Landlord's Termination Right in Lieu of Granting Consent to Sublease, Etc.
Almost all commercial leases will restrict a tenant from assigning, subleasing or otherwise dealing with its lease without the consent of the landlord, with the landlord generally agreeing to not unreasonably withhold such consent. It is also very common in a commercial lease to provide the landlord with a right, in lieu of granting such consent, to terminate the lease and take back the space. This is an additional right bargained for by the landlord so it can regain control of the space (rather than let it go to another occupant) if it so desires.
From time to time it seems that the landlord’s exercise of this right following a request for consent comes as a surprise to a tenant. The tenant may be trying to protect a sale of a business, a lower lease rate or some other interest. In those circumstances a tenant may take the position that the landlord’s termination right is not an independent right but must be read in conjunction with its obligation to act reasonably in considering consents.
Two Ontario cases have dealt with this issue.
In 590207 Ontario Limited and 526442 Ontario Limited v. Mascan Corporation and Hammerson Canada Inc. (Ontario District Court, August 15, 1985) the Court held that the landlord was merely exercising its right to elect to terminate the lease in lieu of either giving or withholding consent and in those circumstances it cannot be said that the landlord’s consent was unreasonably withheld. The landlord was simply exercising an option available to it pursuant to the lease and the tenant’s application to determine whether the landlord has unreasonably withheld consent was dismissed.
However, there is a conflicting result in Priftis v. Trilea Holdings Inc. (Ontario District Court, June 17, 1988). In this case, the Court held that the provision in the lease permitting the landlord to terminate on the mere request of the tenant to assign the lease was contrary to the earlier lease provision that consent to an assignment was not to be unreasonably withheld. The Court resolved the ambiguity in favour of the tenant.
This issue was most recently considered in the Alberta decision of Orbus Pharma Inc. v. Kung Man Lee Properties Inc., 2000 ABQB 754 (CanLII). In this case the tenant made a written request to the landlord for its consent to assign the lease. The landlord elected to exercise its option to cancel the lease in preference to giving that consent. The tenant brought an action against the landlord claiming the landlord was in breach of its obligation under the assignment and sublease provisions of the lease for unreasonably withholding its consent.
The landlord argued that the question of being reasonable was not relevant when it exercised its termination right as the landlord’s options were to:
(a) in the event there was a reasonable basis to withhold consent;
(i) withhold consent;
(ii) consent; or
(iii) terminate the lease; and
(b) in the event there was no reasonable basis to withhold consent:
(i) consent to the assignment; or
(ii) terminate the lease.
That is, the landlord argued it could terminate the lease in either case, whether there was a reasonable basis to withhold consent or not.
The tenant took a different interpretation of the lease. In the tenant’s view:
(a) in the event there was a reasonable basis to withhold consent then the landlord could:
(i) withhold consent;
(ii) consent; or
(iii) terminate the lease; and
(b) in the event there was no reasonable basis to withhold consent, then the landlord was limited to consenting to the assignment and the termination right did not operate.
The court agreed with the landlord finding that the landlord had the separate contractual right to terminate the lease in preference to the consenting to the requested assignment. In its decision the court considered the Priftis v. Trilea Holdings case referred to above and found that the lease there was worded differently and therefore that case was not helpful to the tenant.
As with many lease issues, the decision ultimately turned on the drafting of the lease. Once again, this shows the importance of how lease provisions are drafted.
The Purchaser's Right to Rescind: Easements Materially Affecting Use
Typical language in an agreement of purchase and sale provides that the purchaser agrees to accept title “subject to any easements for sewers, drainage, public utilities, phone or cable lines or other services that do not materially affect the present use of the property.” Language such as this is usually found in either a preprinted form that may be used by the parties or in specifically negotiated “Permitted Encumbrances” in larger deals.
In Ontario, the test for whether an easement materially affects the use of a property is set out by Justice Moldaver in Stefanovska v. Kok (1990), 73 O.R. (2d) 368 (Ont. H.C.):
… the test to be applied is whether the vendor can convey substantially what the purchaser contracted to get. In this regard, all of the surrounding circumstances must be considered to determine if the alleged impediment to title would, in any significant way, affect the purchaser’s use or enjoyment of the property.
Justice Forestell, in Ridgely v. Nielson,  O.J. No. 1699 (Ont. S.C.J.), outlined four factors to be considered in determining whether an easement is material: the location of it; the size of the easement; the point of access; and the owner’s enjoyment of the property.
The point at which an easement “materially affects” a purchaser’s use of a property was recently considered by the Ontario Superior Court of Justice in Macdonald v. Robson (2008), 76 R.P.R. (4th) 156.
In this case, the parties entered into an agreement of purchase and sale for a two acre property. The purchaser gave evidence at trial that the property suited his interests as its lay-out would enable him to build a structure on the west side of the property to house his tractor.
The real estate listing for the property made no reference to any easements. However, in fact an easement in favour of the Town of Flamborough affected approximately 25% of the property. The terms of the Easement Agreement permitted access to the property by the Town to deal with sewer systems and required the property owner to keep the easement area free of all obstructions, including buildings and structures. The restrictions imposed by the easement would have prevented the purchaser’s planned construction of a shed and future building projects.
On discovery of the easement the purchaser’s lawyer requisitioned its removal on the basis that it materially affected the purchaser’s intended use for the property. The vendor’s lawyer countered that given the size of the property there were alternate areas where a shed could be constructed. An application to court was launched.
At trial, Justice Wilson of the Ontario Superior Court of Justice considered the tests in Stefanovska and Ridgely (outlined above). Given the purchaser’s intention to use the property to indulge his building hobby, and given the size and location of the easement, it had a material affect the on the present use of the property. Justice Wilson ordered the return of the deposit and held that the purchaser was entitled to rescind the agreement of purchase and sale.
On appeal, Justice Carnwath of the Ontario Superior Court of Justice (
This case is important as it provides insight into when an easement crosses the line between a permitted encumbrance and something that has a material affect on the benefit received by the purchaser. Whether an easement is “material” will be determined on an objective basis, taking into consideration the view of the purchaser.
This case also highlights the importance of a thorough title investigation early in the purchase transaction.