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Introduction: Lease Assignments
Commercial landlords routinely receive requests from tenants to assign their lease to a third party, often because the underlying business is being sold or wound down, or the location is otherwise changing hands. Upon receiving such a request, commercial landlords must be careful to act in accordance with the terms of the lease and the law relating to lease assignments.
The assignment provision in a typical modern commercial lease will often contain language similar to the following:
The Tenant shall not assign this Lease, sublet all or any part of the Premises, or otherwise transfer its interest in this Lease without first obtaining the prior written consent of the Landlord, such consent not to be unreasonably withheld.
A lease will also often deem a "change of control" of the tenant to be an assignment, meaning that if the shares of the tenant are being transferred as part of a sale of the underlying business, landlord consent is required.
As described in more detail below, when a landlord is deciding whether to consent to a proposed lease assignment, it is permitted to consider certain criteria but prohibited from considering others.
Criteria to Consider: Character and Business
Generally, a landlord is permitted to consider matters that are within the scope of the lease and the leasing relationship, including the character of the proposed tenant, its proposed business and any other criteria explicitly listed in the lease.
When assessing the character of a proposed tenant, the landlord may consider its financial strength as well as the financial strength of its guarantors, the experience of the proposed tenant (or lack thereof) and the proposed tenant's business reputation. To support its assessment, a landlord may request detailed evidence of the proposed tenant's financial capacity and business track-record (the right to such information may in fact be expressly set out in the lease). For example, the landlord may discover the proposed tenant has a poor credit rating, which might create legitimate doubts about the proposed tenant's ability to pay rent on an ongoing basis. This may be grounds for the landlord to reasonably refuse to consent to the assignment.1
When assessing the business of a proposed tenant, a landlord may consider the current and proposed use of the space, and whether the proposed use would breach any restrictive covenants which the landlord may be party to, cause a nuisance, or generally be consistent with the area or the complex.2 For example, a court found that a department store was not able to assign its lease to a used clothing store because it breached an obligation the landlord owed to another tenant.3 Similarly, if a tenant's business is likely to cause noise or smells in a manner inconsistent with the surrounding area, that may also be grounds for refusing consent.
In addition to the character and business of a proposed tenant, a landlord may also consider any criteria explicitly listed in the lease (if any). That type of criteria will vary (and should be considered by the landlord when negotiating the lease), but could include the proposed tenant's business reputation, any history of litigation, confirmation that there is no existing default under the lease, confirmation that the proposed use will comply with the lease, whether the proposed tenant would compete with other tenants or violate an exclusivity clause, whether the proposed tenant's business is likely to increase or decrease foot traffic and whether additional security is required. The lease may also specify materials to be delivered to the landlord, such as a credit report and financial statements.
When weighing any of the above considerations, a landlord must make the determination in good faith without a collateral purpose. This evaluation can properly include factors that are objective and would be considered by any reasonable landlord, but may also include factors that are subjective, meaning that they are important to this particular property or landlord.
Outside Factors Must Not Be Considered
A landlord is prohibited at law from considering certain criteria. In particular, a landlord is not permitted to consider criteria outside the existing lease relationship. For example, it is generally not permitted for a landlord to use a tenant's lease assignment request to attempt to extract a payment from the tenant or to increase the tenant's rent. It is also not permitted to use such an occasion to attempt to improve the terms of the lease, such as re-negotiating a re-development provision or altering restoration requirements. Many cases demonstrate this prohibition. For example, a landlord was found to be acting unreasonably when it refused to consent to an assignment because it wanted to sell the property without a tenant.4 Similarly, a landlord was found to be unreasonable in refusing its consent because it was concerned that additional vacant space being offered in its building would depress rents.5
Procedural requirements
From a procedural perspective, and absent any specific time periods or requirements set out in the lease, a landlord is required to respond to a tenant within a reasonable time and provide reasons for any refusal to provide consent. The landlord may request additional information from the tenant if it does not have sufficient information to weigh the decision. However, a refusal to provide a response in a timely manner may be deemed by a court to be equivalent to unreasonably withholding consent.6 Further, the landlord must provide the reasons for which it declined to provide consent.
Conclusion
When a business is being sold or wound down or a location is otherwise changing hands, a commercial landlord is likely to receive a request to consent to the assignment of the lease. In weighing this request, the landlord may consider the character and business of the proposed assignee and any other criteria explicitly listed in the lease. However, the landlord should be careful not to consider matters outside of the lease relationship.
Every situation is different and the facts, lease language and circumstances may all impact on whether a landlord's refusal to consent is reasonable. If you are considering refusing to consent to a proposed lease assignment, it would be prudent to seek legal advice in connection with this refusal.
Footnotes
1 See, for example: Persica Consulting Inc. v Wescana Properties Inc., 2021 BCSC 2268.
2 Richard Olson, A Commercial Tenancy Handbook (Toronto: Thomson Reuters, 2017), pages 3-48 and 6-27.
3 Anthem Crestpoint Tillicum Holdings Ltd. v. Hudson's Bay Company ULC Compagnie de la Baie D'Hudson SRI, 2022 BCCA 166.
4 Hanch Enterprises Ltd. Simply Ballet Performing Arts Society, 2024 BCSC 1143.
5 Lehndorff Canadian Pension Properties Ltd. V Davis and Co, 1989 BCCA 2762.
6 Jens Hans Investments Co. v. Bridger, 2004 BCCA 340.
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