In these challenging economic times, businesses involved in leasing arrangements have opportunities to shield themselves from uncertainty through clearly drafted contracts. In particular, both tenants and landlords may shield themselves from surprises related to lease assignment provisions by understanding, during the negotiation phase, the issues assignment provisions raise.

This survey of the law with respect to commercial lease assignments in Ontario, British Columbia and Alberta, as well as the law of New York State, reveals the need for local legal awareness in similar transactions. While these matters may be subject to case-by-case exceptions, the purpose of this article is to demonstrate that seemingly boilerplate provisions can be subject to widely differing interpretations between jurisdictions. Furthermore, this article will provide recommendations for addressing contentious lease assignment issues when negotiating leases across Canada or the United States.

Commercial leases are freely assignable absent a provision to the contrary. Lease forms typically limit assignments of all or part of a tenant’s interest without the landlord’s prior consent. This harsh limitation is often a negotiated point, with the tenant’s attorney usually requesting, and obtaining, a proviso that the landlord will not "unreasonably withhold" consent to assignments. This article reviews the source, the meaning and the effect of provisions prohibiting a landlord from unreasonably withholding its consent to lease assignments.

Ontario

The Ontario legislature has addressed the assignment issue directly through statute. In Ontario, where a commercial lease contains a covenant that restricts assignment without a landlord’s consent, the Commercial Tenancy Act deems this covenant to be subject to the landlord’s consent not being unreasonably withheld. An exception exists where the lease specifically provides that consent may be unreasonably withheld. Section 23(1) of the Commercial Tenancy Act states:

License to assign not to be unreasonably withheld. In every lease made after the 1st day of September, 1911, containing a covenant, condition or agreement against assigning, underletting, or parting with the possession, or disposing of the land or property leased without licence or consent, such covenant, condition or agreement shall, unless the lease contains an express provision to the contrary, be deemed to be subject to a proviso to the effect that such licence or consent is not to be unreasonably withheld.

British Columbia & Alberta

In B.C and Alberta, there is no statute imposing a covenant to ensure that a landlord’s consent is not unreasonably withheld in a commercial lease. A landlord may arbitrarily refuse consent to a proposed assignment. Therefore, a prospective tenant in these jurisdictions should be advised to negotiate for language included in the lease assignment provisions which states that landlord consent will "not be unreasonably withheld"

New York and the Objective Factors Test

New York State, like B.C. and Alberta, does not have a statute mandating that landlord consent to lease assignments are "not to be unreasonably withheld". Furthermore, New York State law differs greatly from its Canadian counterparts in its application of "not to be unreasonably withheld" language. With respect to assigning a commercial lease, New York law is set out in Logan & Logan, Inc. v. Audrey Lane Laufer, LLC 2006 NY Slip Op 08220 [34 AD3d 539]. In New York, if a commercial lease includes a term that allows "assignments and subletting subject to the Landlord’s consent, which will not be unreasonably withheld", then the landlord may refuse consent to an assignment based only on a consideration of objective factors. The objective factors which may be considered are:

(a) financial responsibility of the proposed assignee;

(b) suitability of the tenant for the particular building;

(c) legality of the proposed use; and

(d) the Nature of the Occupancy.

Subjective factors cannot be considered in the decision to withhold consent for a lease assignment.

The Canadian Subjective / Objective Test

Conversely, courts in Ontario, B.C. and Alberta have adopted an approach which takes into account subjective and objective factors in determining whether a landlord unreasonably withheld consent to a lease assignment. Lehndorff Canadian Pension Properties Ltd. v. Davis Management Ltd. (BCCA) (1989), 59 D.L.R. (4th) 1, provides an overview of the law’s evolution, starting in England, and discusses the eventual adoption of the principles into Canada. The Canadian interpretation of the covenant which states that assignment of a commercial lease is subject to "the landlord’s consent which shall not be unreasonably withheld", is based on Lord Denning’s analysis in Bickel v. Duke of Westminster [1976] 3 All ER 801. Prior to Denning’s analysis in order to withhold consent, a landlord’s refusal must have been based on either: (i) the nature and personality of the assignee; or (ii) the effect of the assignment on the value of the property. If the landlord considered factors which were outside of these objective principles, then a refusal to accept the assignment or sublet would be considered unreasonable. Denning, alters the law and states that the reasonableness of the circumstances must be tested in each case in order to reflect modern commercial realities. This subjective / objective test for determining the reasonableness of a landlord’s refusal to consent has been adopted in Canada.

The subjective component of the test is used to determine the landlord’s state of mind upon refusing consent. The objective component is used to determine whether it was reasonable for the landlord to refuse consent having regard to all the surrounding circumstances, including the commercial layout of the market place, and the economic impact of an assignment on the landlord.

Two recent cases, 1455202 Ontario Inc. v. Welbow Holdings Ltd. [2003] O.T.C. 396 and Zellers Inc. v. Brad-Jay Investments Ltd. [2002] O.J. No. 4100, reviewed indicia that may be used to establish whether a landlord has been unreasonable in withholding consent, and set out the following factors:

(a) the burden of proof lies with the tenant to satisfy the court that the refusal to consent was unreasonable;

(b) the question is not whether a reasonable person might have given consent; it is whether a reasonable person could have withheld consent;

(c) in determining the reasonableness of a refusal to consent, it is the information available to the landlord at the time of the refusal to be considered, not any additional facts or reasons provided subsequently to the court;

(d) it is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, just that they were conclusions that might have been reached by a reasonable person in the circumstances;

(e) the landlord can take a realistic look at the property and the type of tenants to determine if the proposed use is offensive, or would injure, other tenants;

(f) discretion to withhold consent must be exercised in good faith. A refusal will be unreasonable if it was designed to achieve a collateral purpose; and

(g) the financial position of the assignee may be a relevant consideration. A probability that the proposed assignee will default on his obligations under the lease may be a reasonable ground for withholding consent.

In conclusion, when considering whether to assign or sublet a commercial lease in the face of a covenant requiring a landlord’s consent, the first step is to determine if there is a statute imposing reasonableness on the landlord, such as Ontario’s Commercial Tenancy Act. If a statute, or the contract terms, provide that a landlord’s consent to tenant assignments must be reasonable, then reasonableness will be determined by the law of the governing jurisdiction. Ontario, B.C. and Alberta determine reasonableness based on a broad range of subjective and objective indicia. If this statutory or contractual provision does not exist, a landlord may arbitrarily withhold consent. New York State, on the other hand, will apply a strictly objective test to determine the reasonableness of a landlord withholding consent. For parties interested in using this objective test in Canada, it should be explicitly incorporated as a provision in the lease agreement.