Real eState
Commercial Lease Remedies During The COVID-19 Pandemic – Real Estate and Construction – Canada – Mondaq News Alerts
In a series of recent cases, courts in Quebec have prevented
landlords from terminating commercial leases and/or have reduced
rent payable during periods where tenants were forced to close due
to COVID-19, particularly where landlords did not apply for the
Canada Emergency Commercial Rent Assistance program
(CECRA).
In Ontario and British Columbia1,
similar measures have temporarily been enacted into law to prevent
landlords from terminating leases or exercising distress rights if
they are or would otherwise be eligible for CECRA; however, these
measures do not relieve tenants of their obligation to pay rent or
give the tenant the right to pay reduced rent.2 The expiration of these measures may result
in an influx of landlord-tenant disputes and challenge courts to
apply existing common law principles to unfamiliar
circumstances.
Court cases
Quebec courts have begun to temporarily prevent landlords from
terminating commercial leases for rental defaults arising from the
forced closure of retail establishments due to COVID-19. In a
majority of those decisions, courts have granted tenants temporary
injunctive relief pending the determination of the matter on its
merits. In other cases, tenants have succeeded at trial and been
relieved of the obligation to pay rent during periods of forced
closures due to, among other things, the landlord’s inability
to provide peaceable enjoyment of the premises for their intended
use or the fact that the tenant resumed paying full rent following
the forced closures.
Courts outside Quebec are unlikely to rely on those same
principles in pandemic-related lease disputes. However, the
decisions canvassed in the early stages of the pandemic signal a
willingness by the courts to use their power to protect tenants
affected by the impacts of COVID-19. This is particularly true in
situations where landlords do not take advantage of CECRA or other
government initiatives to mitigate the consequences of the
pandemic. As such, commercial tenants outside Quebec may be able to
achieve similar results by interlocutory injunctions and/or relief
from forfeiture.
Interlocutory injunctions
An interlocutory injunction is a form of temporary relief
granted by courts to prevent a party from performing certain acts.
In Quebec, courts have used this relief to prevent landlords from
terminating leases in situations where the pandemic has caused the
forced closure of retail establishments. To obtain such relief, a
tenant must establish that its claim has some merit, it will suffer
harm that cannot be cured by monetary compensation (such as the
loss of its business or customer base) and the harm it may suffer
if the injunction is not granted is greater than the harm to the
landlord.
The test for interlocutory injunctions is substantially the same
throughout Canada, suggesting that similar decisions may be reached
at the interim relief stage, particularly when a landlord is
eligible but has refused to apply for CECRA. This remedy is likely
to be a commercial tenant’s first recourse if a landlord seeks
to terminate a lease when and where legislative protections no
longer apply.
Relief from forfeiture
A court may grant an interlocutory injunction to a tenant either
pending or as part of its discretion to grant relief from
forfeiture, a remedy available to commercial tenants in Ontario,
British Columbia and Alberta that gives courts the power to
reinstate a tenancy as they see fit. At least one reported decision
in Ontario has already considered such relief in light of COVID-19
and would have restored the tenancy.3
Generally, courts will consider four criteria when the
tenant’s alleged default is the non-payment of rent, including
whether or not:
- the tenant acted honestly and in good
faith; - the tenant refused to pay rent
outright; - the landlord suffered a serious loss
from the delay in paying rent; and - the rental arrears were
significant.
The recent Ontario Second Cup decision signals a willingness to
look at rental defaults in the context of the pandemic. In that
case, the tenant’s rental arrears amounted to 25.5% of rent,
which was considered insignificant in light of the
“unprecedented pandemic that shut down most of [the
tenant’s] operations and the country’s economy.”
Tenants may be able to make similar claims either where they ask
the landlord to forego 25% of rent as part of the CECRA program or
where the tenant can only make partial payments. A tenant’s
expressed desire to have a landlord apply for CECRA or enter into a
rent abatement or deferral agreement during the pandemic may
therefore weigh in its favour as such actions contradict an
outright refusal to pay rent.
The courts may also consider a number of other factors,
including the length of the tenancy, the history of defaults and
the tenant’s ability to bring the lease into good standing.
Where special circumstances are at play, those factors may weigh
more heavily in favour of the tenant. For example, the Ontario
decision involved a unique scenario where the tenant would have
lost the benefit of applying for a cannabis retail store licence
for the premises and other locations, which was of utmost
importance to the company.
Practical impact
The decisions released in the early stages of the pandemic may
be a sign of what is to come in the “new normal.” While
the statutory protections in Ontario and British Columbia have been
extended to October 30, 2020, and October 13, 2020, respectively,
the courts have signalled a willingness to effect similar results
in the absence of those protections by the application of equitable
doctrines. This trend may decrease the level of commercial
certainty and comfort that landlords have in pursuing lease
remedies for pandemic-related defaults.
While each situation must be examined case-by-case, landlords
wishing to exercise their rights and remedies under a lease are
encouraged to seek legal advice, particularly in circumstances
where they were eligible but did not apply for CECRA or believe
special circumstances are at play for their tenants.
