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Does a Commercial Tenant have the Right to Assign the Lease?
Most people seem to know that commercial landlords are tougher and often don’t want to agree.
The right to assign a lease is provided to residential tenants under the Residential Tenancies Act .
But, what about commercial tenants? Do they have similar rights?
Actually, they do! Have a look at s.23 of the Commercial Tenancies Act :
Licence to assign not to be unreasonably withheld
23. (1) In every lease made after the 1st day of September, 1911, containing a covenant, condition or agreement against assigning, underletting, or parting with the possession, or disposing of the land or property leased without licence or consent, such covenant, condition or agreement shall, unless the lease contains an express provision to the contrary, be deemed to be subject to a proviso to the effect that such licence or consent is not to be unreasonably withheld.
Application to court where consent to assignment or subletting withheld
(2) Where the landlord refuses or neglects to give a licence or consent to an assignment or sub-lease, a judge of the Superior Court of Justice, upon the application of the tenant or of the assignee or sub-tenant, made according to the rules of court, may make an order determining whether or not the licence or consent is unreasonably withheld and, where the judge is of opinion that the licence or consent is unreasonably withheld, permitting the assignment or sub-lease to be made, and such order is the equivalent of the licence or consent of the landlord within the meaning of any covenant or condition requiring the same and such assignment or sub-lease is not a breach thereof.
So, for a substantial period of time, commercial tenants have had this same right. However, there is a difference. For residential tenants, the right cannot be taken away. However, for commercial tenants, the agreement could state otherwise.
In more sophisticated leases, there will usually be a specific provision dealing with sub-letting.
In cases where the documentation is not drawn upon the Landlord’s 50 page form, then you will often find that the documentation is nothing more than the “Offer to Lease” or the “Agreement to Lease”. In those situations, the Commercial Tenancies Act prevails, and the right to assignment is included.
Brian Madigan LL.B., Broker www.OntarioRealEstateSource.com
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Landlord Consent for Commercial Lease Assignments
In the current climate, several businesses have faced challenges operating brick-and-mortar premises. As a result, there may be increased interest in reducing expenses by shrinking an enterprise’s real estate footprint or transferring their commercial leases. When a tenant chooses to reduce their financial burden by assigning their lease, their relationship with the landlord takes on importance. In most cases, a landlord’s consent is required under a commercial lease agreement in order to assign the lease to a new tenant. Under what circumstances can a landlord reasonably refuse consent? In the following blog, we examine what is reasonable vs. unreasonable in this situation by reviewing a recent Ontario decision.
Landlords Cannot Unreasonably Withhold Consent to a Lease Assignment
When assigning a lease, the contractual link between the landlord and tenant is severed once the tenant transfers their entire interest in the lease to a third party. Most commercial leases will contain a provision dealing with the transfer of a lease, frequently with a restriction against the tenant assigning the lease without the consent of the landlord. Generally, the provision will also say that the landlord cannot unreasonably withhold consent. Even where this is not explicit in the lease, section 23 of Ontario’s Commercial Tenancies Act stipulates that landlords cannot unreasonably withhold consent, and if a landlord refuses, a tenant may apply to the Superior Court for an order determining whether consent has been unreasonably withheld.
Where there is a dispute over whether it is reasonable or unreasonable for a landlord to withhold consent to a prospective assignment, determining reasonableness will be a question of fact. The tenant will be obliged to demonstrate that consent has been unreasonably withheld. The landlord does not carry the onus of proving they acted reasonably, and it is not necessary for courts to arrive at the same conclusion as a landlord after evaluating the facts. The focus is merely on whether a reasonable person could have withheld consent in the given circumstances. There are no set factors that landlords may consider when evaluating whether to consent, but courts allow landlords to consider the commercial realities of the marketplace, the economic impact on the landlord, and the financial position of the assignee.
The Conduct and Communication of the Parties Matters
One recent case acts as a reminder that even if a tenant finds a party willing to take over a lease, landlords have a lot of latitude to refuse a transfer.
