This article has been contributed by Darrell Gold LLB with Robins Appleby & Taub LLP
Landlords rightfully want and need some control over their tenant mix in terms of permitted uses as well as the actual tenants. Typically this is done through the use and transfer provisions in a Lease. In the latter tenant transfers are not permitted as of right, (other than in certain limited and negotiated circumstances which are dependant on the leverage of the tenant and even then certain pre-conditions usually apply) at the tenant’s own volition but are rather subject to landlord consent being obtained.
Virtually all landlord lease forms contain transfer clauses designed to control a tenant’s right to transfer its interest in the lease. Invariably, that clause gives the tenant a transfer right but with the very common added qualification: “subject to the Landlord’s consent, not to be unreasonably withheld”.
Where a lease provides for landlord consent without the qualification noted, subsection 23(1) of the Commercial Tenancies Act, Ontario provides that unless a lease contains an express provision to the contrary [i.e. it says the landlord can be unreasonable], the lease will be deemed to include a clause prohibiting the landlord’s consent from being unreasonably withheld.
If a landlord wants the right to reject a transfer in certain circumstances in an attempt to avoid a dispute by the tenant regarding the decision not to grant consent, you will often see the lease listing circumstances where the landlord will be deemed to be reasonably withholding consent so as to avoid the tenant disputing the landlord’s discretion. Examples include: the transferee carrying on a different use; the proposed use would breach another tenant’s exclusive use; unacceptable creditworthiness, character or reputation of the transferee in the landlord’s sole discretion; the tenant being in default at the time of request; the transferee is a current tenant of the landlord elsewhere in the project; the proposed rent is lower than the landlord is otherwise charging in the building; and the transferee has no prior business history for that use. Some of these may be considered reasonable grounds for withholding consent even if not expressly listed as such in the lease.
However, what about those cases where consent is refused and the tenant successfully challenges the reasonableness of the refusal? Some examples of that situation include: where the landlord wants the space back to redevelop the property; the landlord wants to use the opportunity to amend the lease form to address other issues it noted; the transferee would compete with the landlord’s business; and, the sublease rent is higher than what the lease rent is i.e. the transferor will profit.
Where a tenant does dispute the landlord’s refusal to give its consent to a transfer (and the law in Ontario is that the tenant has the burden of proving the refusal to consent was unreasonable), the tenant has recourse to the Courts and if successful, the landlord risks having the refusal to consent deemed “unreasonable” by the Courts in which case the tenant may be entitled to damages and, in certain cases, a fundamental breach of the lease may be deemed to have occurred by the refusal and entitle the tenant to treat the lease as being over. Not the result that a landlord would normally expect or desire.
Landlord’s try and protect themselves from that result, but providing expressly in the lease that if the tenant does dispute the withholding of consent successfully, then the most the tenant can be awarded is a reversal of the landlord’[s decision and receive a consent to the transfer. In some cases that may be too late for the tenant as its potential transferee is unlikely to wait for the consent issues to be resolved by the Courts and the tenant will not even be entitled to any damages.
Ultimately the issue of “reasonableness” comes down to the facts determined on the circumstances of each particular case and while prior cases may serve as guidance for another case, no two cases are exactly the same.
The Lessons: 1. consider transfer concerns at the outset of the lease negotiations e.g. what will be considered “reasonable/not reasonable” so as to minimize court intervention at a later date; 2. Before a landlord gives consent or refuses to consent, it should consult with counsel to determine if the decision could be successfully challenged; 3. consider what remedies the tenant will have if it successfully challenges the refusal or, if the lease limits the remedies to merely reversing the landlord’s refusal; 4. if the landlord wants a subjective test to apply then the lease must expressly provide for it, 5. typically restriction on alienation clauses are not looked at favourably for a landlord so the best way to deal with that is careful drafting by counsel which means counsel must know his/her client and the client’s business.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at firstname.lastname@example.org with your suggestion. Not all requests can be accommodated.]