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 Fiske LLP 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.