In 2020, the tenant, Dr. Rabin, reached an agreement to sell his dental practice to a group of younger dentists who would start a new professional corporation. He leased space in a medical office building that had four years remaining on the lease, with an option to extend for an additional five years. The new professional corporation was set to assume the remainder of the lease.
The landlord had purchased the property in 2017 and had plans to redevelop the building. However, little progress had been made and the landlord had made no effort to vacate the building by securing surrender agreements with the remaining tenants. The lease contained a clause stipulating that it could not be assigned to another tenant without the landlord’s consent which should not be unreasonably withheld.
Dr. Rabin retained a lawyer to deal with the transaction who proceeded to write to the landlord to advise him of the process and to obtain consent to the assignment of the lease. The landlord responded that he would consent if the lease were amended to include a demolition clause upon 24 months’ notice. Dr. Rabin did not agree to the landlord’s condition, knowing the new tenants would object to the amendment. He alleged that the landlord had unreasonably withheld consent at that point, though negotiations continued.
The landlord indicated he would consider consenting if the lease was amended to include the demolition clause just during the renewal term, but this modified proposal remained unacceptable to Dr. Rabin. The landlord then sought financial information from the prospective incoming tenants, requesting they complete a credit application. The landlord deemed the financial information from the new tenants inadequate and continued to refuse consent.
Landlords may Evaluate the Character of Proposed Tenants
The Court found that the landlord had made two different proposals, in which he would consent to an assignment if a demolition clause was included. Those proposals were not a refusal to consent to the assignment. The landlord acknowledged that he was attempting to secure the demolition clause, but his attempt was not an ultimatum.
However, the landlord’s subsequent demand for extensive financial information was unreasonable and he was not clear about what information he required from the tenants. While it was reasonable for the landlord to want to know something about the character of the new tenants, some of the information requests were just a pretense to show the landlord had concerns about the financial viability of the tenants.
In determining the reasonableness of a refusal to consent, it is important to consider the information available to the landlord and the reasons given at the time of the refusal. Based on the conduct of the parties in the case at hand, the Court concluded that Dr. Rabin had not established the necessity for the Court to order the assignment of the lease. The judge dismissed the matter, pending Dr. Rabin providing further information to satisfy the landlord’s request for information.
Landlords are Given Leeway in Deciding Whether to Consent to an Assignment
A landlord cannot refuse to consent to a lease transfer on arbitrary or opportunistic grounds, or for an ulterior purpose, and must also exercise its discretion in good faith. Nevertheless, they still have an interest in evaluating tenants and have discretion in deciding whether to give consent. This case also demonstrates the importance of communicating clearly during negotiations and for each party to act reasonably throughout the process.
The lawyers at Milosevic & Associates in Toronto are skilled at providing strategic litigation advice across complex commercial matters including commercial real estate litigation. Our team has extensive experience managing risk in commercial real estate transactions. To learn how we can help you call us at 416-916-1387 or contact us online to schedule a consultation.
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Commercial Lease Assignment (Canada - Ontario)
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Ontario court of appeal provides guidance on transfer of commercial leases.
In a decision from Ontario’s highest court, it was held that a landlord cannot arbitrarily refuse to allow a commercial tenant to assign its lease.
In coming to its ruling, the court looked at the applicable facts and information provided to the landlord at the time of refusal to determine whether a landlord’s refusal to consent to lease assignment is unreasonable and what constitutes “consent” in lease assignment.
The court also examined what a tenant’s waiver of reasonable performance looks like.
Please see our previous column on this case.
The case and lower court ruling
In Rabin v. 2490918 Ontario Inc. (Rabin), a 70-year-old dentist ran his practice in the same building in Toronto for over 40 years. The landlord acquired the building in 2017 with the view of redeveloping the property.
The lease between the landlord and tenant, set to expire at the end of 2025, contained a clause which provided that the tenant could not assign the lease without consent from the landlord, whose consent should not be unreasonably withheld.
The lease also provided that the landlord was required to grant or refuse consent within 15 days of the request to assign.
In late 2020, the tenant advised the landlord that he wanted to sell his practice and assign the lease to two young dentists who would run a similar dental practice.
In early 2021, the tenant gave the requisite formal notice of the assignment to the landlord, along with additional financial information about the assignees.
The landlord did not provide a response within the 15-day deadline.
Twenty-two days after the initial formal notice, the landlord responded, stating that consent would be provided, subject to a demolition clause upon 24 months’ notice being incorporated into the lease.
The tenant refused this proposal and brought a court application seeking an order to affect the transfer.
The application judge noted that, in the past, the law greatly favoured tenants, limiting landlords' power over lease transfers. But the legal landscape has significantly shifted recently, giving landlords more control.
Now, landlords' decisions on lease transfers can be informed by various factors, including the lease's context, building conditions, market realities and prospective tenant's financial status.
However, it was also noted that landlords cannot indiscriminately deny transfers or manipulate for selfish gains. If tenants feel their transfer request is being unfairly rejected, they must prove this.
In Rabin, the court found the landlord's demand for extensive financial data from the new tenant unreasonable. Still, it also ruled the tenant hadn't acted in good faith by not supplying any information.
Ultimately, the court didn't approve the tenant's application due to its lack of cooperation. But the tenant was granted an opportunity to fulfill the landlord's information request.
If denied a transfer, the tenant could revisit the court to reapply.
The Ontario Court of Appeal decision
The tenant appealed the decision and the Ontario Court of Appeal reversed the lower court ruling and held that the landlord provided no reasonable excuse for their failure to provide consent and respond within the 15-day lease-prescribed deadline.
In coming to its ruling, the court looked at the following principles which are used to help determine whether a landlord acted reasonably in withholding consent:
- The burden is on the tenant to satisfy the court that the refusal to consent was unreasonable.
- A probability that the proposed assignee will default in its obligations under the lease may, depending upon the circumstances, be a reasonable ground for withholding consent.
- The financial position of the assignee may be a relevant consideration.
- Reasonableness is a fact-based question, to be determined based on the case-specific circumstances, including commercial realities of the marketplace and economic impacts of the lease assignment.
In this case, the court noted at the time of the renewal request, the landlord did not require additional information from the tenant, and its response 22 days later did not mention anything other than the insertion of a demolition clause.
Further, the reasons provided for withholding consent were not adequate, especially given that the landlord was notified early that the tenant would be requesting consent for lease assignment.
It was also held that the application judge made several legal errors, such as applying the doctrine of waiver even though it had not been raised by the parties, and then erred in the application of the doctrine.
Rather, it was noted that the judge should have determined whether the landlord neglected or refused to provide consent, and if so, whether it was unreasonably withheld.
In analyzing this principle, the court looked to section 23 of the Commercial Tenancies Act (the “Act”), which provides that consent to assign a lease shall not be unreasonably withheld by a landlord.
If a landlord refuses or neglects to provide consent to a lease assignment, the Court may make an order to determine whether or not the consent is unreasonably withheld.
As such, it was held that neither the consent provision in the lease, nor the tenant’s efforts to appease the landlord and the landlord’s failure to respond, constituted a waiver of section 23 of the Act.
Waiver is only found where the waiving party has full knowledge of their rights and an “unequivocal and conscious intention to abandon them.” Waiver must therefore be explicitly expressed in the lease to constitute an exception under section 23 of the Act.
Also, the Act does not define what constitutes a refusal or neglect to consent, nor an unreasonable withholding of consent. Therefore, ordinary meaning of the terms is presumed. Notably, the court emphasized that a conditional consent (in this case consent hinging on a demolition clause) is not a consent to assign a lease.
In the end, the court ruled that the landlord unreasonably withheld consent for the tenant to assign the lease.
This decision affirms that, while landlords often have wide latitude in enforcing the provisions of a lease, when it comes to consent to the assignment of a lease the landlord must act reasonably and cannot arbitrarily withhold its consent.
