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

 

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, [2007] 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 (Divisional Court) upheld Justice Wilson’s decision.

 

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.

 

Bob Fraser

Principal's Liability for Acts of Agents

There are some special rules governing the liability of a principal who has an agent acting on their behalf to sign contracts.  The rules are different depending upon whether the party dealing with the agent knows there is a principal behind that agent.  Where the principal is not known (an undisclosed principal) there are again differences in the rules depending upon whether the contract is one made under seal or deemed to be under seal by legislation.  The recent case of Vicdom Sand & Gravel (Ontario) Limited v. Oak Harbor I Management Limited et al [2008] O.J. No. 5357 (Ont. S.C.J.) is an example of the application of the sealed contract rule to an undisclosed principal.

Disclosed Principal

Where an agent enters into a contract on behalf of a principal who is named, and that agent has the authority to enter into that contract, the principal is liable for the performance of the contract.  That authority may be either actual authority granted to the agent or apparent authority where the principal has by its conduct given the indication that the agent has authority for such matters.

Where a disclosed agent acts outside of both its actual or apparent authority, the agent, and not the principal, will be bound.  However, the principal in that situation can ratify the act of its agent.  To constitute ratification, three conditions must be satisfied.  The agent must have purported to act for the principal, at the time the act was done the agent must have had a competent principal and at the time of the ratification the principal must be legally capable of doing the act itself (see John Ziner Lumber Ltd. v. Kotov, 2000 CanLII 16894 (Ont. C.A.)).

Undisclosed Principal

Where an agent acts on behalf of an undisclosed principal, the law has recognized that the third party thinks it is dealing with a person acting on its own behalf.  However, if that third party ultimately learns of the existence of the undisclosed principal, generally that third party may sue the principal so long as the agent has acted within the scope if its actual authority.  There is no concept here of apparent authority because the agency relationship was not known when the contract was made.

However, there is an important exception to that rule, which was relevant in the Vicdom Sand & Gravel case.  It has long been held that a contract made under seal cannot be enforced against the undisclosed principal.  This is inconsistent with the general principle that agents can bind third parties for whom they contract.  The rule has been criticized for that reason.  On the other hand, it seems to have survived on the basis that it is consistent with commercial reality.  The party dealing with the agent does not know there is an undisclosed principal behind the agent and therefore should not get the benefit of any other rights to sue.

The Vicdom Case

The Vicdom Sand & Gravel case involved an agreement of purchase and sale with a vendor take back mortgage.  The agreement of purchase and sale was assigned to Oak Harbor I Management Limited (“Oak Harbor”) and the mortgage back was given by that entity.  It later came out that Oak Harbor was the general partner of a limited partnership and therefore acting as agent for an undisclosed principal.

Vicdom Sand & Gravel, the mortgagee, attempted to collect from the undisclosed principal.  One basis for this was relying on the law that when a person acts as an agent, the transaction can be enforced directly against the principal.

However, the court applied the sealed contract rule.  By reason of the Land Registration Reform Act, in Ontario every registration document dealing with land is, by statute, to have the same effect as if executed under seal.  Accordingly, the mortgage back was considered a sealed contract.  As such, Vicdom Sand & Gravel could not proceed against the undisclosed principal.

Bill Rowlands

 

Notices of Renewal and the Doctrine of Waiver: Case Comment on 1651788 Ontario Inc. v. 1628093 Ontario Inc.

Under the legal doctrine of waiver, a landlord’s failure to insist upon a tenant’s compliance with certain conditions of the lease may lead to the landlord being precluded from asserting that such original conditions are still operative and binding. An argument of waiver arose in the recent case of 1651788 Ontario Inc. v. 1628093 Ontario Inc. (2008 CanLII 45395 ON S.C.), where the Subtenant alleged that the Sublandlord’s oral agreement to renew the sublease was sufficient to waive the requirement in the sublease for renewal by written notice.

In that case, the parties entered into a sublease for a 145 square foot space in a shopping mall used by the Subtenant for the rental and sale of DVD's. The sublease contained a renewal clause under which the Subtenant could renew the term for a further period of 3 years at a rental rate to be agreed upon, so long as written notice of the renewal was given to the Sublandlord 60 days prior to the expiration of the term (which was by May 28, 2008). Failing agreement on the rental rate, rent for the renewal  period was to be determined by arbitration.

 

The Subtenant and Sublandlord had a cordial and informal relationship. The Subtenant alleged that it had discussions with the Sublandlord in April 2008 in which the Sublandlord acknowledged that the sublease would be renewed, although rent remained to be determined. The Subtenant further alleged that similar discussions took place again in mid and late May 2008, in which the Sublandlord confirmed renewal but would not commit to a rental rate for the renewal term.

