Canada: Hot Sublease Market? Beware Sections 21 And 39(2) Of Commercial Tenancies Act (Ontario)

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate, April 2009

The ongoing uncertainty in the economy and the resultant market slowdown has tenants re-evaluating their space needs. After considering their options and weighing demand, some tenants determine that the appropriate way to shed space on a cost-effective basis is to sublet all or a portion to a third party subtenant.

A tenant will, of course, have to navigate its way through the requirements contained in a lease that are triggered in a sublease scenario. In most cases, the consent of the head landlord to the proposed sublease arrangement will have to be obtained.

One concession that a head landlord often expects from the subtenant as a condition of the head landlord's consent to the sublease is a waiver by the subtenant of any statutory and common-law rights it may have in the case of termination of the head lease. Head landlords and, indeed, prospective subtenants do not always understand what statutory rights are being waived.

This article examines issues surrounding the impact of a subtenant waiving its rights under sections 21 and 39(2) of the Commercial Tenancies Act (Ontario) (CTA). With concern over business insolvencies trending upward, a subtenant that has waived its sections 21 and 39(2) rights might want to consider a solution that will lessen the impact to its business if its occupancy of the subleased premises is threatened by termination of the head lease.

Effect On The Sublease Of Termination Of The Head Lease Due To Sublandlord Default: Section 21 Of The CTA In the absence of any direct contractual relationship (such as a non-

disturbance agreement) between the subtenant and the head landlord, the subtenant's tenure in its subleased premises is only as solid as the head lease. Accordingly, if the head lease is terminated by the head landlord due to a default of the sublandlord under the head lease, the sublease will also be terminated. This would be the case even though the subtenant may be solvent, promptly paying rent and performing the obligations of the tenant under the head lease as they pertain to the subleased space.

Of course, it might be of benefit to the head landlord to see to the continued occupancy of the subtenant of the premises it occupies if there is an event terminating the head lease. However, for a myriad of reasons, including if the subleased premises consist of part of a floor or a building or if the subtenant itself is on shaky ground, the head landlord will want flexibility to start from scratch and be in a position to lease the premises as a whole to a new tenant.

However, head landlord and subtenants alike should be aware of section 21 of the CTA – a number of other Canadian provinces have similar legislation protecting subtenants. Section 21 gives a subtenant the right to apply for an order of the court to permit it to remain in its premises as a direct tenant of the head landlord, if the head landlord is enforcing a right of re-entry or forfeiture under the head lease due to a sublandlord default. The terms of the arrangement between the head landlord and the subtenant (i.e., rent, costs, expenses, damages, giving of security, etc.) are subject to the court's discretion; however, the term of the new lease cannot be longer than the term of the original sublease. For a subtenant subleasing only a portion of the premises leased by the sublandlord under the head lease, there is a possibility that the court could require the subtenant to take on all of the premises that were the subject of the original head lease.

It is easy to see why a head landlord would wish to have a prospective subtenant waive its rights under section 21; after all, a successful application by a subtenant could leave the head landlord with a court-imposed tenancy on unpredictable terms.

Effect Of Head Tenant's Bankruptcy On The Sublease: Section 39(2) Of CTA

A termination of the head lease due to a default of the sublandlord, such as the non-payment of rent, is not the only possible event jeopardizing the subtenant's tenure. If the sublandlord goes bankrupt, the sublandlord's trustee-in-bankruptcy or receiver is entitled to disclaim the lease, resulting in the termination of the contractual relationship between the head landlord and the head tenant/sublandlord. This would, again, result in a termination of the sublease.

Section 39(2) of the CTA accords to a subtenant that occupies subleased premises pursuant to an arrangement approved or consented to in writing by the landlord, a manner of remaining in possession of its premises if there is a bankruptcy or winding-up of the sublandlord. The subtenant can elect, within three months of the bankruptcy filing or winding-up order, to step into the sublandlord's shoes under the head lease. The subtenant will have the same liabilities and obligations to the head landlord as the sublandlord had, except that the rent payable by the subtenant will be the greater of: (a) the rent paid by the subtenant to the sublandlord under the sublease, and (b) the rent paid by the sublandlord to the head landlord under the head lease.

Protecting The Subtenant If Rights Under Sections 21 And 39(2) Of CTA Are Waived

As mentioned above, the subtenant is often required to bargain away its rights under sections 21 and 39(2) as part of the process involved in securing the head landlord's consent to the sublease. What can a subtenant without recourse to the statutory provision do to protect itself?

If the subleasehold interest is wiped out, the subtenant will invariably suffer costs associated with displacement. Aside from the intrinsic value of the subtenant's tenure under the sublease for the now foregone term, the subtenant will be required to find new suitable premises, possibly at a higher rent than the subleased space. There will also be moving costs, costs of fixturing the new premises and other usual costs of relocation.

For the subtenant, these costs can be significant and, arguably, should not be borne entirely by the innocent subtenant, which could be harmed by an event over which it has no control. One possible solution is to require the sublandlord to provide the subtenant with some form of security that the subtenant could resort to if the subleasehold interest of the subtenant is terminated because the head lease has been terminated or disclaimed due to a sublandlord default or bankruptcy of the sublandlord. A cash security deposit and/or a letter of credit drawn on the sublandlord's bank for the subtenant's benefit may be the appropriate form of security. The amount of the security will inevitably be the subject of negotiation, but it should approximate the costs and expenses (perhaps on a declining balance basis as the term of the sublease elapses) that would be incurred by the subtenant if forced to vacate its premises.

A Few Words Of Caution

Whether cash security or a letter of credit is employed, it is critical that steps be taken to ensure that the language in the documentation be appropriately drafted to ensure that the subtenant will have access to the security in case it is needed and that it will not, for example, pass to the estate of the bankrupt sublandlord.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions