April 2010

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"Unreasonable" refusal to grant consent to a lease assignment

Commercial leases commonly provide that the tenant may not assign or sublet the lease without the landlord’s consent, such consent “not to be unreasonably withheld”.  In Ontario, a landlord may not withhold its consent solely to secure a new advantage uncontemplated by the terms of the lease.

This issue recently came before the Ontario Superior Court of Justice in the case of Tradedge Inc. v. Tri-Novo Group Inc., 84 R.P.R. (4th) 84.  There, the tenant’s business came under severe financial constraints and it entered into a sale agreement which was conditional on an assignment of the tenant’s lease.

The terms of the lease prohibited the tenant from assigning the lease without the landlord’s consent (such consent not to be unreasonably withheld).

The purchaser (“proposed assignee”) entered into preliminary negotiations with the landlord over the terms of the lease assignment during which it provided the landlord with information about its proposed new business. After reviewing that information, the landlord refused a straight assignment without conditions, alleging that the proposed assignee was not in a satisfactory financial condition.

The landlord was willing to grant its consent if the proposed assignee agreed to pay an increased rent and addressed the landlord’s concerns about its protection in the event of the proposed assignee’s default by agreeing to additional lease terms. However, when the landlord provided these additional lease terms, many of them were unrelated to the proposed assignee’s financial condition. The proposed assignee refused to agree to the additional lease terms but offered to post a $100,000 letter of credit as well as confirmation that its bank had approved a $250,000 loan, including $150,000 for renovations to the premises.

Following further discussions, the proposed assignee agreed to pay the increased rent, as well as a deposit towards the landlord’s legal costs for the assignment. The tenant,  however, refused to agree to the assignment unless the landlord agreed to pay the tenant’s legal fees and provide a certain period of rent relief. As a result, consent to the assignment was not given by the landlord and the lease was not assigned.

The tenant left the premises and the landlord leased them to the proposed assignee at a higher rent and with a $175,000 inducement for the landlord to sign the lease. The tenant proceeded to bring an application that the landlord had unreasonably withheld its consent in order to benefit itself by re-leasing the premises.

The court agreed with the tenant and found that the landlord would not have been worse off by consenting to the assignment, but rather may have been better off given the financial condition of the tenant. The landlord had acted unreasonably in refusing to grant its consent to the assignment.

This case illustrates that a landlord’s refusal to grant its consent to a tenant’s request to assign the lease will be seen by the court to be unreasonable where it is designed to obtain a benefit to the landlord which is unconnected to the existing terms of the lease.

Bob Fraser