Commercial leases often include clauses that require a tenant or landlord to consent to a particular action, such as requiring the landlord’s consent to a tenant’s proposed assignment of the lease, or requiring the tenant to consent to a location to which the landlord proposes to relocate the tenant. At times, this requirement is contractually qualified, requiring the consent not to be unreasonably withheld. But what constitutes unreasonable withholding of consent and what, if anything, can the party requesting the consent do about it?
How do you know when they are being unreasonable?
Whether consent has been unreasonably withheld has received the most judicial consideration in the context of a landlord refusing to consent to a proposed assignment of a lease or sublease by a tenant. Most leases are negotiated to include wording that consent may not be unreasonably withheld, but in the absence of that qualification, section 23 of the Commercial Tenancies Act1 deems that the consent cannot be unreasonably withheld. Note that parties are free to negotiate a different standard, but this is rare.
In determining whether consent is being unreasonably withheld, the courts have laid out several principles to be considered.
The first principle is that of onus of proof. The party claiming the other is acting unreasonably has the burden of proving it.2 In deciding whether the burden has been discharged, the question that the court asks is not whether the court would have reached the same conclusion as the party whose consent is required, or whether a reasonable person might have given consent under the circumstances; rather, the question is whether a reasonable person would have considered the same reasoning/reason (whether the reason for refusing consent was a reasonable consideration).3 For example, if a tenant is required to consent to a relocation of its premises to another location, and refuses consent on the basis that it is of the opinion that the proposed new location has less customer traffic and sales will fall, it is likely a court would uphold the refusal to give consent as being reasonable even potentially if the tenant was incorrect in its judgment (the location may actually have resulted in increased sales), as the reason considered was a “reasonable reason” i.e. that it would be normal and reasonable for a tenant to consider if sales would be affected by a move.
In determining whether the withholding of consent is unreasonable, the court also looks at the applicable covenant in the context of the lease, and ascertains the purpose of the covenant in that context.4 The question of reasonableness is essentially one of fact to be determined on the circumstances at hand, including “the commercial realities of the market place and the economic impact on the party being asked for their consent”.5
The Court further holds that a refusal of consent will be unreasonable if it was designed to achieve a collateral purpose, or benefit the party, that was wholly unconnected with the bargain between the parties as reflected in their contract giving rise to the consent requirement.6
In Tradedge Inc. v. Tri‐Novo Group Inc., the landlord refused to consent to an assignment by the tenant. The Court found that the landlord had been unreasonable because its purpose was to increase the rent and was not based on considerations surrounding the proposed assignment. The Court held that the landlord would not have been worse off after the assignment and, in fact, may have actually been better off by the assignment. As such, the Court held that the landlord’s refusal to consent to the assignment was unreasonable because the refusal was designed to achieve a collateral purpose.
Courts have held that reasonableness should not be confused with what may seem fair or just or to matters which touch both parties, but that the party refusing consent is entitled to take matters of convenience and interest to them alone into account.7 Further, it is not necessary for the party whose consent is required, to prove that the conclusions that led it to refuse to consent were justified, if they were conclusions that might have been reached by a reasonable person in the circumstances.8
The court also looks at the circumstances surrounding the consent or withholding thereof. In the end, no rigid rule governs what type of circumstances may be taken into account.9
What can be done if consent is being unreasonably withheld?
If the party requesting consent believes that the other party is being unreasonable in refusing to consent, one potential remedy is to bring an application to Court for a declaration that the other party is unreasonably withholding consent and to request the Court to grant the consent. Another alternative is to treat the failure to grant consent by the other party as a breach of the contract by such party, but this can be risky, especially if the Court later determines that the consent was not unreasonably withheld. Alternatively, the party requiring the consent may choose not to proceed with the action requiring consent and sue the other party for damages (subject to any limitations and releases in the lease or contract).
Preventing the issue
During the negotiation stage of a lease, the parties should turn their minds to what would be reasonable (e.g. it is deemed reasonable to withhold consent if…) or explicitly limit the grounds that can be used to refuse consent. In the context of an assignment of a lease, grounds might include, but are not limited to, the financial health of the proposed assignee, the effect on other tenants of the landlord, or the nature of the use of the premises. With these limiting grounds in place both parties will have a better idea of what is reasonable in the circumstances and perhaps avoid the argument altogether as to whether a party acted unreasonably.