Reasonableness Can be a Two-Way Street

July 5, 2022

By Mark Mikulasik

When may a commercial landlord reasonably refuse to consent to the assignment of a lease?

This issue was reviewed by the Ontario Court of Appeal in the decision of Tabriz Persian Cuisine Inc. v. Highrise Property Group Inc. 

THE CASE

In this case, the tenant attempted to assign its lease three times. On each occasion the landlord refused to consent and offered different reasons for doing so. Common to all of the refusals was the landlord’s insistence that the tenant remove an outdoor patio that it had built outside of the leased premises on property owned and controlled by the landlord’s condominium.

Most commercial leases contain a clause which entitles the tenant to assign the lease upon certain conditions. Wordings vary. The result in this case may not be the same as would happen under your lease. However, there are certain basic principles that apply. Most common is the requirement that any refusal be reasonable.

The difficulty with any contract that depends upon describing conduct as “reasonable” is that one person’s idea of reasonable is not the same as another’s. For that reason, the courts have developed some objective standards of reasonableness. We have talked about in the context of administrative tribunals before. But what about leases?

In the Tabriz case, the landlord could not unreasonably withhold consent, but the lease specified that the landlord could reasonably consider the proposed transfer’s conformity with the lease, the assignee’s business fundamentals, and the availability of other premises. It said nothing specific about what happened if the tenant constructed a patio outside of the leased premises.

Objectively, it is easy to see that the landlord could argue that the patio lacked conformity with the lease. The tenant had promised on prior occasions to remove the patio, yet the patio remained. The tenant argued that nothing in the clause allowed the landlord to refuse consent simply because the tenant was in breach of the lease.

THE LAW

The Court of Appeal confirmed the leading principles governing cases of a refusal to consent to an assignment as follows:

    1. The burden is on the tenant to satisfy the court that the refusal to consent was unreasonable. In deciding whether the burden has been discharged, the question is not whether the court would have reached the same conclusion as the landlord or even whether a reasonable person might have given consent; it is whether a reasonable person could have withheld consent.
    2. In determining the reasonableness of a refusal to consent, it is the information available to – and the reasons given by – the landlord at the time of the refusal – and not any additional, or different, facts or reasons provided subsequently to the court – that is material. Further, it is not necessary for the landlord to prove that the conclusions which led it to refuse consent were justified, if they were conclusions that might have been reached by a reasonable person in the circumstances.
    3. The question must be considered in the light of the existing provisions of the lease that define and delimit the subject matter of the assignment as well as the right of the tenant to assign and that of the landlord to withhold consent. The landlord is not entitled to require amendments to the terms of lease that will provide it with more advantageous terms, but, as a general rule, it may reasonably withhold consent if the assignment will diminish the value of its rights under it, or of its reversion. A refusal will, however, be unreasonable if it was designed to achieve a collateral purpose, or benefit to the landlord, that was wholly unconnected with the bargain between the landlord and the tenant reflected in the terms of the lease.

    1. The question of reasonableness is essentially one of fact that must be determined on the circumstances of the particular case, including the commercial realities of the marketplace and the economic impact of an assignment on the landlord. Decisions in other cases that consent was reasonably, or unreasonably, withheld are not precedents that will dictate the result in the case before the court. [Citations omitted.]

So, as with administrative tribunals, the landlord’s decision does not need to be proven to be correct to be found to be reasonable.

The court also confirmed that the assignment test is moving towards a “more liberal approach”, which is to consider the surrounding circumstances, the commercial realities of the marketplace and the economic impact of an assignment on the landlord.

In the Tabriz case, the refusal to remove the patio imposed economic loss on the landlord. The tenant knew that the patio was a breach of the lease and had made unfulfilled promises to remove it. The landlord’s refusal to assign the lease as long as the patio was there avoided perpetuating the problem. The landlord simply sought to restore the original bargain as expressed in the lease.

That desire on the part of the landlord was a sufficient basis on which a reasonable person could withhold consent.

The Court of Appeal did warn that in a situation where there were multiple reasons to refuse consent, the reasonable basis to refuse would not always save a coexisting tainted purpose. However, in the Tabriz case, because the removal of the patio was the predominant reason, it was sufficient.

THE TAKEAWAYS

The main take away from this decision is that parties to a lease must fulfill their promises. Both at trial and on the appeal, the tenant’s consistent failure to remove the patio after saying it was going to do so counted strongly against it.

It is also important to bear in mind that the burden is on the tenant to satisfy the court that the refusal consent was unreasonable. Even if the court would have reached a different decision than the landlord, reasonable does not mean correct. There may be more than one reasonable result.

In considering what is reasonable, the court will look at all the surrounding facts but is particularly concerned with enforcing the bargain originally made by the parties. The request for consent is not an opportunity for either party to renegotiate the terms of the lease.

HOW WEILERS LAW CAN HELP

The complexity of clauses such as assignment clauses is one of many reasons why it is best to have professional legal advice before you sign a commercial lease. For all but the shortest leases of small premises, having the lease negotiated and drafted professionally is a sound investment in your future.

While you are living under your lease, as the facts change, it is good to consult regularly with your lawyer to see whether you should seek amendments to the lease while things are on a friendly basis and you may have more bargaining power.

When you come to the time for an assignment, legal assistance in requesting the landlord’s consent may help frame the facts in the most favourable fashion.  If the landlord still refuses consent, then you should consult your lawyer as to your rights.

The commercial lawyers at Weilers Law carry on our proud tradition as careful drafters and skilled negotiators of leases. We have practical knowledge to understand how provisions may work in different circumstances, and customize wording if necessary to fit your needs.

Should you find yourself in a dispute with your landlord over an assignment, the litigation team at Weilers Law can work closely with the commercial lawyers to seek a favorable result.

For any of your business law needs, it is never too early to give Weilers Law a call and see if we might be the right lawyers for you.