Canadian Commercial Real Estate Law Blog

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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.

Bill Rowlands

 

May 25, 2009 in Leasing | Permalink

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Comments

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Posted by: Lake Placid Homes | Oct 14, 2010 2:46:38 AM

Execellent thought 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.Nice information.

Posted by: build on your lot builders | Nov 30, 2010 6:33:17 AM

Thank you for the information. I am a commercial bailiff in BC specializing in rent distress and other matters of commercial landlords. Many times they look to me for advice on such issues, now I can give them this link.
Randall Pierce
"The World's Fastest Bailiff"
www.carpe.ca Agnew Bailiffs & Financial Adjusters Ltd.

Posted by: Randall Pierce | Mar 14, 2011 2:51:30 AM

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