Is Your Commercial Landlord Justified in Withholding Consent to Assign Your Lease?
A recent Ontario Court of Appeal decision, Rabin v. 2490918 Ontario Inc. (2023 ONCA 49), has reaffirmed that whether a landlord has unreasonably withheld their consent to assign a commercial lease is a fact-driven and context-specific analysis.[1]
What is Landlord Consent?
Before visiting Rabin, it is helpful to understand the rationale behind obtaining a landlord’s consent to assign a commercial lease.
Within a commercial lease agreement, a landlord typically includes an assignment clause in its favour which prohibits a tenant from assigning the lease without first obtaining the landlord’s consent. An assignment clause enables a landlord to maintain control over the tenant that is using and occupying the property as a landlord must have confidence that its tenant (or any potential assignee) will have the ability to observe all of the obligations under the lease and to ensure the calibre and reputational standing of the candidate. Absent an assignment clause, courts have interpreted the silence in favour of the tenant, enabling a tenant to freely assign its interest in a lease and shifting legal and business risks to the landlord.
Once the landlord’s consent has been obtained, typically the tenant, landlord, and the third-party assignee would enter into an agreement whereby the tenant transfers its entire leasehold interest to a third-party assignee for the unexpired lease term and any remaining options in most cases.
Typically, the assignment clause in a commercial lease agreement will mimic the language in the Commercial Tenancies Act, R.S.O. 1990, c. L.7, which states that a landlord cannot unreasonably withhold their consent. Whether the landlord’s actions are reasonable are considered within the context of the reasonable person standard.[2]
The Facts and Decision in Rabin v. 2490918 Ontario Inc.
The tenant, Dr. Rabin, operated a dental practice for approximately 44 years from the leased premises in a building owned by 2490918 Ontario Inc. (the “Landlord”). According to the terms of Mr. Rabin’s lease (the “Clinic Lease”), the Clinic Lease was set to expire on December 31, 2025, and there was an option to renew for an additional 5-year term.
In late 2020, Dr. Rabin desired to wind down his practice and engaged in discussions with two young professionals (collectively the “Buyers”) for the purchase of his dental practice. In accordance with the Clinic Lease, Dr. Rabin requested the Landlord’s consent to assign the Clinic Lease to the Buyers. Article 11.1 of the Clinic Lease stated that the Landlord’s response would be provided within 15 days of such request and that the Landlord’s consent could not be unreasonably withheld.[3]
The Landlord failed to respond within the 15-day deadline pursuant to the Clinic Lease. Nevertheless, after repeated requests from Dr. Rabin and his lawyers, the Landlord agreed to consent to assignment but only if the Clinic Lease was “modified to include a demolition clause upon 24 months’ notice, during the balance of the term or any renewal term,”[4] and if a credit application was completed.
Ultimately, the Ontario Court of Appeal found that the Landlord's actions were unreasonable for two reasons. First, the Landlord's failure to respond within the mandated 15-day period and "last-minute" request for the prospective assignee's financial information was unwarranted as the Landlord was aware of Dr. Rabin's intention to make a request for assignment two months in advance of his formal, written request.[5] Second, it is unreasonable to make consent contingent on the addition of a lease term that is favourable to the Landlord.[6]
The Importance of Rabin
The onus is on the tenant to establish that a landlord’s refusal to consent to assignment was unreasonable.
Generally, the court considers the following factors in determining whether consent was unreasonably withheld:
(1) the information that the landlord possessed in connection with the assignment request, and the reasons given by the landlord at the time of refusal;
(2) all provisions in the lease as it relates to assignment, including the right of the tenant to assign and that of the landlord to withhold consent;
(3) the likelihood of the proposed assignee defaulting on its obligations under the lease;
(4) the state of the assignee’s financial position; and
(5) the circumstances of the assignment request, taking into account the “commercial realities of the marketplace” and the financial implications of the assignment on the landlord.[7]
Conclusion
To assess whether a landlord has unreasonably withheld consent, the court will examine the existing lease terms, the rights of both the tenant and the landlord, and the behaviour and communication of each party.
Withholding consent may be deemed reasonable if the assignment to a third party compromises the landlord’s rights. However, the court may deem it unreasonable for consent to be contingent upon the addition or modification of clauses that are advantageous to the landlord and go beyond the scope of the original lease.
[1] Rabin v 2490918 Ontario Inc., 2023 ONCA 49 [“Rabin”] at paras 34-36.
[2] Rabin at paras 36.
[3] Rabin at paras 6, 33.[4] Rabin at para 9.
[5] Rabin at paras 38-43, 45-46.
[6] Rabin at paras 43-44.
[7] Rabin at para 35.