 

In mid June the Sublandlord referred the Subtenant to the Sublandlord’s solicitor, who informed the Subtenant that as no written renewal notice had been given, a new Sublease was required. Following the meeting, the Subtenant wrote a letter to the Sublandlord requesting confirmation that the sublease had been renewed and claiming that the requirement for a new sublease was unfair. In mid July the Subtenant’s solicitor sent a further letter to the Sublandlord stating that a renewal had already been effected and including rent for July 2008.

 

In late June the Sublandlord entered into a new sublease with a new subtenant at an above market rental rate (although the parties agreed that the tenancy would be carried over until the litigation with the Subtenant was resolved).

 

At trial, the Sublandlord denied that there were any discussions or verbal agreements with the Subtenant regarding renewal of the sublease, and claimed that no part of its conduct could be interpreted as a waiver of the required term of 60 days written notice of renewal.

 

After hearing the parties’ evidence, Gilmore J. held that a renewal of the sublease took place during the discussions between the Sublandlord and Subtenant in April and May of 2008. The Subtenant’s actions in requesting that a contract be drafted and rental amount agreed upon reflected that the Subtenant was under the impression that the renewal was decided until the Subtenant met with the Sublandlord’s solicitor in June. Further, even if the communications of the Subtenant were insufficient to constitute an unequivocal renewal, the conduct of the Sublandlord was sufficient estoppel with respect to its right to rely on the strict terms of the renewal. Gilmore J. ordered the renewal of the sublease in accordance with the renewal option, and that rent for the renewal term be determined by arbitration in the event the parties were unable to reach agreement.

 

From a landlord’s perspective, this case demonstrates how a failure to insist on strict compliance with the terms of the lease may lead to waiver of the landlord’s rights. To the tenant, this case is a reminder of the importance of providing notice in writing where required so that debates such as occurred here are avoided.

Bob Fraser

Assignability of rights of first refusal granted under a lease

A right of first refusal under a lease is a contractual right that gives the tenant the right to match any third party offer if the landlord chooses to sell the property.  A right of first refusal is different from an option to purchase: while an option to purchase immediately creates an interest in land, a right of first refusal is merely a contractual right that becomes an interest in land only when the right is triggered (Canadian Long Island Petroleums Ltd. et al. v. Irving Industries Ltd., 1974 CanLII 190 (S.C.C.); Harris v. McNeely (2000), 47 O.R. (3d) 161 (Ont. C.A.)).  Even though a right of first refusal is granted in a lease document, it is seen as an independent agreement separate from the lease legally valid without any additional consideration (Budget Car Rentals Toronto Ltd. v. Petro Canada Inc. (1989), 69 O.R. (2d) 289 (C.A)).

 

While a right of first refusal is a independent contact, and, generally, under contract law a benefit of a contract could be assigned (unless the contract itself restricts such assignment), case law has established that, in Ontario, a right of first refusal granted in a lease is a personal right of the contracting parties and, therefore, not capable of being assigned without the landlord’s specific consent (Zouvgais v. Chang (1986), 39 R.P.R. 221 (Ont. H.C.)).

 

Despite the “specific consent” requirement, practitioners should keep in mind that the landlord’s consent could be inferred based on the language of the lease or the intent of the parties:

 

In Zouvgias v. Chang (1986), 39 R.P.R. 221 (Ont. H.C.), the tenant assigned his lease to another with the landlord’s consent but there was no explicit consent to assign the right of first refusal.  The court found that the consent to assign the lease and “all benefits under the lease” included consent to assign the right of first refusal since the lease described the right of first refusal as forming “an integral part of this Indenture".

In Law-Woman Management Corporation v. Peel (Regional Municipality et al.(1991), 17 R.P.R. (2d) 62, the court held that the lease containing a definition of “lessee” as including “assigns” evidenced the intent of the parties that a general assignment of the lease included an assignment of the right of first refusal.

In summary, when contemplating an assignment of a right of first refusal either together with or independently from the tenancy interest under the lease, remember that even if the lease document is silent on the point, the landlord’s specific consent is likely required before the right of first refusal could be validly assigned. This would be in addition to the consent to the assignment of the tenancy interest (which is likely required under the terms of the lease). Also, if the intent of the lease is to make it assignable in certain circumstances without consent (such as to corporate affiliates) care should be taken in the drafting to ensure that applies to the assignment of a right of first refusal as well.

Anna Sosis

Judicial Interpretation of "completely carefree net lease"

The intent of a "net" lease is to shift responsibility for the payment of expenses under the lease to the tenant. However, the case law has fairly consistently required landlords to specify particular expenses in their leases in order to be able to recover such expenses from tenants. This is seen again in 1645111 Ontario Ltd. v. 1169136 Ontario Inc., 2008 CarswellOnt 4002.

