On May 20, Prime Minister Trudeau announced that the application portal for landlords to apply for relief under Canada’s Emergency Commercial Rent Assistance Program (CECRA) will open on Monday May 25. One day earlier, CMHC posted new details on its website concerning the CECRA application process, including sample forms of rent reduction agreement, forgivable loan agreement and attestations that will have to be submitted by landlords who are seeking relief1.
In response to criticism of the program from landlords, CMHC and the federal and Ontario governments are encouraging landlords with small business tenants who are struggling to make rent payments to be co-operative and apply for CECRA loans in order to avoid the potential disruption that may result from tenant bankruptcies or evictions or more significant government intervention in the commercial leasing market2.
Under the CECRA program, commercial landlords with small business tenants whose revenues have been reduced by more than 70% as a result of the COVID-19 pandemic can apply for forgivable loans that will cover up to 50% of the tenant’s rent for the months of April to June 2020. The landlord is required to forgive not less than 75% of the rent for the applicable three-month period while the tenant remains responsible for paying up to 25% of the rent for the period. For further information on the eligibility criteria for the CECRA program, please see our May 15 bulletin COVID-19 and Canada’s Emergency Commercial Rent Assistance Program: Rent relief for small businesses.
CMHC has engaged MCAP, one of Canada’s largest independent mortgage finance companies, and First Canadian Title (FCT), a leading title insurance company, to deliver CECRA for small businesses. We anticipate that the application portal will be made available through CMHC’s website for the CECRA program which is available here.
Pre-application registration process
According to CMHC, the application portal will open at 8:00 a.m. on Monday May 25. In anticipation of a large volume of applications and consistent with other government assistance programs announced in response to the COVID-19 pandemic, CMHC is requiring that property owners register to obtain access to the application system.
Eligible property owners include registered freehold owners and tenants under registered ground leases or emphyteutic leases, as well as nominee title holders holding the applicable property in trust for one or more beneficial owners who have authorized the nominee to apply for the CECRA program and enter into the applicable agreements. The sample form of Forgivable Loan Agreement makes it clear that the applicant property owner may not be a sublandlord or a beneficial owner with an unregistered interest in the applicable property.
Registration for the CECRA program is to be done on a staggered basis by province as follows:
Monday May 25
Property owners located in Atlantic Canada, British Columbia, Alberta and Québec, with up to 10 tenants who are eligible for the program
Tuesday May 26
Property owners located in Manitoba, Saskatchewan, Ontario and the Territories, with up to 10 tenants who are eligible for the program
Wednesday May 27
All other property owners in Manitoba, Saskatchewan, Ontario and the Territories
Thursday May 28
All other property owners in Atlantic Canada, British Columbia, Alberta and Québec
Friday May 29
All property owners
Once registered, the application portal will be available 24/7 for applicants to input data and upload documents.
Required application materials
Applicants will be required to provide the following documentation in support of an application for a CECRA loan:
- Rent Reduction Agreement. The property owner must enter into a legally binding agreement with each impacted tenant to confirm the required 75% gross rent reduction in accordance with the program terms and conditions.
- Forgivable Loan Agreement. The property owner must agree to the terms and conditions in the application and in the loan agreement.
- Property Owner Attestation. The property owner must sign an attestation confirming that the information relating to it and the property provided in the application is correct and attesting to its eligibility under the program requirements.
- Tenant/Subtenant Attestation. The property owner must require each of its eligible small business tenants/subtenants to sign an attestation confirming the tenant’s/subtenant’s eligibility under the program requirements.
CMHC has posted samples of these four key documents on their website and encouraged property owners to use the sample documents to help prepare for the application process3. Legal versions of the application documents will become available when the application portal opens on May 25.
In addition to the foregoing documents, property owners will be required to provide supporting information concerning themselves and the applicable property including: property address and type; property tax statement; latest rent roll for each property and the number of commercial units; landlord contact information (including information and contact details concerning any co-owners); and banking information, including a bank statement. Information concerning impacted tenants is also required including: tenant contact information; registered business name; lease area; and monthly gross rent for the period April to June 2020.
