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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:

  1. The burden is on the tenant to satisfy the court that the refusal to consent was unreasonable.
  2. 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.
  3. The financial position of the assignee may be a relevant consideration.
  4. 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.

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