April 2011

« February 2011 | Blog Home

Withholding consent to assignments: a primer

The issue of when a landlord can refuse to consent to the assignment of a lease remains a notable source of litigation in the commercial real estate space.  While lease agreements typically contain provisions permitting the tenant to assign upon securing the landlord’s consent (such consent not being unreasonably withheld), parties tend to arrive at significantly different interpretations of such clauses when faced with a dispute.  The purpose of this article is to provide an overview of the law in this area in an effort to help landlords and tenants better position themselves when considering the assignment of commercial leases.

In 2002, the Court of Appeal for Ontario offered a salient summary of the law of assignments in Rodaro v. Royal Bank (2002), 59 O.R. (3d) 74.  Writing for the Court, Doherty J.A. stated:

"Aside from limitations imposed by statute, public policy or the terms of a specific contract, a party to an agreement may assign its rights, but not its obligations under that agreement, to a third party without the consent of the other party to the contract.  A party will not, however, be allowed to assign its rights under a contract if that assignment increases the burden on the other party to the agreement, or if the agreement is based on confidences, skills or special personal characteristics such as to implicitly limit the agreement to the original parties.”

This suggests that where a lease is silent as to the issue of assignment, the tenant may generally assign its interests without obtaining the landlord’s consent unless: (a) the assignment would increase the burden on the landlord; or (b) the landlord initially elected to enter into the lease owing to the tenant’s confidences, skills or special characteristics.  The issue becomes more complicated in circumstances where the parties turned their minds to the issue and included the common-place restriction in which the tenant is required to secure the landlord’s consent before an assignment can occur.  This restriction is typically softened by the qualifier that the landlord may not unreasonably withhold such consent.  Moreover, subsection 23(1) of the Commercial Tenancies Act provides that unless a lease contains an express provision to the contrary, it will be deemed to include a clause prohibiting the landlord’s consent from being unreasonably withheld.

Shortly after the Court of Appeal’s decision in Rodaro v. Royal Bank, the Ontario Superior Court of Justice released what is widely regarded as the leading Ontario authority on the process to be followed in determining whether a landlord has unreasonably withheld consent.  In 1455202 Ontario Inc. v. Welbow Holdings Ltd., 2003 CanLII 10572, Culluti J. offered the following guidance:

1. the burden is on the tenant to satisfy the court that the landlord’s refusal was unreasonable;
2. in determining the reasonableness of a refusal to consent, it is the reasons given by the landlord at the time the refusal was made, and not any additional or different reasons provided subsequently to the court, that are material
3. as a general rule, the landlord may reasonably withhold consent if the assignment is expected to diminish the value of its rights under it;
4. a probability that the proposed assignee will default in its obligations under the lease may be a reasonable ground for withholding consent;
5. the financial position of the assignee may be a relevant consideration; and
6. the question of reasonableness is essentially one of fact that must be determined on the circumstances of each particular case, including the commercial realities of the market place and the economic impact of an assignment on the landlord.

As suggested by the Ontario Superior Court of Justice in the recent 2010 decision in Suncor Energy Products Inc. v. 2054889 Ontario Ltd., [2010] O.J. No. 5129, commercial realities play perhaps the most important role in determining whether a landlord’s consent has been unreasonably withheld.  In that case, the terms of a lease of a gas station provided that the tenant could assign upon obtaining the consent of the landlord, such consent not to be unreasonably withheld.  The landlord refused to consent on the mistaken belief that the assignment would erode the financial value of the leased premises.  The Court, upon hearing evidence submitted by both parties, found that the landlord would in fact be much better positioned from an economic perspective if it consented to the assignment.  Accordingly, the court held that the landlord was being unreasonable and concluded that the refusal was invalid.

The assignment of leases is a quintessential example of a complex legal issue disguised as a straight forward affair.  Landlords and tenants should exercise care in ensuring that their intentions with respect to assignments are clearly set out at the onset of the negotiating process in order to mitigate the need for future judicial intervention.

Devin Anderson