Commercial real estate leases often include terms that prohibit a tenant from assigning or subletting the leased premises without the landlord’s consent. These leases can also include a landlord’s covenant that consent will not be unreasonably withheld and that “notwithstanding” the landlord’s covenant to act reasonably, the landlord may terminate the lease after receiving a request for consent. These terms enable a landlord to regain control of the leased premises and provide the landlord with an opportunity to lease the premises to a new tenant perhaps at a higher rental rate or on different terms.
The Alberta Court of Appeal in 550 Capital Corp. v. David S. Cheetham Architect Ltd.  A.J. No. 622 decided that this form of a landlord’s termination right was unenforceable. Article 10.02 of the lease provided that the tenant could not assign the lease without prior written consent of the landlord and such consent was not to be unreasonably withheld. Article 10.03 stated that notwithstanding 10.02, if the tenant requested consent to assign or sublet, the landlord had the right to terminate.
The Court of Appeal found that the termination provision in Article 10.03 jeopardized the tenant’s continuing tenancy in the event a request was made for a transfer, assignment or subletting arrangement because they were not entitled to withdraw the request and remain tenants. Furthermore, the provision permitting the landlord to terminate if the tenant requested consent was contrary to the landlord’s promise not to unreasonably withhold consent. Consequently, the Court of Appeal resolved the ambiguity in the tenant’s favour by finding Article 10.03 unenforceable.
The Effect of the Alberta Court of Appeal’s Ruling on Landlords
The Alberta Court of Appeal’s decision in 550 Capital Corp. illustrated that provisions contrary to the intent of a lease may be resolved in favour of a tenant, particularly when the offending provision contradicts a landlord’s covenant. Furthermore, it shows that the Court has the power to override terms that have been expressly agreed to by two parties in a commercial agreement. Therefore, in an attempt to avoid this situation landlord’s should review the termination rights (if any) that stem from requests for transfers, assignments or subleases in their current leases and ensure that:
- If they have agreed to act reasonably, the tenant may withdraw its request for consent if the landlord elects to terminate so that once the request is withdrawn, the landlord may not terminate the lease; and/or
- If the landlord has an option to terminate and has also covenanted to act reasonably when deciding whether or not to consent to a transfer, assignment or sublease, the covenant is conditional upon the landlord first choosing not to exercise its option to terminate.
Preserving a Landlord’s Termination Right That Arises from a Request to Transfer
If a landlord would prefer to have a termination right articulated in a lease in the event a tenant requests a transfer, assignment or sublet, they could consider including one of the following terms:
- An outright prohibition on the tenant’s ability to assign, sublet or transfer the lease and in addition to any of the remedies available to the landlord the option to terminate should a tenant make such a request; or
- Should the tenant request an assignment, sublet or transfer, the landlord would have the right to terminate the lease X days after delivering a written notice of termination to the Tenant. Notwithstanding this option to terminate, if the tenant advises the landlord within the X days that they withdraw their request to assign, sublet or transfer, the landlord’s election to terminate the lease is void.