A tenant facing eviction for pandemic-related defaults would
also be wise to consult its legal advisors in order to identify the
full range of available rights and remedies. Further, tenants are
encouraged to keep detailed records of COVID-19-related losses
suffered and should actively engage with landlords regarding the
options available to help militate against the financial impacts of
the pandemic on both parties.
Footnotes
1. The Alberta Commercial Tenancies Protection
Act (Bill 23) lapsed on August 31, 2020 regarding certain
protections afforded to tenants and to date, this emergency period
(non-enforcement period) has not been extended by regulation even
though the government has the power to do so. The regulations
expire on August 31, 2023.
2. See Helping Tenants and Small Businesses Act,
2020 (Ontario) and COVID-19 Related Measures Act (British
Columbia).
3. The Second Cup Ltd. v 2410077 Ontario Ltd.,
2020 ONSC 3684.
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Real eState
Caution about Canada's private real estate sector abounds as valuations slow to adjust – The Globe and Mail
Valuations for Canada’s office real estate have taken longer to adjust than properties in other advanced economies.Jeff McIntosh/The Canadian Press
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As the U.S. economy has pulled meaningfully ahead of Canada’s, so too has its private commercial real estate sector, which is adjusting more positively to the post-pandemic reality.
That’s particularly evident in both countries’ privately held office property markets. While the U.S.’s is well down the path of transforming, demolishing or otherwise ridding itself of empty office space, Canada’s has practically frozen in place following a wave of markdowns in 2023. That has made valuation assessments next to impossible.
“There’s a big dichotomy, and the Canadian market so far has not corrected,” says Victor Kuntzevitsky, portfolio manager with Stonehaven Private Counsel at Wellington-Altus Private Counsel Inc. in Aurora, Ont., which holds private real estate assets in credit and equity vehicles in both Canada and the U.S.
It’s no secret that last year was a difficult period for owners of Canadian private real estate, with many pension fund managers losing money as high interest rates drove up borrowing costs, inflation increased operating costs and vacancy rates remained high or even climbed.
The Caisse de dépôt et placement du Québec saw its real estate portfolio decline 6.2 per cent in 2023. The Ontario Teachers’ Pension Plan experienced a 5.9-per-cent loss in its real estate book, while markdowns on commercial properties owned by the Ontario Municipal Employees Retirement System (OMERS) resulted in its real estate portfolio dropping by 7.2 per cent.
However, there are pockets of strength investors can look to, says Colin Lynch, managing director and head of alternative investments at TD Asset Management Inc. These include multi-family residential and open-air retail centres, as well as industrial properties, which have been steady performers following strong gains through the pandemic.
It’s a view that dovetails with other analyses of the Canadian market. BMO Global Asset Management’s latest commercial property outlook notes that the industrial and multi-family segments remain strong due to high investor demand and tight supply.
“Office remains the asset class of the greatest near-term concern and focus,” the BMO GAM report states, estimating “a timeline for a return to ‘normal’ of a least five years.”
Mr. Lynch says while that timeframe could be accurate, private real estate investors need to evaluate opportunities on a city-by-city basis.
“Every city is very different. In fact, the smaller the city, the better the office property market has generally performed because commute times are much better, so in-office presence is much higher,” he says.
He points to cities such as Winnipeg, Regina and Saskatoon, where commute times can be 10 minutes and office workers are in four days a week on average.
However, there’s also room for more bad news, with some property owners struggling to refinance expensive debt in a higher-for-longer rate environment that could force firesales for lower-quality buildings.
The U.S. and other advanced real estate markets, such as the U.K., are “quarters ahead” of where the Canadian office market is in terms of valuation adjustments, Mr. Lynch says. A major reason is much of Canada’s commercial office real estate is owned by a relatively small group of large investment funds.
“Peak to trough in the U.K., for example, declines were about 20 per cent,” he says, noting that Canada’s market hasn’t corrected to that extent, but it is catching up.
Mr. Kuntzevitsky says these private fund assets are valued based on activity.
“The U.S. market is deeper, there’s more activity within it compared to Canada,” he says. “The auditors I speak to who value these funds are saying, ‘Listen, if there’s no activity in the marketplace, we’re just making assumptions.’”
Nicolas Schulman, senior wealth advisor and portfolio manager with the Schulman Group Family Wealth Management at National Bank Financial Wealth Management in Montreal, holds private real estate funds for clients and says he’s preparing to evaluate new investments in the Canadian space later in 2024.
“We don’t think the recovery would take a full five-year window, but we do believe it’s going to take a bit more time. Our conviction is, we want to start looking at the sector toward the end of this year,” Mr. Schulman says.
Mr. Kuntzevitsky says he’s been allocating any excess cash to the U.S. market in both private and publicly listed vehicles.
“The opportunity here is that you redeem your open-ended private [real estate investment trusts (REITs) in Canada] and reallocate the money to the U.S., where the private market reflects [net asset values] based on recent activity, or you can invest in publicly listed REITs,” he says.
Still, Mr. Kuntzevitsky is watching developments closer to home for evidence the market is turning.
In February, the Canada Pension Plan Investment Board and Oxford Properties Group Inc. struck a deal to sell two downtown Vancouver office buildings for about $300-million to Germany’s Deka Group – about 14 per cent less than they were targeting.