In this case, the Tenant leased the basement, main floor, patio space and a portion of the second floor of the building for the purpose of operating a bar and restaurant. The Landlord undertook major repairs of the roof and sought to charge the Tenant its proportionate share of the expense, an amount which totaled approximately $32,000.00.

The lease in question was prepared on a standard stationary company form which states that the lease is a "completely carefree net lease for the Landlord". However, in this case the parties also added a clause to Section 6 of the form, which addresses repair and maintenance. Paragraph 6(5), inserted by the parties, read "the Landlord shall be responsible for, at its expense, the maintenance of the structure of the building including, but not limited to, the roof, exterior walls and heating system."

The issue before DiTomaso J. of the Ontario Superior Court of Justice was how a lease described as being a "completely carefree net lease to the Landlord" could be reconciled with a provision in the lease which attributed responsibility to the Landlord for its expense in maintaining the roof of the building.

The Landlord argued that under the lease the Tenant was responsible to pay to the Landlord Additional Rent consisting of all charges, costs and expenses of every nature and kind and its proportionate share of costs for common areas and facilities (the roof being a common area used by the Tenant). The Tenant countered that the roof was not a common area that the Tenant used so as to attract Additional Rent and that paragraph 6(5) (mentioned above) excluded the Tenant from responsibility for expenses regarding the maintenance of the structure of the building, including the roof.

DiTomaso J. noted that despite the lease's description as being carefree and net to the Landlord, the terms of the lease as a whole must be considered. In this case, paragraph 6(5) was inserted as an exception to the overall intent of the lease. It placed responsibility for maintenance of the structure of the building (including the roof) on the Landlord and at the Landlord's expense. This was not an inconsistency that could be dismissed by characterizing the roof as a common area for which repair costs were chargeable to the Tenant as Additional Rent. The paragraph's wording and its context within the document defeated the Landlord's claim that the cost of the roof repair could be passed through proportionately to the Tenant and the Landlord's application was dismissed.

This case is important because it illustrates that the description of the lease as being "net" to the landlord does not necessarily make it so. Even in a net lease, tenant and landlord responsibilities for operating costs should be clearly and consistently defined.

Bob Fraser

How-To Brief: How To Prepare Closing Documents in a Commercial Real Estate Transaction

The Real Estate Group at Lang Michener LLP has just completed the "How-To Brief: How To Prepare Closing Documents in a Commercial Real Estate Transaction" for the Law Society of Upper Canada. This is a real estate How-To Brief for the Law Society's online resources. These resources have been designed to assist lawyers and articling students in performing key day-to-day tasks in major practice areas. The How-To Briefs are intended to provide a step-by-step procedural guide and to raise substantive issues to consider in relation to these tasks. The How-To Briefs are available on the Law Society's website.

As a senior real estate practitioner in Ontario, Bruce McKenna was approached by the Law Society earlier this year and agreed to prepare this material. He was assisted throughout this preparation process by Matthew German. In addition, every other lawyer, clerk and student in Lang Michener LLP's Real Estate Group made some contribution to and enhanced the final product. We are proud that the Lang Michener LLP forms will be used in commercial real estate transactions across Ontario.

As with the O'Brien's Encyclopedia of Forms Division on Leases prepared by Bill Rowlands and others, the Real Estate Group at Lang Michener LLP continues to provide leadership in the Ontario Real Estate bar. 

Bruce McKenna

Matthew German

Subrogated Claims by Insurers in Commercial Leases (Part V)

This post follows the entries of Bill Rowlands on October 28, 2005, August 29, 2006, March 6, 2007 and February 26, 2008 discussing the ability of an insurer of a landlord to proceed against a tenant to recover from the tenant amounts paid out by the insurer under an insurance claim by the landlord. That is referred to as a subrogated claim.

 In 1044589 Ontario Inc. c.o.b. Nantucket Business Centre v. AB Autorama Ltd. (2008 CanLii 39435 ONSC), the parties had not signed a formal lease and their relationship was governed by the Offer to Lease. A fire started as a result of the tenant’s operations and caused damage to the premises, its contents, an interruption of the tenant’s business and a resulting loss of profits.

 The issue facing the court was whether the terms of the Offer allowed the landlord to sue the tenant for damages, (and its insurer to sustain a subrogated claim) or whether, when it included insurance as part of the costs of the tenant’s proportionate share of the cost of the premises, the landlord assumed the risk of damage by fire, and thus may not sue the tenant for damages arising from the tenant’s negligence.