Analysis of the sample documents
Rent Reduction Agreement
Helpfully for commercial landlords, CMHC’s sample Rent Reduction Agreement is expressly conditional upon final approval of the landlord’s CECRA loan application. The agreement will have no force or effect unless and until the landlord’s CECRA loan application has received final approval. This will permit landlords to apply for relief for impacted tenants without having to commit to a rent reduction and face the risk that their application is rejected.
The Rent Reduction Agreement also contemplates rent reductions in three potential scenarios: between a landlord and an impacted tenant, between a sublandlord and an impacted subtenant and between a head landlord and a tenant who is not impacted but who is sublandlord to impacted subtenants. In this third scenario the required rent reduction between the landlord and the tenant/sublandlord must be 75% of the gross rent payable by the subtenants for the three- month period from April to June 2020.
If the tenant has already paid rent in excess of the reduced rent for the target months, the landlord must either reimburse the excess payment from the proceeds of the CECRA loan or agree to give the tenant a credit for the excess against the rent next coming due. If the landlord and the impacted tenant have entered into a prior rent reduction agreement for the applicable three-month period, the prior agreement is deemed amended to conform to the CMHC form of agreement which will prevail in the event of any conflict.
The landlord must agree that the rent reduced and forgiven pursuant to the Rent Reduction Agreement will never be recoverable by any means, including annual rent reconciliation mechanisms, other than if the tenant is determined to not be eligible for CECRA benefits.
The tenant must confirm, to the best of its knowledge, that all information and declarations provided in connection with the CECRA application are true and correct and acknowledge that if the CECRA administrator (i.e. MCAP) determines that the tenant has made false or misleading statements and is not eligible to receive CECRA benefits, then the original rent (without reduction) less amounts already paid by the tenant becomes due and owing to the landlord within 30 days of notice of the tenant’s ineligibility. If the tenant has granted a sublease to an impacted subtenant and the subtenant’s attestation is false or misleading, the tenant must make commercially reasonable efforts to recover rent that was previously forgiven from the subtenant and remit the amount to the head landlord.
The landlord must also agree not to evict the tenant for the period from April 1, 2020 until the later of three months after the date of the landlord’s CECRA application and the date on which the tenant is no longer receiving a rent reduction or rent credit under the Rent Reduction Agreement.
Forgivable Loan Agreement
The sample form of Loan Agreement provides for an unsecured, interest free, forgivable loan of up to 50% of the “Rent” owed by an impacted tenant to the applicable property owner minus a pro rata portion of any rental loss insurance proceeds available to the property owner/landlord, or any non-repayable proceeds of any other federal or provincial government programs targeted at commercial rent assistance in response to the COVID-19 emergency, which are received or receivable by the property owner/landlord or the impacted tenant in respect of the eligible program period of April 1 to June 30, 2020.
How the pro rata portion of insurance and other government benefits is to be calculated is not clear but presumably it should be based on the rentable area of the premises leased by the impacted tenants for whom rent is being reduced and relief is being sought.
Rent is expressly defined as the aggregate of all recurring amounts payable by the impacted tenant pursuant to the terms of a valid and enforceable lease or sublease for the eligible program period without considering any rent deferral or reduction agreement.
The loan proceeds must be used by the property owner/landlord either (i) to reimburse impacted tenants for any Rent paid in respect of the eligible program period in excess of 25% of the Rent, as reduced under the Rent Reduction Agreement, unless the tenant opts to receive a credit against future rent; or (ii) to pay costs and expenses relating directly to the applicable property including debt service and operating, maintenance and repair costs, property taxes, utilities and insurance.
The property owner/landlord agrees to repay the loan on December 31, 2020 unless the loan is forgiven by CMHC on that date. The loan will be forgiven by CMHC and will not be repayable unless an Event of Default has occurred. If an Event of Default occurs, the loan will be due and payable immediately upon demand by CMHC, together with interest at 5% per annum on the unpaid principal balance from the date of the notice of default until the loan is repaid in full. If interest becomes payable, interest payments are due and payable monthly in arrears on the first day of each month until the loan is repaid in full.
