The COVID-19 pandemic has presented some unique challenges to lenders that finance long-term care and assisted living facilities in Alberta. This article identifies some precautionary measures lenders should consider in order to support operators in this sector. Although this article is focused on the context in the Province of Alberta, similar issues may arise in a number of other provinces where governments have exercised special powers to respond to outbreaks of the COVID-19 virus in assisted living facilities.
Background. Typically, financing arrangements for assisted living arrangements are underpinned by a master services agreement or similar arrangement (an “MSA”) entered into between the operator of the facility and Alberta Health Services (as the regional health authority, “AHS”) or a similar public health body which provides for the cash flow that will be the main support for the financing. The operator’s rights under the MSA are assigned to the lender as security, and the lender, the operator and AHS enter into a tri-partite agreement under which AHS consents to the assignment and agrees to give the lender notices of default by the operator under the MSA and a reasonable opportunity to cure the default and thereby keep the MSA in good standing (the “Tri-Partite Agreement”).
Emergency Orders. The Lieutenant Governor in Council made Order in Council 080/2020 (the “Public Health Order”) on March 17, 2020 declaring a state of public health emergency in Alberta due to the COVID-19 pandemic, with effect for a period of 90 days. The Public Health Order will lapse on June 15, 2020 unless otherwise continued by a resolution of the Legislative Assembly. The Public Health Order may also be terminated at any time, either for the entire province or a portion of the province, on the advice of the provincial Chief Medical Officer if the public health emergency is determined to no longer exist. While such Public Health Order remains in effect, under the Public Health Act (the “PHA”) the Minister of Health and/or AHS are given a number of statutory powers for the protection of public health. The scope of the special powers that can be exercised during the public health emergency is quite broad and includes acquiring any real or personal property, authorizing the entry into any building without warrant and maintaining and coordinating the delivery of health services.
In addition, under the Nursing Homes Act (Alberta) (the “NHA”) the Minister of Health has the power during an emergency to make an order cancelling or suspending a nursing home contract where, in the opinion of the Minister, an operator has contravened the NHA or the associated regulations, or has otherwise done or omitted to do anything in a specific care facility that has or could prejudicially affect the health, well-being or safety of the facility residents. In these circumstances the NHA also permits the Minister to appoint a person to be the official administrator of a nursing home and to suspend any of the nursing home contracts, subject to any terms and conditions the Minister considers appropriate. An appointed official administrator is entitled to possession of the nursing home and all records, supplies and equipment necessary for continued operation of the nursing home, to the exclusion of the operator or any person claiming through the operator.
We are aware of two specific ministerial orders (each, a “Ministerial Order”) having been issued in Alberta in order to protect public health within long-term care or similar Alberta care facilities which have been particularly impacted by COVID-19 outbreaks. In one case, the Ministerial Order authorized AHS to immediately take over the role of operator from the incumbent operator, and in the second, the Ministerial Order authorized the immediate replacement of the incumbent operator with another operator. Each Ministerial Order effectively suspended the applicable MSA and related agreements governing operation of the affected care facility and expressly authorized AHS to use any of the powers of a regional health authority granted under the PHA and other powers listed in the Ministerial Order in relation to the care facility.
Effect on Financing Arrangements. Generally, a failure by an operator to remedy a material breach of the MSA terms for a care facility will constitute an event of default entitling AHS to exercise any or all of the remedies available to AHS. As noted above, where financing is in place for the facility and the MSA has been assigned to the lender as security, a Tri-Partite Agreement would normally require AHS to give prior notice to the lender and an opportunity to remedy the default before the AHS exercises its remedies. The default by the operator under the MSA will also generally constitute an event of default under the loan agreement and any security documents, and may entitle the lender to make a demand for payment, accelerate any committed credit facilities and take various other remedial steps against the operator.
However, ministerial orders like the ones described above have the effect of superseding the Tri-Partite Agreement and immediately suspending the MSA without any requirement that the formalities and time periods of the Tri-Partite Agreement be followed. Although these Ministerial Orders are temporary, their effect significantly impacts the lender’s financing arrangement with its borrower until such time as the Ministerial Order either lapses or is terminated. We understand that these provisions may also preclude the lender from declaring an event of default, making a demand for repayment or accelerating the debt.
Early Involvement by Lenders. While the Public Health Order continues in effect, we encourage lenders who finance operators of long-term care or similar facilities in Alberta to maintain regular contact with their borrowers and to understand the practical circumstances of each facility. More specifically, lenders should:
- request that the lender be provided with copies of all relevant infection and outbreak documents as required by AHS (including the emergency management and business continuity preparedness plan required by the MSA);
- monitor the status of all COVID-19 precautions being taken at the care facility;
- require copies of any relevant communications from AHS which may result in a notice of default being issued or other action taken by AHS in respect of the care facility; and
- monitor and support the borrower in maintaining compliance with its obligations under the MSA and the applicable loan agreement.
In the event that a ministerial order is issued in response to a COVID-19 outbreak in a financed care facility resulting in the replacement of the incumbent operator, we encourage the lender to (i) promptly establish contact with AHS to open a line of direct communication, (ii) clarify the terms of the ministerial order and how it may impact the lender’s contractual relations with the operator and AHS and, (iii) to the extent that the lender does not otherwise defer scheduled repayments during continuation of the pandemic, confirm the basis on which debt service payments will continue to be made until the ministerial order lapses or is terminated.