Why A Commercial Evictions Moratorium is Absolutely Necessary To Save Small Business
It’s not about evictions — it’s about negotiating power, and the massive imbalance landlords currently hold.
The reluctance of the Canadian federal government and its Provincial governments to institute a moratorium on commercial evictions is leaving hundreds of thousands of small business owners at the mercy of their landlords. This article explains why it’s not as simple as “why would a landlord want to evict anyone?” and why a moratorium is essential to a fair sharing of the burden of this public health crisis.
In many countries, one of the first acts of governments in their economic response to the COVID19 public health crisis was to ensure that businesses could not be evicted from their premises. The UK declared a moratorium on evictions on March 24th, and Australia on March 29th, both worried about the businesses that wouldn’t be able to pay their rent on April 1st. France and Denmark took different approaches, with France simply declaring a pause on both rent and mortgages, and Denmark announced very early on that they would pay a portion of fixed costs for affected businesses, ensuring that there would be no unpaid rent.
In Canada, the decision on whether to impose a moratorium on commercial evictions has been left to the provinces, as this is within their jurisdiction. But only a couple of provinces have done this, leaving the vast majority of Canadian businesses exposed to being locked out of their premises if they can’t make rent. And that is a lot of businesses — according to the Canadian Federation of Independent Business’ most recent survey, 58% of respondents won’t be able to pay May 1st rent in full.
At Save Small Business we’ve been advocating for a moratorium on commercial evictions since we started, about a month ago. But whenever I talk about this, someone who thinks they’re clever says some version of this: “but why would landlords evict their tenants? Isn’t that bad for them too? Who’s going to rent all that space if they kick everyone out?”
Effectively, their argument is that it’s in the best interests of both the landlord and the tenant for the tenant still to be there when physical distancing restrictions are relaxed, and therefore there should be lots of good reason for a deal to be reached. So, we should be hearing wide-spread examples of fair agreements with landlords and tenants sharing the burden of forced closures.
Yet, this isn’t happening. At Save Small Business what we’re hearing from all over the country are stories of businesses being threatened with evictions and deals being signed for rent deferrals that are heavily weighted to the landlord. There are some cases of landlords actually reducing rent, but they are very few and very far between.
The questions is: why? Why isn’t this perfectly logical argument playing out?
The answer lies in how leases are structured, and in the dynamics between the small business owner and their landlords. Anyone who understands small business will instantly understand this, and the fact that there isn’t an evictions ban in every province is evidence of the lack of understanding of small business among our country’s leaders. Any Premier who does not already have an evictions ban in place should never be allowed to claim they speak for small business again.
Here’s why:
Imagine negotiating your salary with your boss. But, instead of just leaving and finding a new job if you weren’t satisfied with the result, you had to find a completely new career. And all that furniture you own? Well, your boss gets to just take that when you leave, and you need to pay all the recruitment expenses for your replacement. What does your negotiating position look like now? How likely are you to get what you want?
That’s the position of a commercial tenant.
Most business owners have signed personal guarantees for their leases. So, they remain on the hook for rent until either the lease runs out, or a new tenant is found. They’ve also often put hundreds of thousands of dollars into fitting out their businesses, which they lose if they’re locked out. Consider the restaurant with customized bars, tables, décor and a professional kitchen. Or the gym with expensive flooring and heavy equipment. These things can’t just be picked up and moved somewhere else.
Many will also have other business debts, which can’t be covered without income from their businesses. So, an eviction not only means starting from scratch, in many cases it means bankruptcy.
Contrast that with the landlord’s position: if they evict, they can re-sell whatever’s inside, go after the tenant for whatever rent is left unpaid, and their downside isn’t bankruptcy: it’s the time it takes to find a new tenant.
This stark imbalance of power is leading to business owners all over Canada taking money out of their retirement funds and borrowing from friends and family to pay their rent. Or, they’re signing deferral deals with landlords that will make it incredibly hard to make a profit once they re-start. With so much to lose, it’s impossible for tenants to take a strong negotiating position. So, if they are able to make it through, the landlord will end up getting all the rent due to them during this crisis, sharing none of the burden. And if they don’t the landlord will have received as much as they possibly could before the business finally closes.
The issue isn’t evictions. It’s the threat of evictions.
Finally, it’s important to understand that leases can be quite long: often five or ten years. And some tenants have extension options that can take these to as many as twenty years. As a lease gets older, its market value changes. If an area improves, the potential rent a landlord could get goes up, and obviously the reverse is true. Tenants have no way to get out of leases that they’ve signed. But right now, because a public health crisis has closed down so many businesses, starving them of cash to pay rent, landlords have a once-in-a-generation opportunity to get out of leases where the current market value may be higher than they’re getting from the current tenant.
Again, this is a massive imbalance of power, caused not by anything a business owner did wrong, but a public health emergency.
This article isn’t intended to be “anti-landlord.” A market economy is all about these types of negotiations, and landlords are mostly acting according to their own best interests, as our society expects them to do. The goal here is to paint an accurate picture of what’s happening in our communities, so governments can act accordingly.
In times of crisis, these types of sudden and massive imbalances in power, like the one that’s developed between landlords and small business owners, need to be corrected. And the only way to do that is through a moratorium on commercial evictions to even the playing field, while reasonable deals on rent can be negotiated, and ideally mandated. Many other countries have recognized this. In Canada the real estate lobby is very strong, and true local community businesses don’t have much of a voice. We’re seeing the impact of that in the decisions that governments are making to ignore this issue.
There’s only a week left before May 1st, and bad deals are being signed all over the place. Any province that cares about its small businesses needs to act now to put a moratorium on commercial evictions in place.
