With the advent of pandemic induced lockdowns, many businesses have been forced to shut their doors. As a result, there has been an influx of commercial tenants looking to transfer their commercial leases and with it, the obligation of having to pay rent. Unfortunately, however, a 2021 Ontario court decision determined that landlords could be given wide discretion to refuse the transfer of a commercial lease, even if a replacement tenant has been lined up to assume the lease.
In the case of Rabin v. 2490918 Ontario Inc., the lease in question stated that the lease could not be assigned (transferred) to another commercial tenant without the landlord’s consent. The assignment clause in the lease itself contained language that stated that consent could not be “unreasonably withheld” by the landlord. Of course, the landlord refused to allow the transfer of the commercial tenant’s lease. Therefore, the court had to come to a determination as to whether the landlord’s refusal to consent to the transfer in the circumstances was unreasonable.
The commercial tenant was a dental practice in Toronto that operated for more than four decades. The lease in question was set to expire in 2025. Earlier in the year, the tenant looked to sell its dental practice to another group of dentists, who would form a new business to assume the lease for the remainder of the term.
When the commercial tenant requested the consent of the landlord to transfer the lease to the new commercial tenants, the landlord refused to allow it unless the existing commercial tenants agreed to the insertion of a “demolition clause” into the lease agreement. This clause would have given the landlord the ability to terminate the lease with only two years notice if it later wanted to demolish and redevelop the building. Indeed, the landlord acknowledged that its request to insert this clause was an opportunistic measure to get the tenants to move out of the building. Naturally, the new tenants did not agree to the insertion of the demolition clause as they did not want their lease term cut short.
After further negotiations took place, the landlord agreed to consent to the transfer of the commercial lease only if the new tenants provided very extensive financial information for the new dental practice, which had not even been incorporated at the time. As such, the tenants refused this request and went to court seeking an order to affect the transfer of the lease. The tenant consequently claimed that the landlord was unreasonably withholding its consent to transfer the commercial lease.
In analyzing the case at hand, the court observed that since commercial landlords where the ones who chose who to lease their property to, then they should also have the discretion of deciding whether to transfer those leases to new tenants. Indeed, the court stated that landlords can take a variety of factors into account when making such a determination. Some of these factors include the surrounding circumstances of the lease and the property itself as well as the realities of the commercial marketplace, the financial situation of the new tenants and any impact the transfer of the lease may have on other tenants in the property.
Ultimately, the court ordered that the tenant ought to be given another chance to respond to the landlord’s request for information regarding the transfer of the lease. If the landlord still withheld its consent to transfer the commercial lease, the judge observed that the tenant could seek another court order to permit the transfer.
In conclusion, commercial tenants who are experiencing difficulties in paying rent during the pandemic should take note of this decision. Their ability to transfer their lease to another commercial tenant hinges on whether the landlord provides its consent to the assignment. Even if a commercial tenant finds another party willing to assume its lease, a landlord has wide discretion in this regard, although it cannot act unreasonably in denying such a request. At the end of the day, it will come down to the facts and context of the case at hand. We welcome the insight and clarity that this decision brings, and urge you to contact us to schedule a 30-minute free consultation so we can better discuss how to plan your commercial needs in light of these new developments.