Let's Be Reasonable: Landlord Consents to Lease Assignment

April 04, 2023

Written By Simon Crawford and Stephanie Brazzell

What sort of things go through a commercial landlord's mind when receiving a notice from its tenant that the tenant wants consent to assign its lease? The answer is, all sorts of things. The landlord may want the space surrendered so it can re-lease it at a higher rental rate. The landlord may doubt the ability of the proposed assignee to perform the obligations under the lease. The landlord may be contemplating demolition and redevelopment and see an opportunity to amend the lease by adding a demolition clause. The landlord may want to use the consent as an opportunity to extract a fee or other benefit from the tenant. The landlord may simply not like the type of business that the proposed assignee wants to conduct on the premises.

The challenge for the landlord, however, is that the law does not allow landlords to take into consideration all sorts of things when exercising its discretion in granting consent. The law requires that the landlord act reasonably in exercising its discretion.

A standard provision of commercial leases is the requirement for tenants to obtain landlord consent to an assignment of the lease. To protect tenants from a potential power imbalance between the landlord and the tenant, these provisions often specify that the landlord may not unreasonably withhold its consent. Even if this protection is not included in the lease, the Commercial Tenancies Act (Ontario)¹ (the Act) deems this language included in all commercial leases absent an express provision to the contrary.

But what does unreasonably withholding consent look like? This is not defined in the Act. Accordingly, ordinary meaning and the common law are used to fill in the gaps.

Recently in 2023, the Ontario Court of Appeal in Rabin v 2490918 Ontario Inc.² provided guidance by affirming the applicable principles for determining whether a landlord acted reasonably in withholding its consent:

1. "The burden is on the tenant to satisfy the court that the refusal to consent was unreasonable.
2. It is the information available to—and the reasons given by—the landlord at the time of the refusal—and not any additional, or different, facts or reasons provided subsequently to the court—that is material.
3. The question must be considered in the light of the existing provisions of the lease that define and delimit the subject matter of the assignment as well as the right of the tenant to assign and that of the landlord to withhold consent.
4. A probability that the proposed assignee will default in its obligations under the lease may, depending upon the circumstances, be reasonable ground for withholding consent.
5. The financial position of the assignee may be a relevant consideration.
6. The question of reasonableness is essentially one of fact to be determined on the circumstances of each case, including the commercial realities of the marketplace and the economic impact of the assignment on the landlord.

These factors are considered within the context of the "reasonable person" standard"³. That is, what would a reasonable person have done in the same circumstances.⁴

Applying these principles to the facts in front of the court, Justice Roberts held that the tenant had met its burden and that the landlord had unreasonably withheld its consent to the tenant's requested lease assignment.

Facts of the Case

Looking at the facts of the case, Dr. Rabin was a 70 year old dentist who had been a tenant of the building since around 1977. The landlord had acquired the building in 2017 with the ultimate intention of demolishing the building and redeveloping the property. The lease in question was set to expire at the end of 2025, with a five-year option to renew.

Dr. Rabin wanted to semi-retire and sell his practice to two younger dentists. To facilitate this transaction he sought the landlord's consent to assign the lease under article 11.1 of the lease, which provided that the tenant could not assign the lease without landlord consent "which consent shall not be unreasonably withheld, subject to the provisions of Section 11.1(a)."

Section 11.1(a) required the tenant to provide the landlord written notice of the intent to assign, specifying the name of the proposed transferee, as well as any credit, financial or business information with respect to the transferee that the landlord required. The landlord then had 15 days to notify the tenant of its decision to consent or not.

Prior to formally requesting the assignment in writing, the tenant texted the landlord advising him of his intention to sell his practice and assign the lease, as well as offering any information on the purchaser that the landlord required. Two months later, the tenant provided the landlord with the requisite formal written notice of the assignment and requested the landlord's consent. The landlord did not respond to the tenant within the requisite 15 day period.

The landlord's real estate lawyer responded to a subsequent request by the tenant's lawyer 22 days after the tenant's initial request for consent, indicating consent would be given if the new principal provided his personal guarantee, the existing principal continue with his personal guarantee and that the lease be modified to include a demolition clause upon 24 months' notice. The tenant rejected this proposal.

Further correspondence was exchanged between the parties including the landlord's lawyer sending a short email more than a month after the initial request indicating that the consent to assignment was denied and subsequently requesting an extensive list of documents and information from the tenant. By then the tenant had commenced an application under subsection 23(2) of the Act to determine whether the landlord's consent had been unreasonably withheld.

Ontario Superior Court Decision

While critical of both sides, the application judge ultimately held that (1) the tenant had waived the 15-day requirement under article 11.1(a) of the lease, and (2) that the tenant had failed to establish that the landlord had either refused to consent to the assignment or unreasonably withheld its consent to the assignment. The tenant's application was, accordingly, dismissed with the tenant then appealing the decision to the Ontario Court of Appeal.

Ontario Court of Appeal Decision

Dismissing the first holding, as neither party raised the doctrine of waiver, Justice Roberts then applied the principles, as set out above, to the facts before her to determine whether the landlord's consent was unreasonably withheld.

To start, the court held that the application judge erred by failing to find that the landlord's failure to respond to the tenants request within the 15 day period amounted to neglect and an unreasonable withholding of consent. To support this conclusion, the court noted that the landlord provided no reasonable excuse for his failure, having been aware two months prior to the formal requisition of the forthcoming request, and admitting having read the assignment clause and speaking to his lawyer during the 15 day period.

While this neglect to consent within the time limit was held to amount to an unreasonable withholding of consent and, therefore, was sufficient to dispose of the case, the court continued. In its further analysis, the court held that the landlord's lawyer's email denying the consent to the lease assignment also amounted to an unreasonable refusal of consent, as did requesting additional information regarding the proposed assignee well after the 15-day deadline.

Lastly, the request to insert a demolition clause was likewise held to amount to an unreasonable withholding of consent, the court noting that it is well established that a landlord attempting to obtain an amendment to a lease for its benefit in exchange for providing consent is unreasonable. "A conditional consent, is not a consent."⁵

Accordingly, the appeal was allowed with the court ordering the consent of the landlord to be given, thereby permitting the assignment of the lease.

Conclusion and Key Takeaways

Rabin v 2490918 Ontario Inc. provides a needed reminder about what is considered unreasonable withholding of consent for the purposes of Section 23 of the Act. While the decision ultimately hinges on the specific facts of each case, the principles affirmed in Rabin v 2490918 Ontario Inc. provide a framework for analyzing these facts.

More broadly, this case also provides certain cautions to landlords including that:

1. failure to deliver a timely response may itself lead to a finding that the landlord has been unreasonable; and
2. consent conditional on obtaining a gain from the tenant is not a consent and can, similarly, lead to a finding that consent was unreasonably withheld.

At the end of the day, a surprising amount of common sense dictates how a landlord should act when exercising its discretion in these circumstances. They must act reasonably … they must act in a timely manner … and they must exercise their discretion having regard to the purpose for which that discretion was granted in the lease.

For more information, please contact the authors of this blog or a member of the Bennett Jones Commercial Real Estate group.

Authors