Commercial real estate has seen some dramatic ups and downs over the past few years, as many businesses were forced to pivot to work-from-home models early in the pandemic. However, as Ontario has been working towards a slow return to pre-pandemic health practices, companies are looking to move back into offices. With that, commercial real estate has seen record highs in several major markets across Canada in terms of price, occupancy, and rental rates. According to a recent Globe & Mail article, commercial properties in Toronto are currently at less than 1% vacancy and have seen the average rent increase by double digits.
However, several businesses, particularly small-to-mid-sized operations, are still feeling the economic pinch caused by lengthy government-mandated closures, supply chain disruptions, and staff reductions. As a result, there are more and more discrepancies in the amount landlords are charging, versus what businesses can pay, creating situations where some businesses have been forced to relocate or even close due to the expense. This has led to many business owners looking for better protections and more flexible dispute resolution services in the commercial real estate space, similar to protections currently in place in the residential space.
A group known as the Better Way Alliance, comprised of several small businesses located across Ontario, is advocating for better protections for businesses concerning commercial property leasing. The Alliance recently released a report highlighting what it claims are inequities facing small and medium-sized businesses and some recommended changes needed to bring parity between landlords and tenants to allow both sides to come to the negotiating table on equal footing. If some or all of the recommendations gain enough traction to induce actual change, it could significantly impact the way commercial leasing works in the province going forward.
Businesses Manage to Survive Pandemic, Only to Close Due to Rent Increases
Recent articles from the CBC highlight some of the small businesses that have been forced to close in recent months after their commercial landlords unexpectedly increased rent by more than 25%. For example, one Cambridge restaurant was forced to shutter when the landlord raised the rent by 35% for 2022, and another 35% for 2023. Another nearby restaurant, which had been in business for over 25 years, also had to close after the landlord raised the rent by 30%.
In Hamilton, a family-owned restaurant attempted negotiations with the landlord when the landlord wanted to increase the rent from $3700 per month to $5700, an increase of more than 50%. Negotiations ultimately broke down, and the restaurant will now be closing after the business owner spent $160,000 out of pocket to make improvements to the space. The landlord also spoke with the CBC, indicating that he attempted to find a middle ground with the tenant, however, the parties were unable to come to terms. For his part, the landlord indicated that the increase reflects an increase in his own costs, including property taxes, which have increased by more than double since 2016.
Highlights of The Better Way Alliance’s Report and Recommendations
In response to situations like the ones described above, the Alliance conducted a study of over fifty small business owners across the province in industries including hospitality, professional services, finance, trade, and retail. The surveys were conducted in 2020 and 2021, with follow-up interviews conducted in early 2022. The final report was released in late February.
Some of the key findings include:
- Rent is one of the three most significant expenses for nine out of ten small business owners, with more than half saying it accounts for more than 60% of their monthly expenses.
- 75% of respondents have experienced a one-time rent increase of at least 10%, and over 15% have had a one-time increase of at least 50%. One in ten have seen rents double in a single increase.
- Nearly half have had to move in the past due to a rent increase, and over 50% of those polled indicated that they’d likely need to move at the end of their current lease for the same reason.
The report suggests three recommendations for improving the commercial leasing landscape in Ontario, to create a more even playing field between landlord and tenant:
- Cap annual rent increases for commercial properties in the same way that increases are capped for most residential leases in the province.
- Create a standardized commercial tenancy agreement with the following goals:
- Ensuring transparency for commercial tenants and landlords regarding shared costs; and
- Ensure existing tenants are given priority for renewal at the end of a lease term.
- Create a dedicated dispute resolution forum, similar to the Landlord Tenant Board, to enable parties to resolve disagreements more efficiently and cost-effectively instead of relying on litigation.
Commercial vs. Residential Leasing in Ontario
To highlight some of the key differences between commercial and residential leasing in Ontario, there is no current cap on commercial rent increases. On the contrary, residential rent is capped at a set percentage set by the provincial government each year. For 2022, residential rent increases are capped at 1.2%. However, there are certain exceptions to this policy. For example, the cap does not apply to vacant units, meaning landlords may increase the rent by more than the set amount between tenants. Further, landlords may apply for an exemption that allows them to increase the rent beyond the cap amount in certain situations, such as if the landlord has made significant capital expenditures to the property. Notably, the cap on residential rent increases does not apply to buildings or additions constructed or occupied for the first time after November 15, 2018.
There is also a dedicated forum for dispute resolution between residential landlords and tenants. The Landlord and Tenant Board allows the parties to resolve disputes before a tribunal with subject-matter expertise in a forum designed specifically to hear and decide residential leasing issues. The process can be much more cost-effective than traditional litigation, and so the Better Way Alliance’s report is asking for a similar process for commercial leasing dispute resolution.
To date, there is no indication that the provincial government is considering implementing any of the requested changes. When asked to comment on the report, a spokesperson for Nina Tangri, the Associate Minister of Small Business, pointed out various supports offered to small businesses to help ease financial pressures caused by the pandemic. However, Gillian Pearce, one of the report’s co-authors, noted that these issues had been a problem for small business owners before the pandemic began:
COVID didn’t cause this crisis. … The pandemic just shone a light on this. Businesses have suffered a lot during the pandemic, but this issue did start before, and it will, unfortunately, continue to close down small businesses if we don’t address this underlying issue that there are no protections.
If the government were to consider some or all of the changes recommended by the report, it could have a dramatic impact on commercial landlords in the future and could potentially restrict their ability to adjust rental rates as needed to respond to market and economic fluctuations.
For Trusted Guidance on Commercial Real Estate Matters Contact Milosevic Fiske LLP
At Milosevic Fiske LLP, our Toronto commercial real estate lawyers have many years of experience advising clients on effectively managing risk in large commercial real estate transactions. Where a transaction results in a legal dispute, we will represent you in litigation at all levels of court. Call us at 416-916-1387 or contact us online to learn how we can help.