Commercial rent prices are rising, and many small businesses are finding it hard to keep up
Since 2004, Linette Doherty has taught dance and theatre classes to children out of the same street-front studio, The S.P.A.C.E., on Toronto’s Danforth Avenue. Though the pandemic ended in-person instruction for months on end and slashed her revenue, she hung on and has rebuilt her business nearly back to where it was.
As she planned for the future, she hoped to stay in the same studio she’s been in for nearly 20 years. That is, until she got a new landlord, who sent her a devastating letter this spring: He was raising her rent 35 per cent when her lease is up on July 31. She could pay the increased rent or move out.
“I can’t take a 35-per-cent hit overnight,” Ms. Doherty said. “I’m not going to suddenly grow my business to 35 per cent more of its prepandemic level this summer overnight. I’m not even back to prepandemic levels.”
Commercial rent prices are rising, and many small businesses are finding it hard to keep up. The situation is highlighting how few protections commercial tenants have – something that some small businesses are hoping to change.
According to Statistics Canada’s commercial rent prices index, commercial rents dropped in the early months of the pandemic and then began to climb back up. Demand for industrial and warehouse space grew fastest, but by early 2022 retail rent prices were back to prepandemic levels – even though sales had not recovered to the same degree. In Toronto, average retail lease rates were 14 per cent higher than before the pandemic, according to the Toronto Regional Real Estate Board. In Vancouver, the average asking net rent was up 27 per cent year-over-year in the first quarter of 2022, according to Colliers.
Small businesses are especially sensitive to rising rents because most lease their properties. According to a 2020 study by the Canadian Federation of Independent Business, 71 per cent of small businesses rented their spaces. And most commercial leases pass on property taxes to their tenants to pay as well.
Aaron Binder, chief experience officer of Go Tours Canada and director of small-business advocacy group Better Way Alliance, said he is concerned that rising rent could put more pressure on independent stores and force them to close.
“The only businesses that are going to be able to afford that type of rent are chains and pot shops,” Mr. Binder said.
The issue for many small business owners is that, compared with residential tenants, there are few laws protecting commercial tenants when their leases are up for renewal. Rents can be raised as much as a landlord wishes and entrepreneurs often must pay for lawyers to help them negotiate lease contracts. If a dispute arises, there are no landlord-tenant boards to go to – commercial tenants have to sue and wait months or years to go through a civil-court process at great expense.
Mr. Binder’s group has begun to advocate for some solutions they say would help level the playing field between commercial tenants and their landlords, such as standardized and mandatory leases, and creating commercial tenant-landlord boards that would take disputes out of the backlogged court system.
Scott Johnston, a Vancouver real-estate lawyer and co-chair of the small- and medium-sized enterprises (SME) committee for the Canadian Chamber of Commerce, said a standardized lease could, for example, contain clauses to limit rent increases upon renewal, while still allowing for negotiation.
He said he has seen too many small businesses struggle without any lease in place, and so he is in favour of creating lease templates – even if that ultimately means less income for real-estate lawyers such as himself.
“In fairness, if it’s between not seeing me or another lawyer and having no lease in place, for the better good, I would much rather prefer small business tenants to have some form of lease,” he said.
Landlords, however, may not be so keen on any legal reforms.
Michael Brooks, chief executive of the Real Property Association of Canada, which represents executives in commercial real estate, said the government should stay out of commercial contracts between landlords and tenants.
“If an existing tenant doesn’t like a proposed rent increase upon renewal, they have the choice to find another space that’s more affordable to them and perhaps adjust their business size or move to a different market,” Mr. Brooks said. “It’s not up to the landlord to prop them up and keep them in business.”
For Ms. Doherty, who has been a mainstay on her main-street block for nearly two decades, it has been heartbreaking to walk through her neighbourhood and see the papered-up windows of businesses that closed within the past two years. She has occasionally thought that she might be next.
“It really feels like we’ve made it through the worst of the pandemic, and if we go under now, it’s simply because of unchecked greed on the part of commercial landlords,” she said.
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