“Hopefully, that will activate the market,” Mr. Kuntzevitsky says. “But so far, we haven’t seen that yet.”
For more from Globe Advisor, visit our homepage.
A large condo complex proposed in the increasingly condo-packed Yonge and Eglinton neighbourhood is planning to go much taller.
Developer Madison Group has filed plans to increase the height of its planned two-tower condo complex at 50 Eglinton Ave. W., from previously approved heights of 33 and 35 storeys, respectively, to a significantly taller plan calling for 46- and 58-storey towers.
The dual skyscrapers will rise from a podium featuring restored facades of a heritage-designed Toronto Hydro substation building.
As of 2024, plans for high-rise development at this site have been evolving for over a dozen years, first as two separate projects before being folded into one. The height sought for this site has almost doubled in the years since first proposed, and it shouldn’t come as a huge surprise for anyone tracking development in this part of the city.
Early 2024 design for 50 Eglinton West before current height increase request.
Building on a 2023 approval for towers of 33 and 35 storeys, the developer filed an updated application at the start of 2024 seeking a slight height increase to 35 and 37 storeys.
Only a few months later, the latest update submitted with city planners this April reflects the changing landscape in the surrounding midtown area, where tower heights and density allotments have skyrocketed in recent years in advance of the Eglinton Crosstown LRT.
April 2024 vision for 50 Eglinton Avenue West.
The current design from Audax Architecture is a vertical extrusion of the previous plan that maintains all details, including stepbacks and material details.
That updated design introduced in January responds to an agreement that allows the developer to incorporate office space replacement required under the neighbourhood plan to a nearby development site at 90-110 Eglinton East.
According to a letter filed with the City, “As a result of the removal of the on-site office replacement, which altered the design and size of the podium, and to improve the heritage preservation approach to the former Toronto Hydro substation building… Madison engaged Audax Architecture and Turner Fleischer Architects to reimagine the architectural style and expression of the project.”
A total of 1,206 condominium units are proposed in the current version of the plan, with over 98 per cent of the total floor space allocated to residential space. Of that total, 553 units are planned for the shorter west tower, with 653 in the taller east tower.
A sizeable retail component of over 1,300 square metres would animate the base of the complex at Duplex and Eglinton.
The complex would be served by a three-level underground parking garage housing 216 spots for residents and visitors. Most residents would be expected to make use of the Eglinton Line 1 and future Line 5 stations across the street to the southeast for longer-haul commutes.
Audax Architecture/Turner Fleischer Architects
Real estate is increasingly a tale of two markets — a luxury sector that is booming, and the rest of the market that continues to struggle with higher rates and low inventory.
Overall real estate sales fell 4% nationwide in the first quarter, according to Redfin. Yet, luxury real estate sales increased more than 2%, posting their best year-over-year gains in three years, according to Redfin.
Real estate experts and brokers chalk up the divergence to interest rates and supply. With mortgage rates now above 7% for a 30-year fixed loan, most homebuyers are finding prices out of reach. Affluent and wealthy buyers, however, are snapping up homes with cash, making them less vulnerable to high rates.
Nearly half of all luxury homes, defined by Redfin as homes in the top 5% of their metro area by value, were bought with all cash in the quarter, according to Redfin. That is the highest share in at least a decade. In Manhattan, all-cash deals hit a record 68% of all sales, according to Miller Samuel.
The flood of cash is also driving up prices at the top. Median luxury-home prices soared nearly 9% in the quarter, roughly twice the increase seen in the broader market, according to Redfin. The median price of luxury homes hit an all-time record of $1,225,000 during the period.
“People with the means to buy high-end homes are jumping in now because they feel confident prices will continue to rise,” said David Palmer, a Redfin agent in Seattle, where the median-priced luxury home sells for $2.7 million. “They’re ready to buy with more optimism and less apprehension.”
The luxury market is also benefiting from more supply of homes for sale. Since wealthy sellers are more likely to buy with cash, they are not as worried about trading out of a low-rate mortgage like most homeowners. That has freed up the upper end of listings, creating more inventory and driving more sales.
The number of luxury homes for sale jumped 13% in the first quarter, compared to a 3% decline for the rest of the housing market, according to Redfin. While overall luxury inventory remains “well below” pre-pandemic levels, the number of luxury listings that came online during the first quarter jumped 19%, the report said.
“Prices continue to increase for high-end homes, so homeowners feel it’s a good time to cash in on their equity,” Palmer said.
Still, not all luxury markets are booming, and the strongest price growth is in areas not typically known for luxury homes. According to Redfin, the market with the fastest luxury price growth was Providence, Rhode Island, with prices up 16%, followed by New Brunswick, New Jersey, where prices were up 15%. New York City saw the biggest price decline, down 10%.
When it comes to overall sales of luxury homes, Seattle posted the strongest growth of any metro area, with sales up 37%. Austin, Texas ranked second with sales up 26%, followed by San Francisco with a 24% increase.
Luxury homes sold the fastest in Seattle, with a median days on the market of nine days, followed by Oakland, California, and San Jose, California.
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