Court Sets Out 'Reasonableness' Test for Landlord Consent to Lease Assignment

In a recent case, the court concluded that a commercial landlord had unreasonably refused to consent to the tenant's assignment of its lease. The case is noteworthy in highlighting the proper factors for a landlord to consider, when deciding whether to give such consent.

The leased property was a gas station, car wash and convenience store. The lease's wording precluded the tenant from assigning it without the landlord's written consent.

The tenant approached the landlord with a proposal to assign the lease to a corporation. The landlord refused, citing among other reasons that the tenant was in default of certain lease terms, such as neglecting to make repairs and failing to pay taxes and insurance premiums. The tenant then applied to the court under the Commercial Tenancies Act, for a ruling on whether the landlord had unreasonably withheld its consent to that proposed assignment.

The court began by noting the Act stipulates that if a commercial lease requires the landlord's consent to an assignment, then the lease is deemed to also provide that the consent is not to be unreasonably withheld. Although the older case law tended to favour the tenant, modern rulings are pro-landlord, and apply a liberal test assessed from the landlord's own perspective.

In deciding whether to consent, the landlord may consider a variety of factors. They are not limited to any particular criteria, but can include all the surrounding circumstances including: (1) the commercial realities of the marketplace; (2) the economic impact of the assignment; and (3) the financial position of the assignee. The landlord may also consider its own position, as well as the positions and interests of other tenants.

Similarly, when asked to review the reasonableness of the landlord's refusal to consent, the court must look at the lease covenant against the contextual matrix of the entire lease, as well as the factual circumstances. As viewed in the context of the "reasonable person" standard, these include the commercial realties, and the economic impact on the landlord of any change in use. These evaluations must be made from the landlord's own perspective, considered as of the time it made the refusal. Finally, each case is determined on its own facts, with the tenant bearing the onus to prove unreasonableness.

Applying those tests to the proposed assignment in this case, the court concluded the landlord had indeed withheld its consent unreasonably. Admittedly, the evidence showed the landlord had longstanding concerns about the tenant's failure to comply fully with the lease provisions. However, these concerns were independent, quickly remediable and raised only after-the-fact in some cases. None of them were the real reason for the landlord's refusal to consent, the court found.

Instead, the landlord's predominant concern was about the financial viability of any proposed new tenant. Yet in this case, the landlord had met with a representative of the corporation being considered and had orally agreed to consent after vetting its financial information and expressing satisfaction with the experience and qualifications of its principals.

The landlord's subsequent reversal, conveyed in a letter, was simply based on the belief the corporation might want to re-negotiate the lease, which the landlord was unwilling to do. This was the real reason for the landlord's refusal to consent, and in the court's view, it was an insufficient since the corporation later confirmed it would abide by the lease terms. This stripped the landlord of genuine reason for its refusal. The tenant having met its onus, the court granted the application. See 6791971 Canada Inc. v. Messica, 2020 ONSC 1642.