In addition to worrying about keeping their business afloat these days, businesses are wondering if their Paycheck Protection Program (“PPP”) loan will be canceled. Without loan forgiveness, many of these businesses will not survive. Therefore, the stakes are high!

The eligibility conditions for the cancellation of PPP loans are complex. Like us previously discussed, in large part, the cancellation of the loan is based on the borrower using the loan proceeds within the eight week period immediately following receipt of the loan on specified expenses, including payroll and rent.

Some landlords have been generous enough to reduce or even lower the rent for a period (say, three months) to help the tenant get their business back. Therefore, these businesses may have little or no rent to pay during the eight week period. If a business owner asks them for advice on what to do in this situation, the owner will likely say:

Love your landlord – pay me anyway!

Whether the prepayment of rent (or payment of rent for a period preceding the eight week period) applies for the purposes of calculating loan forgiveness under the PPP is likely a question to which many companies and their advisers are asking.

Background

As previously discussed, the CARES Act created the PPP under which the Small Business Administration (the “SBA”) is authorized to provide up to $ 349 billion (increased to $ 659 billion) in forgivable loans to small businesses to enable them to face salary costs, social benefits, rents and charges.

Article 1106 (b) of the CARES Act provides that an eligible beneficiary of a PPP loan is eligible for debt relief in an amount equal to the sum of certain “costs incurred and payments made” (“eligible costs ”) During the eight week period. period beginning on the loan inception date (the “Covered Period”).

Eligible costs include “payment of any covered rental obligation”. To this end, a “guaranteed rent obligation” is defined as “a rent incurred under a lease contract in force before February 15, 2020”.

The SBA has yet to issue formal guidance on the payment of “covered rent obligations”. The US Department of the Treasury (the “Treasury”) recently declared, however, that the SBA will soon be issuing “regulations and guidelines” regarding PPP loan forgiveness applications.

The SBA loan forgiveness application instructions direct candidates to “[e]enter the amount of commercial rents or rents… during the Covered Period, in accordance with the leases in force before February 15, 2020. The instructions also provide that the following “non-employee” costs are eligible for the exemption: “obligations de Rent Covered: Commercial rents or lease payments under lease agreements for real or personal property in effect before February 15, 2020 (“commercial rents or lease payments”). “To be eligible for the rebate, these charges” no -employees ”must be“ paid during the covered period or hired during the covered period and paid no later than the next regular billing date, even if the billing date is later than the covered period. ”Thus, the instructions would take us believe that the rent for a period prior to the Covered Period (i.e. the overdue rent) that is paid during the Covered Period is included in the calculation of the rent. bet. As noted below, caution is in order. The law clearly says that payment must be both incurred and paid during the period covered. In addition, the instructions provide that the rent for the Covered Period which is paid on the next scheduled due date which falls after the Covered Period is included in the discount calculation. Again, the instructions go beyond the express terms of the law. Caution is in order.

Rent paid in advance

So, is prepaid rent an eligible cost? The answer probably depends on when the rent was paid and what period it relates to.

There are many variations of prepaid rent. At least two likely common scenarios come to mind: (i) rent paid before the Covered Period for the Covered Period; and (ii) the rents paid during the Covered Period for the periods following the Covered Period.

1. Rent paid before the period covered for the period covered

Is rent paid before the period covered for the period covered an eligible cost?

Rent that was prepaid before the Covered Period, but which relates to the Covered Period not can be included in the forgiveness calculation.

Some practitioners and commentators have suggested that the SBA loan forgiveness request instructions can reasonably be read to allow forgiveness with respect to this prepaid rent variation. Pause for good reason! We do not agree with this conclusion.

First and foremost, in this situation the rent is not be paid from the loan proceeds. At the time of payment, the loan did not exist. The law expressly speaks of the use of the loan proceeds for eligible expenses. A borrower cannot use the loan proceeds until he has received it from the bank!

Second, the rent is not paid during the Period covered. It’s rather paid before the Period covered.

The law provides that the costs must be both incurred and payments must be made during the Covered Period so that it can be included in the loan cancellation calculation. Congress’ use of the conjunction “and” means that both conditions must be met for the amounts to apply for remission purposes.

As stated above, the loan forgiveness request instructions provide (unlike the express terms of the law) that amounts incurred during the period covered but paid on or before the next billing date (even after the period covered) are included in the discount calculation. . The situation envisaged by this reference in the instructions is narrow. The reference is probably limited to the following situation: (i) the rent for a month is due on the 15th^e of the month but covers the entire calendar month, (ii) the Covered Period ends on the 10th^e of the month, and (iii) the rent is actually paid on the due date (i.e. the 15th^e). According to the instructions, the amount of rent paid that relates to the Covered Period (through the 10^e of the month), notwithstanding the fact that it is paid after the Covered Period, is included in the calculation of the discount. Again, this conclusion is contrary to the wording of the law. Whether a court would enforce its application could be questionable.

The orientation of PPPs has been a moving target. To date, the orientation is far from complete. Therefore, the best approach in this situation (unless and until the SBA and / or the Treasury provides otherwise) is to exclude rent payments made before the period covered from the discount calculation.

2. Rent paid during the period covered for periods subsequent to the period covered

Is the rent paid during the period covered for the periods following the period covered an eligible cost?

The SBA loan forgiveness request instructions provide that eligible amounts include amounts paid during the period covered. However, as stated above, the law requires that the rent be both paid and incurred during the Covered Period. For this reason, the best approach in this situation (unless and until the SBA and / or the Treasury provides otherwise) is to exclude rent payments made during the period covered for periods following the termination. period covered by the discount calculation.

Conclusion

We believe that few businesses will have the capacity, in these difficult times, to pay their rent in advance. However, for those who can and do pay rent up front, caution is in order. With the exception of the limited situation discussed above and referenced in the SBA loan forgiveness request instructions, rent prepayments (and for that matter, other expense prepayments) are likely not included in the calculation of the loan forgiveness. We hope that the SBA and / or Treasury will soon address the issue of prepayment of expenses in written guidelines.