Consumers are shopping online. Workers are completing their assignments remotely. Restaurants are seating patrons again, but take-out and delivery are still the bulk of restaurant orders. Six months into the COVID-19 pandemic and the shake-up of our habits is changing the real estate landscape. Shops and office space that represent most of commercial real estate are starting to show signs of strain.
In the spring, Kevin Fernandes, a lawyer at Keyser Mason Ball, LLP, presented an “Ask the Expert” webinar on the corporate/commercial impacts of COVID-19 on business owners and their property owners and managers.
“In May, the focus of our client and community education was to give people an overview of relief programs offered by the federal and provincial government and their private sector partners,” Kevin said during a telephone interview. “Most of those programs are still in effect today. With respect to the rent relief, the challenge a lot of people have expressed was that, for a lot of the programs, there has been great language around the relief available that has not come to fruition.”
Negotiate in, negotiate out
A commercial property lease, like any residential lease, is a contract. Small and medium-sized enterprises negotiated themselves into the lease and they are going to have to negotiate their way out!
CECRA, the Canada Emergency Commercial Rent Assistance, was set up to provide support to small businesses. The recently extended program offers commercial property owners a forgivable loan of up to 50% of a COVID-affected tenant’s rent.
“CECRA was recently changed because landlords weren’t doing certain things, so the government made it easier for them to apply,” Kevin said. “It’s important to remember that the ability to evict has been suspended, but tenants are continuing to feel the stress of having to work with their landlords while there are no obligations for the landlords to work with them.”
According to Kevin, who works in all aspects of corporate law says lease negotiations are revealing a lot about business relationships and rethinking those relationships.
“Prior to COVID-19 we had a completely different commercial real estate environment,” Kevin explained. “People were signing anything to join the party and get into a space. Now people are looking at those contracts and asking: ‘What was my relationship like then, and what is it like now?’”
With the pandemic limiting businesses in their ability to generate income, at least the way they used to, there is often a shortage of funds for tenants to pay their rent.
“There is something called a force majeure, which is simply unforeseen circumstances that prevent someone from fulfilling a contract, but not every circumstance of this pandemic meets that threshold,” said Kevin. “While we work with commercial landlords to negotiate the payment and deferral of rent, sometimes we do have to look at other legal strategies to exit the contract.”
While office and commercial space are the most obvious areas where landlords and tenants are re-negotiating their contracts, and their relationships with them, the implications of COVID-19 on commercial real estate go much further.
“There’s also medical space, there is student residence space,” Kevin explained. “We don’t yet fully know what other service providers will need to pivot and change how they offer services. We’re going to know better after the second wave hits with the royal mess of flu season combined with COVID-19.”
It is clear to Kevin that landlord-tenant relationships aren’t the only business relationships being re-thought.
“Most legal firms work at about a 60% capacity during the summer months,” Kevin said. “Right now, I am working at an 80 to 90% capacity because our business clients are thinking about risk and have time to think about re-structuring relationships in terms of structure and agreements. Share-hold agreements, entering and exiting partnerships, and succession planning are all up for discussion right now.”
The changes though, may not be anything to fear.
“Commercial real estate and land development might have seen a little dip in value at the beginning of the pandemic,” Kevin said. “Issues with rents were short term enough that values have recovered and new developments keep pushing forward.”
What should entrepreneurs do while relationships change and business pivots to deal with COVID-19 demands?
“Remain optimistic,” Kevin said. “Keep running your business and, as part of that, keep an eye out and eye open. It’s important to look for opportunities.”
A clear understanding of government rent relief programs can be difficult to obtain without expert help. Kevin recently delivered an Ask the Expert webinar on these issues for the Mississauga Business Enterprise Centre’s Business Services Advisory program.
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