Ontario Court of Appeal provides guidance on transfer of commercial leases

Last year, the Court of Appeal released a decision that provides a good reminder of the obligations associated with the assignment or transfer of commercial leases.

The case involved a retiring dentist (Dr. Rabin) who sought to sell his practice and assign the lease for his premises to the purchasers of his practice. The lease included a provision that required Dr. Rabin to provide his landlord with written notice in order to assign the lease, and to provide certain information about the proposed new tenants. Under the provision, the landlord was required to provide notice of whether he would consent or deny the assignment within 15 days of being notified of the proposed assignment.

On December 3, 2020, Dr. Rabin informed the landlord that he intended to sell his practice and assign the lease, and he subsequently provided formal written notice on February 2, 2021. The landlord did not respond to the assignment request until February 24, when its lawyer informed Dr. Rabin that consent would only be provided on certain conditions, including that the lease be modified to include a demolition clause. Dr. Rabin considered the landlord’s response a refusal, and subsequent conversations between counsel for the parties ultimately led nowhere.

Dr. Rabin eventually sought a court order under section 23(1) of the Commercial Tenancies Act that consent was unreasonably withheld. The application was ultimately dismissed, with the application judge finding that the parties’ communications and negotiations had the effect of waiving the 15-day deadline, and that consent was not unreasonably withheld.

The Appeal

On appeal, the Court of Appeal set out the principles that apply in assessing whether a landlord has acted reasonably in withholding consent. Finding that the principles are to be considered within the context of “whether a reasonable person would have withheld consent”, the Court of Appeal cited the following principles enunciated in 1455202 Ontario Inc. v Welbow Holdings:

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 that must be determined on the circumstances of the particular case, including the commercial realities of the marketplace and the economic impact of an assignment on the landlord.

Ultimately, the Court of Appeal allowed Dr. Rabin’s appeal and found the landlord to have acted unreasonably. In coming to its decision, the Court of Appeal made a number of key findings. Specifically,

1. The Court of Appeal found that failing to respond within the required 15-day period constituted an unreasonable withholding of consent. According to the Court of Appeal: "The respondent provided no reasonable excuse for its failure to respond within the 15-day deadline other than its principal was away in Florida, had not seen a signed share purchase agreement, and wanted to see if he could negotiate the insertion of a demolition clause in exchange for giving consent to the assignment. Importantly, at that time, he did not, pursuant to [the applicable provision] of the lease, require any information from the appellant. In particular, he requested no financial information respecting the new dentists."
2. While the Court of Appeal found that the failure to provide a response within the 15-day period was enough to dispose of the case, the Court also found that the landlord’s subsequent conduct further amounted to an unreasonable withholding of consent. Specifically, the landlord sought to make consent to the assignment contingent on the inclusion of a demolition clause. The Court of Appeal found that attempting to amend a lease for the landlord’s benefit as a condition of providing consent “has consistently been characterized as an unreasonable withholding of consent.” According to the Court of Appeal, “[a] conditional consent is not a consent.”
3. Finally, the Court of Appeal rejected the application judge’s finding that Dr. Rabin’s conduct waived the landlord’s need to comply with the 15-day requirement. According to the Court of Appeal, waiver requires a full knowledge of rights and an intention to abandon those rights. And in this case, attempting to resolve the landlord’s “failure to respond in order to close the transaction for his client does not amount, without more, to a waiver of the [Dr. Rabin’s] rights or of the [landlord’s] defective performance.”

This case thus provides a good reminder that in considering a tenant’s request to assign a lease, depending on the terms of the lease, landlords must act reasonably so as to comply with the requirements of the Commercial Tenancies Act. Further, landlords must also ensure that they comply with any applicable provisions of their lease that impose additional obligations.

How can we help?

Whether you are a tenant who is about to enter into a commercial lease, or a landlord seeking to lease space to a tenant, contact us for advice – as an experienced commercial real estate lawyer, I understand the seriousness of the potential implications of the transfer provisions in commercial leases for both landlords and tenants alike, and I strongly recommend that you obtain appropriate legal advice prior to entering into commercial lease agreements – the costs of resolving (or attempting to) issues which may arise down the road often far outweighs the cost of obtaining legal advice prior to entering into the agreement.

About the Author

Sean Larjani is a commercial real estate lawyer who regularly advises his clients on commercial real estate transactions, including commercial leases, multi-million-dollar real estate development projects, land assemblies, and acquisition and disposition of such properties. Previously in his career, he acted as in-house counsel for a development firm in Toronto and was also the managing director for a Toronto-based investment/lending company.