! But usually there’s a right to accelerate three months rent. And usually it requires notice often it requires notice, I should say not usually, but yes, certainly a landlord can accelerate rent if the lease allows for that.
Krista Chaytor: So accelerating rent just makes the rent payable earlier. And why does that matter if you’re the landlord and you’re saying, well, I’m not getting paid the rent that’s in arrears. What difference if I accelerate rent, I’m not going to get paid the accelerated rent either. But one thing to keep in mind as a landlord and another thing also to keep in mind, if you’re a tenant, is that most leases actually allow for charging interest. So if you accelerate rent and it becomes due immediately, then the landlord can also charge interest on that accelerated rent immediately. And Caitlin, why don’t you tell us about
interest clauses and leases and why you may want to look out for these if you’re a tenant?
Caitlin Steven: Yeah. So if the lease doesn’t specifically set an interest rate for the interest that can be charged, then if there was a disagreement and the matter thought switched into litigation and you were in court, then the court’s likely going to say that just a regular interest rate applies. That rate is established by certain legislation and as of right now, it’s around 2%. But if there’s an actual interest rate set in the lease, then it’s usually much, much higher than 2%. Recently in some new leases, the interest rates are usually expressed as percentages above prime. So something like prime plus 5%.
Caitlin Steven: And tenants may see that high interest rate in their leases and think, Oh, there’s no way that this rates actually enforceable it’s way too high. I don’t have to worry about it. But the case will actually suggest otherwise. Courts look at these situations and they generally say that since the landlord and the tenant negotiated the lease and they agreed to the terms set out in the least, then they’re bound by those terms. And those terms may include that high interest rate. There could be some exceptions, if you can make an argument that the term’s onerous and it wasn’t brought to your attention, then maybe you don’t have to worry about that high interest rate. But if the lease was negotiated and the parties reviewed the law, they had lawyers involved. Then it’s going to be difficult for a tenant to argue that it didn’t know about this interest rate.
Caitlin Steven: So it’s really important to keep an eye out for that, ideally before you went to rent the lease, but if not, then after you’re into it and you’re considering what some consequences of certain actions may be. It’s good to know whether that high rate could apply or not. It’s also important to note that if a landlord doesn’t actually enforce that interest provision during the term of the tenancy, then the tenant could have an argument that the landlord has actually waived its right to interest.
Krista Chaytor: Waiver of interest is an interesting argument, Caitlin, and certainly in my experience, a lot of landlords don’t charge interest if rent is just a little late. Sometimes it may be worthwhile if a landlord who hasn’t charged interest historically wants to start charging interest is to deliver a notice saying I haven’t charged interest in the past, but starting on this date, I’m going to start charging you interest in accordance with the lease. And this is the rate. Mostly leases have a no waiver clause. And landlords can probably rely on a letter like that if they charge interest, just going forward from the date of their letter. But of course, waivers are an interesting argument and tenants will say that a landlord who hasn’t historically charged interest has lost the right to charge it. I agree with you.
Krista Chaytor: You also mentioned that interest rates can be high. I’m old enough to remember when interest rates and leases were sometimes 2% per month compounded monthly. That’s 2% per month, not per year like the current Court of Justice Act rate is. That ends up being 20-something percent and believe it or not, that is not a criminal rate of interest. Although in these interest rate times, it certainly sounds like it.
Narrator: You’re listening to WeirTalking Leasing by WeirFoulds Commercial Leasing Lawyers. Are the issues being discussed far too familiar for you during this time of crisis? If so, our lawyers are here to help. No matter is too big or small. Send us a message at email@example.com, and we’ll get back to you as quickly as possible. Now back to the episode.
Caitlin Steven: So now that we’ve talked about all these ways that a landlord can actually require a tenant to pay more rent when they’re in default of rent, how exactly is a landlord able to enforce this when they’re not allowed to actually terminate the lease?
Krista Chaytor: So the best way, really for a landlord to get paid rent, if it can’t terminate a lease is to sue for the rent. So most landlords are aware of the right to terminate the lease and then sue for the arrears of rent and all of the rent due over the balance of the term of the lease. Most landlords have been in that situation where they’ve been deciding after the termination of the lease, whether to sue, but actually landlords can also sue if they haven’t terminated the lease and that’s suing for the rent as the rent becomes due. And there’s a couple of ways that a landlord can do this. One way is to let enough arrears accumulate so that when there’s a sufficient amount that a landlord feels is worth litigation, it can then sue.