Tags: Legal Leasing
Locations : Ontario National
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Commercial leasing is unique compared to other types of leases. It occupies the intersection between property law and contract law. For example, in property law, the lease must deal with the rights that run with the land, such as the right of the tenant to quiet enjoyment and rights of assignment and sublease in favour of the tenant. In contract law, there could be unique covenants that are included as a result of negotiation between the parties, such as expansion rights and rights to parking. It is important to have a basic understanding of the requirements of the law in Ontario and the resulting obligations of the parties when agreeing to a commercial lease.
Commercial Tenancies Act and the Certainty of Five Terms in a Valid Lease
Ontario’s Commercial Tenancies Act is one of the most important statutes to consider in commercial leasing. It outlines tenants’ and landlords’ rights, responsibilities, and obligations, covering essential aspects such as rent, lease terms, security deposits, maintenance, repairs, and dispute resolution. The Commercial Tenancies Act also addresses issues related to eviction, lease termination, and lease assignment. Many of the below obligations derive from the Commercial Tenancies Act , and the common law has developed a rich caselaw to supplement its provisions.
For there to be a valid lease, there must be certainty as to several important terms, including:
- the parties (the landlord and tenant);
- the exact premises to be leased;
- the commencement date;
- the duration of the term; and
- the amount of rent being paid.
The contract may be void or voidable without sufficient certainty about these five terms.
Inclusion of Terms That are Material to One Party
There is also a “sixth” term that may be included depending on the circumstances. In certain situations, parties can raise terms that they communicate are important to them and to the operation of the relationship. This principle was created by Ossory Canada Inc. v. Wendy’s Restaurants of Canada , where matters of garbage disposal and pylon sign were important to Wendy’s in order for the company to lease the premises. This importance was communicated to the landlord and upon review, the Court of Appeal found no concluded contract between the parties as an agreement was not reached regarding these terms.
This case demonstrates the importance of having sufficient certainty of terms in the lease, not only for the five important terms but also for any term that is material to one party and has been communicated to the other.
The Statute of Frauds and Part Performance
The Statute of Frauds is also highly relevant to commercial leasing as it imposes a number of obligations on the parties. It generally requires that a lease be in writing; however, unlike the Residential Tenancies Act, there is no standard form. The lease can consist of various documents, correspondence, or letters at the parties’ discretion (as long as the above conditions are satisfied). As an exception, a lease not exceeding a term of three years, where the rent during the term is at least two-thirds of the full improved value of the premises being leased, is not subject to the requirement to be in writing.
Even where a commercial lease is not made in writing, it can still be saved under the doctrine of part performance. This doctrine refers to a legal principle that recognizes certain actions or conduct as evidence of an enforceable contract, even if the contract is not in writing. It applies to parties partially performing their obligations under an oral or informal agreement.
The doctrine was reviewed in Erie Sand and Gravel Ltd. v. Seres’ Farms Ltd . The case involved an agreement to purchase farmland, where the plaintiff brought an action for specific performance for the purchase. The defendants argued that although there was an agreement on certain terms, there was only an “agreement to agree,” which is generally unenforceable. The plaintiffs argued that the deal was enforceable due to part performance, partially because they had paid the money. The Court agreed, demonstrating the availability of the doctrine for agreements that are not completed in writing.Nevertheless, it is important to ensure that the agreement to lease complies with the Statute and that relying on the doctrine can result in costly legal action.
Contact the Property Lawyers at Bader Law for Commercial Real Estate Transaction Advice
Commercial real estate transactions represent some of the most complicated financial transactions in the life of any individual or company. As such, it is important to retain a law firm with the experience and skill necessary to ensure the lease is drafted to protect your interests. At Bader Law , our trusted business law team and real estate lawyers regularly advise our individual and corporate clients on various real estate matters and disputes. We represent clients in Mississauga and throughout the Greater Toronto Area. To schedule a consultation, contact us online or call us at (289) 652-9092 .
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