There's more to helping borrowers in the commercial space than walking them through rent deferrals
Commercial landlords were granted a modicum of relief from the stresses of the COVID-19 outbreak last week, when the federal and provincial governments announced the jointly-funded Canada Emergency Commercial Rental Assistance plan. The plan should help property owners worried about their tenants’ ability to pay rent recoup a fraction of their potential losses, but it doesn’t address many of the legal issues they may be struggling with.
The potential for legal problems to arise in the residential space is real enough; anyone who’s visited the Landlord Tenant Board can attest to that. Commercial properties, where two separate bottom lines are at stake, can be even thornier legal environments. And that’s in the best of times. The unprecedented business disruption brought on by COVID-19 has meant a host of new challenges real estate lawyers in the commercial space are currently trying to resolve.
Pavel Malysheuski, who specializes in corporate and commercial law at Lockyer + Hein LLP, has seen a number of commercial deals be put on hold because lenders are uncertain how to properly finance and assess properties whose retail rental income is, under current conditions, far from guaranteed.
Malysheuski says certain tried-and-true strategies can help get these deals done. Waiting for the situation to play itself out is a legitimate option for sellers who can sit out COVID-19. A vendor take-back deal followed by a refinance with a more traditional lender is another more conventional option.
But for a uniquely discombobulating situation like COVID-19, Malysheuski says lenders and lawyers must get creative.
One strategy he suggests is a vendor hold-back agreement, where the purchaser’s lawyer would hold a portion of the purchase funds in escrow to be used as rental guarantee funds. Because it carries with it the potential for a lower overall payoff, the appeal of this approach depends on how desperate the seller is to get out of a property. But the guaranteed rental income makes such deals far more appealing to lenders.
Malysheuski has also created what he calls a vendor take-equity mortgage for situations where a first mortgage in place and there isn’t room for a second. In his VTE scenario, the vendor takes an equity position in the purchaser’s company.
“There’s no additional debt on this purchase and the vendor has a certain control over how things go with the purchaser and the purchase money,” he says.
With so many uncontrollable influences impacting commercial real estate, some buyers may consider turning to force majeure as a way of exiting what are now less desirable deals.
“We’re now exactly in the situation described by the force majeure concept,” Malysheuski explains, “unforeseeable and unforeseen circumstances beyond our control which may render a deal unclos-eable.”
The only problem, and it’s not a small one, is that using force majeure to terminate a potential sale requires agreement between buyer and seller. Otherwise, it’ll be up to the courts to decide if it applies.
“It can be a good argument. However, if you can’t persuade the vendor, you’ll have to persuade the judge,” says Malysheuski, who stresses that a negotiated settlement is always the better play.
If COVID-19 flares up again in the fall, as many medical experts are predicting, it will no longer be an “unforeseeable” incident, rendering force majeure clauses moot. Daniela Peeva of Mortgage Alliance Commercial says commercial landlords should take what they’ve learned over the past few weeks and get ahead of the game.
“Review all your documents and start digging in and amending your leases to include situations like COVID-19 as a part of it,” she says. “Because if this happens a year from now, where we have a second wave, you want to be protected.”
