Most commercial leases contain a provision that prohibits a tenant from completing a lease assignment without the landlord’s consent. A lease assignment occurs when a tenant transfers all of their rights to a lease to another party, however, the original tenant remains liable to the landlord for rent payments. In many instances, landlords are agreeable to lease assignments. However, there are limited grounds on which a landlord may withhold consent.
In the recent case from the Ontario Court of Appeal, the Court considered whether a commercial landlord’s decision to withhold consent to a tenant’s request to assign the lease was unreasonable.
Tenant sought landlord’s consent to assign lease as part of dental practice sale
In the case of Rabin v. 2490918 Ontario Inc., the appellant Dr. Rabin (the “Tenant”) was a dentist who had been running his dental practice from the leased premises since 1977. The Tenant’s lease was set to expire on December 31, 2025, with a five-year option to renew.
The Tenant sought to retire and sell his practice to two younger dentists. As part of that sale, the Tenant requested the consent of the defendant and respondent, 2490918 Ontario Inc., (the “Landlord”).
Article 11.1(a) of the lease agreement provided that the Tenant could not assign the lease without the prior consent of the Landlord. It also stated that the Landlord shall not “unreasonably withhold” their consent. Article 11.1(a) also set out a procedure for the assignment consent process, which required the Tenant to provide the Landlord with written notice of a request to assign the lease. In this request, the Tenant was required to provide the Landlord with information about the proposed transferee. Further, the Landlord was required to notify the Tenant in writing whether it consented to the proposed assignment within 15 days.
Landlord fails to respond to tenant’s written request
On December 3, 2020, the Tenant sent a text message to the Landlord, advising that he intended to sell his practice and wanted to assign the lease, and offered to provide further information on the proposed transferor. On December 10, 2020, the Tenant sent another email to the Landlord, stating that “time was of the essence” in relation to the sale and assignment of the lease. Then, on February 2, 2021, the Landlord, through his real estate lawyer, provided formal written notice of the requested lease assignment and included the names of the proposed transferees. Follow-ups were sent on February 18 and February 19, 2021.
Landlord sought to include a demolition clause in the lease in return for consent
On February 24, 2021, 22 days after the Tenant’s initial request, the Landlord responded to the Tenant. However, the Landlord’s response time exceeded the 15-day response time specified in the lease.
In their response, the Landlord stated that it would consent to the lease assignment as long as the lease was modified to include a demolition clause upon 24 months’ notice. The Landlord had purchased the property in 2017 with the intent to demolish the existing building and redevelop the property, but had not yet done so at the time of the lease assignment request.
Tenant did not accept the addition of a demolition clause
Through his lawyer, the Tenant responded to the Landlord on March 1, 2021, stating that adding the demolition clause to the lease would lead to significant damages for the Tenant, and again requested the Landlord’s consent to the assignment.
Further correspondence was exchanged between the parties and the Tenant repeatedly requested the Landlord’s consent to the lease assignment. The Tenant also provided relevant information regarding the proposed transferees, including a standard credit application and the share purchase agreement which had previously been provided to the Landlord.
The Landlord responded to the Tenant stating that it was unsatisfied with the credit application and again declined the lease assignment. The Landlord then sought numerous additional documents from the Tenant regarding the proposed transferees.
On March 19, 2021, the Tenant commenced an application.
Application dismissed by the Ontario Superior Court of Justice
The application judge criticized both sides of the argument and stated that applying the law under the present circumstances was challenging.
The application judge found that the Tenant had waived the 15-day requirement under Article 11.1(a), but also noted that the Landlord’s requests for additional information were “overreaching and unreasonable.”
Ultimately, the application judge determined that the Tenant was unable to establish that the Landlord unreasonably withheld consent to the assignment and dismissed the application.
The Tenant appealed this decision to the Ontario Court of Appeal.
Application judge erred in finding tenant waived 15-day response requirement
The Ontario Court of Appeal reviewed the waiver doctrine, explaining that waiver occurs when the waiving party has a full knowledge of their rights and an “unequivocal and conscious intention to abandon them.” The Court of Appeal found that the application judge had not referenced this doctrine properly, nor that these two criteria are applied as a “stringent test.”
The Ontario Court of Appeal determined that the attempts made by the Tenant’s lawyer to resolve the Landlord’s failure to respond was not a waiver of the Tenant’s rights under the lease.
The Ontario Court of Appeal further noted that neither party had expressly raised the waiver doctrine. Therefore, it was not open to the application judge to decide on that basis.
Analysis of lease provisions in the context of the Commercial Tenancies Act
Section 23(1) of the Commercial Tenancies Act provides that a landlord’s consent to an assignment of a lease cannot be unreasonably withheld unless the lease expressly provides for the contrary. Article 11.1(a) of the lease in this case does not expressly provide to the contrary, as it includes a requirement that the Landlord not unreasonably withhold consent to a lease assignment.
The Commercial Tenancies Act does not define what amounts to an unreasonable withholding of consent to a lease assignment. However, the applicable principles are summarized in the case of 1455202 Ontario Inc. v Welbow Holdings Ltd as follows:
- The tenant bears the onus of proving that the refusal was unreasonable;
- The information available to the landlord at the time of the refusal is the material information for making the determination of unreasonableness;
- The determination of unreasonableness is considered in the context of the specific lease agreement and its provisions regarding assignment;
- The likelihood of the proposed assignee to default on the lease obligations may be a reasonable ground to withhold consent to an assignment;
- The financial position of the assignee may be a reasonable ground to withhold consent to an assignment; and
- The question of reasonableness is a question of fact that will be determined in the circumstances of the specific case, which will include the “commercial realities of the marketplace and the economic impact of an assignment on the landlord.”
These principles are to be considered in the context of the “reasonable person” standard, which means that the court will consider whether a reasonable person would have withheld consent in the circumstances.
Court of Appeal finds that Landlord unreasonably withheld consent
The Ontario Court of Appeal applied the principles set out in 1455202 Ontario Inc. v. Elbow Holdings Ltd., and held that the Tenant had met his burden to demonstrate that the Landlord unreasonably withheld consent to the lease assignment request for several reasons.
Landlord’s failure to respond and additional requests deemed unreasonable
The Court found that the Landlord’s failure to respond within the 15-day period set out in the lease was an unreasonable withholding of consent.
The Landlord failed to provide any reasonable excuse for this failure and did not ask for any additional information about the proposed transferees at that time. Relevant to this finding was the fact that the Landlord had prior notice of the request for assignment two months before, therefore, the formal request would not have been a surprise.
The Landlord failed to request additional information about the proposed transferees until early March, which was well outside the 15-day deadline, despite the parties’ correspondence throughout the month of February.
Landlord’s request for demolition clause was unreasonable
The Court also found the Landlord’s request to insert a demolition clause into the lease as a condition of consent to be unreasonable. Inserting this clause would have resulted in a material change to the lease and would have threatened the sale of the Tenant’s practice.
The Ontario Court of Appeal declared that the Landlord had unreasonably withheld consent to the assignment and ordered that the assignment be made. The Court also granted the Tenant his costs of the appeal in the amount of $10,000.
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