Sophisticated landlords often include in commercial leases so-called “shot gun” termination clauses in respect of a tenant’s request to assign a lease or sublease its premises to another party (a “transfer”). Generally speaking, these provisions provide that where a tenant wishes to assign or sublease, the tenant must notify the landlord of such an intention. The landlord is then permitted to elect to terminate the lease or consent to the transfer. In the case where the landlord elects to terminate the lease, often such clauses will then allow the tenant to withdraw its request in order to remain in the premises and avoid the termination of the lease. In the decision of Lehndorff Canadian Pension Properties Ltd. v. Davis Management Ltd., 1989 CanLII 2762 (B.C.C.A.) at para 65 (“Lehndorff”), Justice Locke referred to this type of clause as an “ingenious and business like clause”. More recently, however, in 550 Capital Corp. v. David S. Cheetham Architect Ltd., 2009 ABCA 219 (“550”), Alberta’s Court of Appeal (the “Court”) held that a variation of a shot gun clause was unenforceable because it was “repugnant” against an earlier clause that the landlord would not unreasonably withhold its consent to the assignment of the lease. According to one commentator, the Court’s decision is “an alarming case for landlords” (see “Landlord’s Right to Terminate in Lieu of Granting Consent” by Elizabeth Phalen, presented at The Six-Minute Commercial Leasing Lawyer, 2010).
In 550, the tenant, a partnership of several architecture and engineering firms, executed a lease in January 2005. Approximately one year later, the partnership incorporated and transferred all of its assets, including the lease, to the newly formed corporation. Because the partnership retained complete ownership of the corporation, it took the position that no change of control had occurred, and as such, no assignment had occurred, which would have required the landlord’s consent. When the landlord discovered this new arrangement, it asserted that the lease had been assigned, and because the partnership did not seek the landlord’s consent to the assignment, the partnership was in default under the lease. The landlord gave the partnership 15 days to cure the default, i.e., presumably to re-assign the lease from the corporation to the partnership. Though reluctant, in an effort to resolve the issue and at the landlord’s invitation, the partnership requested the landlord’s consent to the assignment of the lease to the corporation. The landlord responded by terminating the lease. When the corporation refused to vacate, the landlord brought an application for possession. The master in chambers found the shot gun clause unenforceable and dismissed the application. The landlord then appealed to the Court.
Prior to examining the enforceability of the shot gun clause, the Court reviewed several principles of interpretation to be applied to the lease: a court is required to discover and give effect to the real intention of the parties; words are to be given their ordinary and grammatical meaning; a court must strive to harmonize apparently conflicting terms; and, if an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails.
At issue were articles 10.02 and 10.03 of the lease. Article 10.02 provided, among other things, that the tenant was not permitted to assign the lease, directly or indirectly, without the prior written consent of the landlord, which consent the landlord agreed not to unreasonably withhold or delay. Article 10.03 contained the shot gun clause. It provided that notwithstanding article 10.02, the landlord had the right upon written notice to the tenant, if the request was to assign the lease, to cancel and terminate the lease, and where the landlord did not exercise its right of cancellation then its consent to the tenant’s request for consent to assign would not be unreasonably withheld. Importantly, article 10.03 did not permit the tenant to withdraw its request in order to maintain the status quo.
The Court ruled that article 10.03 operated so as to “fetter and jeopardize, and effectively take away the tenant’s rights agreed to under article 10.02”. Effectively, the tenant had bargained for the right that the landlord would not unreasonably withhold its consent to an assignment, but article 10.03 allowed the landlord to act arbitrarily and terminate the lease. In other words, article 10.03 had to be rejected as repugnant to article 10.02, and thus article 10.02 prevailed. In concluding that article 10.03 was unenforceable, the Court also noted that (i) the consequences of article 10.03, i.e., risking the tenancy to request consent, could not have been the intent of the contract and (ii) the landlord would be no worse off than if article 10.03 were enforceable.
Indeed, the Court appeared very concerned that the mere request for consent to assign the lease would “jeopardize the continuing tenancy” of the tenant. Addressing this concern appears simple: allow the tenant to withdraw its request without affecting its tenancy. It was on this basis that the court distinguished the lease in question from the lease in Orbus Pharma Inc. v. King Man Lee Properties Inc., 2008 ABQB 754, where the shot gun clause permitted the tenant to withdraw its request. In addition, had article 10.02 specifically provided that the landlord’s obligation to act reasonably was subject to its right in article 10.03 to terminate rather than grant consent, then the Court may not have found the clauses to be repugnant to one another. While the Court in 550 has limited the scope of certain shot gun clauses, it has by no means declared all shot gun clauses unenforceable. Although the decision in 550 contains many lessons for landlords and tenants alike, perhaps the most important are that parties should always ensure that the drafting of the lease is not inconsistent or contradictory and that neither party should overreach in negotiating a lease by attempting to eviscerate one provision, that grants a right to the other party, through the use of another provision.