Among other things, the Loan Agreement includes specific covenants by the property owner/landlord not to serve default notices or seek to evict its impacted tenant during the program period, nor require the impacted tenant to pay more than 25% of the Rent for the eligible program period, and not to attempt to recover any Rent that has been forgiven except if the tenant is determined to have given false or misleading information as to its eligibility for benefits in its attestation. In that case, the property owner/landlord agrees to use commercially reasonable effort to recover the Rent that was previously forgiven and to use such amounts to repay the loan to CMHC. The Loan Agreement is unclear but presumably the property owner/landlord would not be obligated to repay that portion of the CECRA loan attributable to that tenant’s Rent unless the property owner/landlord actually succeeds in its recovery efforts. The property owner/landlord must also notify CMHC if it or any impacted tenant receives any rental loss insurance proceeds, or any non-repayable government rent relief that was not already deducted in the calculation of the loan amount.
The Loan Agreement also includes a representation and warranty from the property owner/landlord in respect of the truth, accuracy and completeness of all information provided to the CMHC in the application, including the attestations. The Loan Agreement is unclear but it appears to require the property owner/landlord to represent in respect of both the landlord’s and tenant’s attestations. This is counter to the form of property owner/landlord form of attestation itself which only requires the property owner/landlord to state that it has no knowledge, acting reasonably and without investigation, of any falsehood or misrepresentation in the tenant’s attestation. However, the tenant is required to provide a similar representation to the property owner/landlord in the Rent Reduction Agreement that to the best of the tenant’s knowledge, all information and declarations provided in the tenant’s attestation are true and correct.
An Event of Default occurs if:
- The property owner/landlord fails to comply with the terms and conditions of the CECRA program or breaches the Loan Agreement or Rent Reduction Agreement.
- The property owner/landlord makes any false or misleading representation to CMHC of the CECRA administrator, including in the application or attestation.
- CMHC determines in its sole discretion that fraud or misconduct has occurred on the part of the property owner/landlord.
- (i) The property owner/landlord avails itself of any law governing bankruptcy, restructuring, reorganization, dissolution, winding-up or arrangement, (ii) a third party initiates proceedings against the property owner/landlord under any such law, or (iii) a receiver or trustee is appointed with respect to the property owner/landlord or its property.
Upon the occurrence of an Event of Default, CMHC may terminate the loan and require immediate repayment with interest and exercise any rights and remedies under any documents or conferred by law, including assigning the loan to Canada Revenue Agency or any recourse available to it through the Canada Revenue Agency.
Property Owner’s Attestation and Tenant’s/Subtenant’s Attestation
Each sample form of Attestation requires the property owner/landlord or tenant/subtenant, as the case may be, to confirm specific information to establish its eligibility for the CECRA program and to advise CMHC if any information provided becomes untrue between the date of the Attestation and December 31, 2020.
If a property owner/landlord or tenant/subtenant provides false or misleading information in its Attestation or otherwise in connection with a CECRA loan application, CMHC may determine that the applicable party is not eligible to receive financial or other benefits through CMHC and expose the applicable party to remedies for the recovery of any benefits received.
Pursuant to the form of Property Owner Attestation, the property owner/landlord must confirm that:
- it has (i) investigated and, where possible, applied for all available non-repayable proceeds of any other governmental programs targeted at commercial rent assistance instituted in response to the COVID-19 emergency, (ii) sought to obtain any rental loss insurance proceeds available to it, and (iii) disclosed to CMHC all amounts of rent relief and rental loss insurance that are received or receivable by the property owner/landlord in its CECRA application.
- it will notify CMHC if it receives further amounts from such sources and to pay all or part of such amounts to CMHC in accordance with the Loan Agreement. The sample form of Loan Agreement does not contain a specific provision requiring such future repayment to CMHC but states that the loan amount will be calculated by deducting any insurance or rent relief received or receivable in respect of the eligible program period (i.e. April 1 to June 30, 2020). Presumably receipt of additional insurance or relief would result in a reduction of the applicable loan amount which would necessitate a repayment by the property owner/landlord—but this outcome is not spelled out in the documentation.
- it has obtained any consents that may be required from its lenders pursuant to the terms of any financing agreements to permit the property owner/landlord to enter into the Rent Reduction Agreement, Loan Agreement and the Attestation. As a preliminary due diligence matter, the property owner/landlord will need to review its existing loan and security documentation to determine whether there are any restrictions on its incurrence of additional debt or its amendment of leases pursuant to the Rent Reduction Agreement.