Krista Chaytor: Another thing I’ve seen is that landlords will sue for the existing arrears of rent and any arrears of rent that are owing as of the date of the hearing of that litigation. I’m going to come back to that. There’s an interesting question about what happens if you do that. Caitlin, if I forget remind me, but when you’re deciding whether to sue, there’s a couple of things to think about. One is which court that you’re suing in. Small claims court is for arrears below $35,000. And then if you’re owed more than $35,000, then you’re in regular court, the regular Superior Court of Justice. And you may want to go to small claims court or not to go to small claims court if you’re a landlord, depending on the situation. So keep in mind what the arrears is and how much it is.
Krista Chaytor: Another thing is if you’re also at the same time, looking for the court to weigh in on whether or not the tenant has lost one of these special rights we talked about earlier in the podcast, then you may want to add that to your lawsuit. So you’ll say in your lawsuit as a landlord, I want payment for the arrears of rent. And I also want the court to weigh in to say that the tenant has lost its right to be exclusive or lost its right to renew or extend the lease because the tenant hasn’t regularly and duly paid rent over the term of the lease, for example. So sometimes those things get added to lawsuits as well. And if you’re adding that kind of request or a declaration or input from the court, then you’ll have to stay out of small claims court for those kinds of determinations.
Krista Chaytor: I mentioned earlier that you may want to consider whether to sue for all of the arrears of rent that will come due as of the date of the hearing. And there’s an interesting question about what happens if the landlord does that and then subsequently wants to terminate the lease for non-payment of rent while the lawsuit is outstanding. It isn’t clear to me whether or not that would result in the landlord having already elected to sue for that arrears, such that the landlord can’t then terminate the lease for that arrears instead.
Krista Chaytor: So for sure, if you’re a landlord and you’re deciding how to structure your claim for arrears of rent, speak to a lawyer about that issue and get some information about the best way to commence your lawsuit, whether you want to include anything about special rights, whether you want to include arrears that haven’t yet accumulated, but may accumulate before you actually get to a hearing on your lawsuit, whether you want to go to small claims court or you want to go to the Superior Court of Justice, there are a lot of things to consider as a landlord about how you want to structure that litigation. There’s some other things to consider too, but they may just be slightly too boring for this podcast.
Krista Chaytor: The other thing to keep in mind as a tenant is whether and how you defend this lawsuit. It’s often difficult to defend against arrears, but if the lawsuit includes taking away your special rights, you may then be in a situation where you have to defend, even if you pay up the arrears. So keep that in mind as a tenant, it may not be so simple as to pay the arrears and get rid of the lawsuit.
Caitlin Steven: So Krista, you’ve outlined a situation where a landlord is allowed to sue for the arrears even if it’s not terminating the lease, but there’s got to be a bit more to it. Like what else does a landlord have to do at the same time? Like what happens with the lease? Does it just continue? Do people still have to do anything under it or does it just sit there and wait until the litigation is done?
Krista Chaytor: Yeah. So sometimes Caitlin, when you sue for the arrears of rent, the tenant is still operating, the tenant is in the premises. And during the course of this ongoing relationship, this ongoing landlord and tenant relationship, there is a side issue where the parties are also in litigation. And that’s not all that uncommon in the context of landlord and tenant relationships that there may be litigation of some sort during the course of the relationship, during the course of a term of the lease. In other situations, what may happen is a tenant may really be gone. A tenant may have closed down and abandoned the premises and isn’t coming back. But in those situations, the landlord may still be in a situation where it doesn’t want to terminate the lease because if it terminates the lease, then the landlord has an obligation to mitigate its damages, which means it has an obligation to look for another tenant.
Krista Chaytor: And at the moment, for some types of space, it may be difficult to find another tenant and it may be better for a landlord not to trigger that obligation to mitigate. And in that situation, the landlord may in fact, not terminate the lease, even though it knows the tenant isn’t operating and doesn’t intend to come back to operate. So in those situations, it’s really important for the landlord not to lose sight of what’s happening. If the landlord is not going to terminate the lease for arrears of rent, then the tenant still has all of its rights under the lease, including its right to possess and occupy the leased premises. So the landlord can’t access the premises except as permitted by the lease for example, and the landlord must meet all of its other obligations under the lease if it chooses to keep the lease alive.
Krista Chaytor: There’s probably a whole other podcast on the issue of things a tenant should think about if it abandons leased premises when it’s shutting down, but a few things for the tenant to keep in mind, if it is doing this. The first is insurance. I would always recommend that even if a tenant is shutting down, it makes sure to keep its insurance in place as there could be some issue that happens, particularly third-party liability insurance, as something could happen on the leased premises and the tenant may still be responsible as an occupier.
