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Commercial Landlords and Tenants Take Note – Court Provides Important Guidance on the Transfer of Commercial Leases

Published on: February 2022 | What's Trending

Handwriting text writing Commercial Lease. Concept meaning contract between a landlord and a business property tenants.

This column was originally published on the Real Estate News Exchange (renx.ca).

As businesses are forced to shut their doors as a result of this pandemic, many commercial tenants have tried to assign their leases to free themselves of the obligation to pay rent and assume debt. Unfortunately for them, a recent Ontario court ruling has held commercial landlords will be given wide leeway to refuse the transfer of a lease. This is true even if a suitable replacement tenant is found.

In Rabin v. 2490918 Ontario Inc., a landlord refused to consent to a commercial tenant’s request to assign its lease and the court had to determine whether the landlord’s decision was “unreasonable” in the circumstances.

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 should be seen as a red flag for commercial tenants who are looking to get out of their leases. Many commercial leases and the Commercial Tenancies Act state that landlords cannot “unreasonably withhold” their consent for a lease transfer. However, what exactly constitutes “reasonable” will come down to context and facts.

In the Rabin case, it was unreasonable for the landlord to refuse the tenant’s request, as the replacement tenant was very similar. It was also unreasonable for the landlord to demand a demolition clause, as this was a ploy to try and secure a better lease for redevelopment. However, this this does not necessarily mean that the landlord was constrained in deciding whether to transfer the lease.

This decision is a good resource for both landlords and tenants when contemplating a lease transfer, especially in this day and age where many commercial tenants have trouble making rent. If a tenant finds another business to assume its lease, their landlord does not have to agree to the transfer, but they also cannot say no for arbitrary or opportunistic reasons. Both sides would be wise to keep this in mind as this pandemic rages on.