 

 

The court looked to the express language of the Offer and found it to be similar to that at issue in Lee-Mar Developments Ltd. v. Monto Industries Ltd. ([2000] O.J. No. 1332 (S.C.J.)). Following the reasoning in Lee-Mar, the court found: (1) there was no covenant in the Offer obliging the landlord to take out insurance on the property; (2) the only express insurance obligation in the Offer was on the tenant, requiring the tenant to maintain commercial liability insurance; (3) the Offer contained an “entire agreement” clause and therefore there were no collateral agreements of obligations outside those in the Offer; and (4) the description of the Offer as “completely carefree” supported the landlord’s position.

The court held that, on the basis of the above factors, the parties intended that the tenant assume the risk for any losses caused by the tenant’s negligence. The plaintiff was not precluded from pursuing its claim against the defendant. 

In addition to offering guidance as to when a tenant may not be protected from a subrogated claim, this case is also a reminder that it may be useful to pursue the formal lease and not live under any offer to lease. The lease negotiations may have resulted in some language that might have impacted the decision. For example, there may well have been a covenant of the landlord to insure in the formal lease 

Bob Fraser .

When a Binding Offer to Lease does not Translate into a Binding Lease

We have previously discussed in this space that in order to have a binding agreement for lease all material terms of the lease must be “unconditionally accepted or otherwise resolved.” If some material terms have not been accepted or otherwise resolved, the agreement for lease will not be seen as a concluded contract. Rather, courts will view it as being in the process of negotiation and, therefore, not enforceable.

Similarly, even where parties signed a binding offer to lease documenting all material terms, one party will not be able to compel another to execute a final lease agreement if a material term of the final lease agreement is at odds with the signed offer (unless the changes to that term have been unconditionally accepted or otherwise resolved).

The recent decision by the Ontario Court of Appeal in 365 Bay New Holdings Limited v. McQuillan Life Insurance Agencies Limited, 2008 ONCA 100 (CanLII), (2008), 233 O.A.C. 299 provides an example of a situation where the final lease agreement submitted for execution by one of the parties was at odds with the signed binding offer to lease.

In 365 Bay New Holdings Limited case the Landlord and the prospective Tenant signed a binding Offer to Lease. The signed Offer stated that the parties would use their best efforts to execute a lease within 20 days of the Offer. It provided that the Landlord was to deliver its Standard Form Lease agreement incorporating all terms of the signed Offer. In addition, the final lease was also subject to further “minor non-financial amendments as may reasonably be requested by the Tenant which are acceptable to both parties...”

After the Offer was signed, the Landlord submitted to the Tenant the revised Standard Form Lease agreement that incorporated the terms of the Offer to Lease. In response, the Tenant requested amendments to one hundred and six (106) sections the Landlord’s Standard Form Lease. The Landlord accepted changes to fifty two (52) sections of the Lease and sent the revised document to the Tenant. In response, the Tenant pressed for additional amendments to over ninety eight (98) sections of the Standard Form Lease.

The parties continued in this fashion for a period of 5 months. Finally, 5 months after the Offer to Lease was signed, the Landlord refused to negotiate further and sent the sixth version of the Standard Form Lease agreement to the Tenant for execution. The version six of the Standard Form Lease sent to the Tenant incorporated 74 amendments requested by the Tenant that the Landlord agreed to. However, the Tenant refused to sign the submitted lease document and rented different premises.

The trial judge found that the nature and the number of amendments to the Standard Form Lease went outside of the “minor non-financial amendments as may reasonably be requested by the Tenant which are acceptable to both parties...” contemplated in the Offer to Lease. The incorporated amendments contained significant substantive terms not found in the Offer. However, the parties came to a bilateral agreement regarding the terms of the Standard Form Lease. As such, the refusal by the Tenant to move forward was a breach of the Offer to Lease and of the subsequently reached agreement.

The Court of Appeal disagreed with the conclusion reached by the trial judge. The Court stated that the final lease agreement in the form specified in the Offer to Lease would have been binding on the Tenant. However, the Court felt that the parties did not reach an agreement on the substantive changes to the Standard Form Lease. As the changes were not accepted by both parties, the Landlord could not insist that the Tenant sign the Standard Form Lease in the form submitted. Essentially, the Landlord could not compel the Tenant to enter into a different lease and, consequently, the Tenant’s refusal to execute the lease submitted by the Landlord was not a breach of the signed Offer.

In summary, this case suggests that when the parties proceed to negotiate changes to a lease form not contemplated by the Offer to Lease, there must be agreement on all changes or the parties must revert back to only those terms contemplated in the Offer to Lease. Here the Landlord accommodated some (but not all) of the changes with a result that the Tenant was free to walk from the deal when the Landlord sent an ultimatum requiring the lease to be signed with only the changes that the Landlord was prepared to accommodate.

Anna Sosis, Articling Student

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