Below is an excellent article concerning lease assignments by lawyer Daniel Waldman (bio and contact information is below). There are a number of things tenants, and landlords can do to address situations such as those in this case. The bottom line for tenants is not to assume you can assign your lease, so the assignment and subletting provisions need to be negotiated and reflect what you want. Don’t simply accept the wording the landlord has in their standard lease form.
The bottom line for landlords is to consider all your current and future plans for the property and have those reflected in the lease. At the Greenstead Consulting Group we call that “Future-Proofing” the lease and property. If things change, and the landlord needs something new in the lease, it is better to negotiate than attempt to bullying your way to what you want.
As more and more brick and mortar businesses become unfortunate victims of this pandemic, many are hoping to assign their leases and free themselves of that liability. However, a recent decision from the Ontario Superior Court states that even if a suitable replacement tenant is found, commercial landlords are given wide leeway to refuse the transfer of a lease.
In Rabin v. 2490918 Ontario Inc., a commercial landlord refused to consent to a tenant’s request to assign its lease and the court was tasked with determining whether the landlord’s decision was “unreasonable” under the lease and at law.
The tenant ran a dental practice through a professional corporation in a medical office building in west Toronto for over 40 years. The tenant’s current lease term commenced in 2015 and is set to expire at the end of 2025, with an option to renew for an additional five years. The lease contained a boilerplate clause stating that it could not be assigned to another tenant without the landlord’s consent, which could not be “unreasonably withheld”.
The current landlord purchased the building in 2017 with plans to redevelop it for mixed residential and commercial use. A land planning application to the City of Toronto was submitted some time ago, but very little had been done to move forward with the redevelopment since that time. In particular, the landlord had made little progress in vacating the building, which was required for the redevelopment to proceed.
Earlier this year, the tenant sought to sell his dental practice to a group of younger dentists, who would form a new professional corporation to assume the lease for the remainder of its term. When the landlord’s consent for the transfer of the lease was requested, the landlord stated that it would only agree to the transfer if a “demolition clause” were to be inserted, which would give the landlord the option of terminating the lease on two years’ notice if it intended on demolishing the building. The landlord acknowledged that it made this offer opportunistically as a means of getting the tenant out of the building.
The tenant did not agree to the landlord’s condition, as the new dental practice would not agree to its tenancy being cut short. Following a period of negotiation, the landlord stated that it would only consent to the transfer if the tenant provided voluminous financial information for the new tenant, some of which made no sense — such as financial statements for the new corporation which had yet to be formed. The tenant refused to provide this information and took the position that the landlord was unreasonably withholding its consent to transfer the lease. The tenant then commenced a court application seeking an order to affect the transfer.
In analyzing the tenant’s request, the court noted that it used to be the case that the law in this area almost always favoured the tenant. As in, if a commercial tenant wished to transfer its lease, landlords were seldom able to say no. However, the law has changed a lot in recent years to give landlords a lot more rope in this regard. Courts have acknowledged that if commercial landlords are able to choose which tenants lease their spaces in the first place, they should also be given some leeway when it comes to transferring those same leases to other tenants.
In deciding whether or not to consent to a lease transfer, landlords are now permitted to rely on a variety of factors in making this determination. For instance, they can examine the surrounding circumstances of the tenancy, the lease and the building in general. They can also consider the commercial realities of the marketplace and how the assignment of the lease could impact them and the other tenants in a particular building. The financial position of the proposed assignee is fair game as well.
Landlords are still not permitted to arbitrarily refuse a lease transfer. Nor are they allowed to say no for opportunistic or ulterior purposes, such as securing higher rent or a better lease. But courts have been clear that they should be given wide discretion in making their decisions.
Also, if the tenant feels that the landlord is unreasonably withholding consent, the tenant bears the burden of proving this. In other words, it is not up to the landlord to convince the court that they are acting reasonably, but rather the tenant must prove that the landlord is acting unreasonably.
In this case, the court agreed that the landlord was acting unreasonably by requesting such far-reaching financial information for the new tenant. However, it was also held that the tenant did not act in good faith either, insofar as it failed to provide any information at all.
In the end, the court chose to deal with the situation in a creative way – it did not grant the tenant’s application due to its failure to provide any information to the landlord. However, the judge ordered that the tenant should be given the chance to make best efforts to respond to the landlord’s request for information; and, if the landlord still did not consent to the transfer of the lease, the tenant would be able to bring the application back before the court to seek the order again.
This case provides some valuable insight into lease transfers in commercial tenancies. Many commercial leases and the Commercial Tenancies Act state that landlords are not permitted to “unreasonably withhold” their consent for such transfers, what exactly constitutes “reasonable” will come down to the facts of each case.
Although in this particular case, it would not have been reasonable for the landlord to refuse the lease transfer, as the proposed assignee was essentially the same dental practice run by younger dentists. Nor was it reasonable for the landlord to demand a demolition clause, as this was clearly an attempt to secure a more favourable lease for its intended redevelopment. But this does not mean that the landlord was necessarily constrained when it came to deciding whether the lease should be transferred or not.
Both landlords and tenants would be wise to heed the information provided in this decision when faced a with potential lease transfer. This is particularly important in the current climate, with the COVID-19 pandemic making it difficult for commercial tenants to pay their rent. This decision should send a message that, just because they find new tenants that are willing to assume their leases, that does not mean that their landlords have to agree. Landlords, on the other hand, cannot turn down a lease transfer for arbitrary or opportunistic purposes, but they still have wide discretion in deciding whether or not to give their consent.
About Daniel Waldman
Daniel Waldman is a senior lawyer in the litigation group at Pallett Valo LLP in Toronto. He practices commercial litigation with an emphasis on complex real property disputes, including commercial leasing, large-scale commercial real estate transactions, development deals, construction law and debt collection. Daniel represents a range of clients including developers, real estate investors, commercial landlords, REITs, banks and international construction companies. Daniel also regularly writes for a range of publications, including Canadian Lawyer Magazine, Precedent Magazine and The Advocates Journal. He also publishes a regular column on The Real Estate News Exchange (RENX.ca) called The Property Law Hub, where he writes about developments in real estate litigation. Daniel has also been named as a Lexology Legal Influencer for his writings on dispute resolution.