COVID-19 and the CECRA Program application process explained

After just over a month since the Canada Emergency Commercial Rent Assistance Program (“Program”) was announced, applications are finally being accepted.

The Program is administered by Canada Mortgage and Housing Corporation (“CMHC”) and is available for eligible property owners (“EPO”) with eligible tenants (“ET”). If approved for the Program, the federal and provincial governments would cover 50 per cent of an ET’s monthly gross rent for a three-month period from April 1, 2020 to and including June 30, 2020 (the “Program Period”) through an interest-free forgivable loan (“Loan”) to the EPO. The EPO would absorb 25 per cent of the rent, and the ET would pay the remaining 25 per cent for the Program Period.

If the EPO complies with all applicable Program terms and conditions (broadly described below), the governmental loan to the EPO of 50 per cent of the ET’s gross rent will be fully forgiven on December 31, 2020. However, if the EPO does not comply with the Program requirements, CMHC has full recourse to recover the Loan from the EPO.

Similarly, according to the CMHC website, if the ET provides any false or misleading information in its attestation, it will be responsible for all rent forgiven under the terms of its lease.

Applications for the Program

As of May 25, 2020, the applications for the Program are available to EPOs to complete through CMHC’s website (link is here) along with details on why property owners should apply.

The deadline to apply is August 31, 2020.

In order to access the application documentation for completion, a property owner must register as an eligible property owner.

Eligibility

Eligible Property Owners. The first step for Program eligibility is to determine if a property owner is an EPO.

An “EPO” must be the registered property owner of a “commercial property” which is occupied by one or more “ET(s)”. However, there are exceptions such as some federal-, provincial-, or municipal-owned properties, where the government entity is the landlord in which case the Program does not apply.

When the Program was first announced, the loan needed to be tied to a mortgaged property. That is no longer the case. This clarification make the Program readily available to those property owners that do not have a mortgage on their property.

Where a property owner and tenant are not dealing at arm’s length (e.g. where the property owner owns the small business that is its only tenant), the Program allows such property owners and tenants to be eligible for the Program, so long as all the general program requirements apply and there is a valid and enforceable lease agreement in place with rent at market rates.

Eligible Tenants. The next step for Program eligibility is to determine if a tenant is an ET.

An “ET” is a tenant or subtenant who satisfies the following requirements:

* it opened for business prior to March 1, 2020;

* monthly gross rent payable per location does not exceed $50,000 (before HST) under a valid and enforceable lease agreement. The CMHC website provides a list of rent inclusions and exclusions;

* it has gross annual revenues of no more than $20 million (at the ultimate parent level); and

* it has experienced at least a 70 per cent decline in pre-COVID-19 revenues.  To measure revenue loss, the ET can compare revenues in April, May and June of 2020 to that of the same period of 2019, or the ET can use an average of its revenues earned in January and February of 2020. 

Program Requirements

If the property is an EPO and the tenant is an ET, in order to receive the Loan, and for the Loan to be forgiven, the following requirements must be satisfied:

Rent Reduction Agreement. The EPO must enter into a legally binding rent reduction agreement which:

* reduces the ET’s rent by at least 75 per cent for the period of April, May and June 2020. This agreement is conditional upon final approval of the application for the Program.

* includes a moratorium on eviction for the period during which the EPO agrees to apply the Loan proceeds.

The agreement may be entered into retroactively so that EPOs may still apply for assistance even after the Program Period has ended, as long as they are able to prove eligibility during that period.

If the ET has paid more than 25 per cent of the rent at the time of approval into the Program, a credit to the ET for a future month’s rent (i.e. July for April) is acceptable — if the ET chooses this option (it is the ET’s option – not the EPO’s). This can be a flexible future three-month period.  

Loan Agreement. A sample Loan agreement was originally provided on the CMHC site, but has since been removed, and is not in the initial group of documents provided for as application documentation. We anticipate that the loan agreement will be provided to the EPO after the application has been approved by CMHC.

EPO and ET Attestations.

* Property Owner Attestation. An attestation signed by the EPO is required and must confirm that the information relating to the EPO and the property provided in the application is correct and confirming it meets the program requirements.

* Tenant Attestation. An attestation signed by the ET is required and must confirm that it meets the program requirements for an ET.

Supporting Information and Documentation.

* From the EPO. The EPO is required to provide information and supporting documentation about the property, such as property address, tax statement, and rent roll, and information and supporting documentation about the property owner, such as bank information and contact information.

* From the ET. The ET is required to provide information and supporting documentation about the ET, such as contact information, lease area, and monthly gross rent.

EPO Bankruptcy, etc. The CMHC website currently provides that if the EPO files for bankruptcy, restructures, reorganizes or dissolves its business, it will need to pay back the Loan.

Loan Proceeds. The Loan proceeds must be used, in order of priority, as follows:

* first, if the ET has paid more than 25 per cent of its monthly rent during the Program Period, to reimburse the ET for such overpayment unless the ET chooses to apply the previously paid rent against future rent; and

* second, if the ET has not paid more than 25 per cent of its monthly rent during the Program Period, the Loan proceeds must be used by the EPO for any costs and expenses relating directly to the property, including any financing and operation, maintenance and repair obligations (such as costs of common area maintenance, property taxes, insurance and utilities).

Program Concerns

For some tenants, the relief is “too little, too late” as they were unable to pay their April and/or May rent and as a result, landlords would have been in a position to exercise their remedies in April or May, or those tenants vacated their premises.

* According to a May 19, 2020 Macleans.ca article by Nick Taylor-Vaisey: “With less than two weeks to go before thousands of Canada’s small businesses owed their landlords April rent payments, many were forced to close up shop as the coronavirus pandemic sent provinces into lockdown mode”.

* According to a survey conducted by the Canadian Federation of Independent Business (110,000 members) over the Victoria Day weekend, 55 per cent of business responding (6,379) said “rent relief could make the difference between their business surviving COVID-19 or shutting for good.”  (Toronto Sun – May 20, 2020 – Jenny Yuen).

There is still reluctance by landlords to participate in the Program given its complexity in terms of time and possible Program costs for the Loan. As a result, there has been a call for government intervention as the Program remains voluntary with no moratorium (in Ontario) on evictions of commercial tenants who have been unable to pay full rent.

* In a May 19, 2020 press release, Ontario Premier Doug Ford was asked about property owners who would not apply for the Program. Premier Ford claimed that “there will be consequences” for landlords that did not take advantage of the Program. In a June 3, 2020 press release, Premier Ford once again claimed that he would take action: “all the landlords out there, you want to play hardball, we’ll play hardball then because I’m going to protect the little guy. I’m going to protect the little businesses out there that are struggling.”

* It is unclear to what consequences Premier Ford has been referring, or what authority he would have to take action; but it is clear from his response that he intends to defend commercial tenants during this crisis.

We expect that the ET attestation will necessitate some financial disclosure by ETs to their EPOs which may deter ETs from participating. EPOs will also likely need to collect information from the ET’s with respect to each ET’s financial situation, which may be burdensome and could further deter EPOs from participating.

While CMHC has stated that thousands of EPOs have already registered, it acknowledges that many are having technical issues with the online process and are frustrated with the call wait times, which currently can range between two and three hours.

At this point in time, there remains uncertainty in terms of how successful the Program will be without some teeth to force landlords into the program such as a moratorium on evictions for rent default (supported by financial evidence that the failure to pay rent was due to government ordered closure and COVID-19 and not for some other reason). However, with the Program now taking applications, we will see if this makes a difference in this critical time for commercial businesses.