Krista Chaytor: Another thing for a tenant to keep in mind if it’s abandoned the leased premises, or really has decided that it can’t keep operating is Section 50 of the Commercial Tenancies Act. That section prohibits a tenant from removing chattels at a time when it is in default of rent or in arrears of rent. If that removal is done in a way that’s fraudulent and clandestine. So if you are a tenant and your in arrears of rent and you’re planning to shut down and you want to remove certain items that belong to the tenant, whether that’s inventory or tables and chairs or anything at all that is removable, then really the best thing to do is be upfront with the landlord about that. Tell the landlord you’re planning to remove these things. And then as a tenant, it will be difficult for the landlord to take the position that you’ve removed these things in a way that’s contrary to Section 50 of the Commercial Tenancies Act.
Caitlin Steven: All right. That’s a lot to think about, Krista. So let’s just try to cover off everything else. Let’s say that I am a commercial tenant. I can’t pay the rent. My business is struggling. So instead of trying to forge on and hope it will work out, I decide that I’m just going to leave the premises completely. What else do I have to be aware of when I’m making this decision?
Krista Chaytor: Yeah. Great question. And we’ve covered a few of these, but there are a few other things for tenants to consider. One issue if a tenant isn’t operating for whatever reason is that there could be in the lease a requirement. And again, this is more likely in a retail setting. There could be a requirement in the lease for a tenant to operate. And in some instances there’s even liquidated damages usually expressed per day if the tenant doesn’t operate. So for example, the lease could say the landlord insists that the tenant operates continuously and actively. And if the tenant doesn’t, then the tenant is responsible to an amount, let’s say $100 per day for each day that the tenant isn’t continuously operating. So that’s something for a tenant to think about.
Krista Chaytor: For smaller tenants, mom and pop type tenants, tenants that aren’t big businesses. The owners of those businesses are going to want to check to see if they’ve actually given a personal indemnity or personal guarantee of the lease. Because if they have that may entitle the landlord to sue the owners of the business directly. If you’re a tenant, remember we mentioned this earlier that if a landlord doesn’t determinate the lease, you still have the right to the premises, even if you aren’t operating. So the landlord can’t come and go as it pleases. But at the same time, remember the landlord has no obligation to mitigate its damages if it doesn’t terminate the lease.
Krista Chaytor: If you’re a tenant, another thing you may want to consider is whether or not you’ve been paying utilities yourself, or whether they’re part of the common area costs or TMI. If you’re a tenant paying utilities yourself, you’re going to want to make sure that you’ve maintained some minimum level of heat in the premises, for example, or perhaps even air conditioning in the summer so that there aren’t other problems with the premises. The most obvious in our climate is frozen pipes in the winter if there’s no heat at all. That could make the situation worse if you are a tenant and you turn off the heat altogether and you create more problems.
Krista Chaytor: So those are some things in addition to what we’ve talked about, that tenants should consider. And then the last thing I’ll say is this, the legislation that Ontario introduced for COVID-19 and the bill that’s currently before the legislature to extend that legislation prevents a landlord for terminating the lease for a rent default, but it doesn’t prevent a landlord from terminating a lease for a non-rent default. So if you’re a tenant in arrears of rent, who also has an obligation to continuously operate, or also has an obligation to have insurance, and you breach one of those clauses, then a landlord who can’t terminate for non-payment of rent may still be able to terminate the lease for those non-rent defaults. Caitlin, do you have anything to add?
Caitlin Steven: No, Krista. I think we’ve covered quite a lot of the stuff would apply, lots of people out there who are in this situation, whether you’re a landlord or a tenant, probably have some more nuanced or detailed questions, depending on your situation. In that case, feel free to reach out to us. You can email us or call us, try to force us on to Zoom. We’re here. We’re willing to talk to you and discuss your situation with you.
Krista Chaytor: Great. Thanks for listening. And Caitlin, as always, let’s do this again. We’ll come up with another topic.
Caitlin Steven: Yeah. Sounds good.
Narrator: Thanks for joining us for this episode of WeirTalking Leasing by WeirFoulds Commercial Leasing Lawyers. Please take a moment to rate, review, and subscribe. And if you’d like to hear from our lawyers on another topic, send us an email at firstname.lastname@example.org. Stay well and tune in again soon.