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Consents to Lease Assignments - Case Comment, Loblaws v. The General
In a recent unreported decision,
the Supreme Court of Newfoundland and Labrador had an
interesting opportunity to consider what it means when a landlord’s consent to
the transfer of a lease is “not to be unreasonably withheld”.
In this case (Loblaws Inc. v. The General Inc., [2007] NLTD 160 (CanLII)), Loblaws operated three
grocery stores in St. John’s in properties owned by The General. Two were closed after Loblaws gave the
required notice to The General.
Both Loblaws and The General had
attempted to find replacement grocery stores for these two locations but with
no luck up to the time the case was heard.
Finally, after 18 months of
looking, Loblaws found a potential subtenant for one location. It applied for consent. The General refused consent. Loblaws brought an action seeking
a declaration that The General was unreasonably withholding its consent,
contrary to the lease.
The potential subtenant wanted to
change the use of the space from a grocery store use and proposed that, Monday
to Saturday, the space would operate for the sale of “new surplus goods,
manufacturers’ end run products, antiques, finished craft products and
art”. On Sunday, the subtenant proposed
to use the space for a flea market, renting to customers so they could sell
“used household products and fixtures, books, dry goods, sporting goods and
equipment, clothing, dishwares, etc.” but excluding auto parts, hazardous
materials or anything that could harm or damage the premises or people.
The General refused its consent
on the basis that this type of business was inconsistent with its business
strategy of entering into relationships with “financially sound national
corporations who deal in first class trade/business activity and who are
considered in the industry as an “anchor tenant”.”
Loblaws relied on two aspects of
the lease. The first was a fairly
standard provision allowing it to assign or sublet with the landlord’s consent,
not to be unreasonably withheld. The
second was a provision requiring Loblaws to restrict its use to that of a
supermarket business but providing that, if it stopped operating a supermarket
there before the lease expired, it could use the premises for any other purpose
not substantially the same as any business operated in any other space in the
shopping centre. Significantly, that
provision goes on to state that, if there is an assignment or subletting of the
Loblaws space, the assignee or subtenant would have to live under the same
restrictions.
A slam dunk for Loblaws? No.
The court worked through a number
of principles to reach its result. It
started by referring to long standing case law which states that the onus lies
on the tenant to prove the landlord is being unreasonable, not the other way
around. In other words, the first hurdle
to cross is to make sure that there’s a rock solid case proving that the
landlord is being unreasonable, since “It was not The General’s burden to prove
that its position was reasonable but that of Loblaws to prove on the balance of
probabilities that it was unreasonable.”
Secondly, the court reminds the
parties that “reasonableness should not be confused with what may seem fair or
just or to matters which touch both parties. The landlord is entitled to take matters of convenience and interest to
him alone into account.”
Thirdly, the court concluded that
it was not unreasonable for the landlord to consider the effect of this
particular use on the ultimate sale value of the property should the landlord
want to sell.
The lesson to be learned? Take “reasonable consent” with a grain of
salt. Even such broad and general
wording may not be the solution to all woes. If it is possible that the inability to change the use will hinder the
tenant’s right to assign or sublet, then the tenant must make it clear in the
offer and the lease that the landlord may not withhold its consent merely
because of a proposed change of use. Even as a landlord, it is probably worth clarifying one’s expectations
in this regard.
As this case illustrates, the
need to deal with this grows the more particular the use is. Thus, a “restaurant” or a “ladies wear store”
may attract a broad range of prospective buyers but, for a supermarket or any
number of other highly specialized uses, one tenant’s inability to succeed in
that location likely means that the use will need to change in order for both
the landlord and any prospective tenant to achieve the highest and best use of
the space. And, after all, isn’t that
the result everyone is hoping for?
Celia Hitch
March 22, 2008 in Leasing | Permalink
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