The form of Tenant/Subtenant Attestation requires the tenant/subtenant to confirm that:
- its lease is set to expire later than August 31, 2020 (which is the deadline for applications to the CECRA program) and that the tenant/subtenant is “committed to the lease and its duration”;
- it has investigated and applied for any available non-repayable governmental rent relief and sought any available business interruption insurance proceeds and disclosed all relief and insurance that have been received or that are receivable by the tenant/subtenant to the property owner/landlord; and
- it is not subject to any actual or pending proceedings under the Bankruptcy and Insolvency Act, the Companies’ Creditor Arrangement Act or any bankruptcy or insolvency legislation in any other jurisdiction.
Attached to each form of Attestation is a broadly worded form of integrity declaration whereby the attestor is required to declare and confirm that:
- the attestor and its affiliates have not been convicted of and are not under prosecution for a crime or regulatory offence under Canadian, foreign or international laws relating financial matters such as but not limited to forgery, fraud, bribery, corruption, international sanctions, taxation or money laundering;
- the attestor and its affiliates have not been declared by the federal or any provincial or territorial government to be ineligible to do business with such government; and
- there are no acts known or which reasonably ought to be known to the attestor which could give rise to CMHC having a concern with respect to entering into a business relationship with the attestor or the attestor’s integrity, and that the attestor has provided all information that may be relevant to the determination by CMHC of the attestor’s integrity.
For this purpose, an “affiliate” is defined as another person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the property owner/landlord or tenant/subtenant, as the case may be. However, the concept of control is not defined.
If the property owner/landlord or tenant/subtenant giving the Attestation is not an individual (which is likely to be the majority of cases), the attestor makes the declarations in respect of each of its directors, officers, members, shareholders and beneficial owners. If the property owner/landlord is a nominee for one or more beneficial owners (which is also a likely situation, particularly for REITs), the attestor makes the declarations in respect of each of its beneficial owners.
Given the breadth of these statements and the potentially serious consequences of making false statements, any property owner/landlord or tenant/subtenant that is a corporate, partnership or business trust and that intends to sign an Attestation in connection with an application for CECRA benefits will want to conduct some due diligence to confirm the truth and accuracy of the statements in the Declaration of Integrity as they relate to the attestor’s affiliates and, if applicable, beneficial owners, and their respective directors, trustees, officers, partners and shareholders.
Interestingly, CMHC has anticipated that some landlords or tenants may not be able to make the Integrity Declaration in the sample form provided. Each form of Declaration of Integrity includes a footnote stating that if the attestor cannot make the Declaration of Integrity it must explain why in a separate document to be included with the Attestation form and that CMHC may request additional information to determine the party’s eligibility to receive CECRA benefits. We would expect any public company or REIT to rely on this approach to exclude shareholders from the Integrity Declaration but CMHC has not provided any guidance as to its rationale for including such possible exception.
The sample documents that have been provided by CMHC are generally consistent with the details of the CECRA program that have been announced to date. The sample Loan Agreement and Rent Reduction Agreement are drafted using relatively simple and plain language that is easy to read and understand. The conditional nature of the sample form of Rent Reduction Agreement eliminates the potential risk of a landlord’s loan application being refused.
However, the requirements for supporting documentation and information for the loan application process will require that landlords and tenants co-operate and do a significant amount of homework in order to compile the necessary supporting materials (rent roll, tax bill, due diligence regarding the Declaration of Integrity, tenant attestations, etc.) before the landlord can complete an online loan application.
While the federal government and CMHC are encouraging landlords to seek benefits under the CECRA program, the requirement that both applicant landlords and impacted tenants have pursued all other available forms of insurance and governmental relief and the breadth of the Attestation and Declaration of Integrity may dissuade or disqualify some potential applicants.
2 See “Why Property Owners Should Apply for CECRA for Small Business” at https://www.cmhc-schl.gc.ca/en/finance-and-investing/covid19-cecra-small-business; See also “Don’t Force My Hand” at https://www.cp24.com/news/don-t-force-my-hand-ford-tells-greedy-commercial-landlords-refusing-to-work-with-struggling-businesses-1.4945152
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