Landlord’s Consent for Assignments or Sub-Lease of a Commercial Lease

By Ridhima Pathak

For more information on Assignments or Sub-Leases, please see my previous article here.

An assignment or sub-lease provision in a commercial lease most commonly require a landlord’s consent. The clause can be drafted in a variety of ways, but typically a landlord’s consent is attached to conditions or requirements for an assignment or sub-lease request to be granted. The conditions may vary, but highlight the assumption and performance obligations of the tenant under the original lease, how rent payments are to be made, how real estate transfer taxes are to be dealt with, any leasing commission that may be due to a real estate brokerage, tenant and subtenant being jointly or severally responsible for all legal costs incurred for obtaining consent to name a few. A landlord’s consent is required to ensure that a landlord has complete control over who is going to occupy the space and protection from a potential tenant defaulting for non-payment of rent.

The consent provision will often contain language stating landlord’s consent, which may not be unreasonably or arbitrarily withheld, at the sole and absolute discretion of the landlord, or consent which cannot be arbitrarily withheld, conditioned, or delayed. A commercial lease agreement would need to be individually assessed to determine how this language is to be interpreted.

To understand the meaning of unreasonably or arbitrarily withheld, we turn to the case 1455202 Ontario Inc. v Welbow Holdings Ltd, 2023, which establishes the test in determining whether a reasonable person would have withheld consent within the circumstances as follows:

1. The burden of proof rests on the tenant claiming the refusal was unreasonable.
2. The court will only consider information available to the landlord at the time and the reasons they gave for their refusal at the time. Any subsequent information or reasons presented to the court will not be considered.
3. Reasonableness is determined with reference to the existing lease between the landlord and tenant, specifically the provisions that “define and delimit the subject matter” of the assignment, and the rights to assign and withhold consent. Under this principle, it is unreasonable for the landlord to make their consent conditional on the addition of more advantageous amendments. Conversely, a landlord can generally reasonably withhold consent if the assignment would diminish its own rights under the lease.
4. The likelihood that a proposed assignee will default may be a justified reason for withholding consent, depending on the circumstances. A refusal is not inherently unreasonable simply because the landlord retains the same rights.
5. The financial position of the proposed assignee may be relevant consideration, regardless of whether it is explicitly required in the lease. In Welbow, the court found the ability of the assignee to carry on its business to be a relevant consideration because the condition was implicitly contained within the terms of the lease. The lease indicated the landlord could refuse consent if the proposed subtenant did not have a history of successful business operation, did not have a good credit rating, or was not able to finance their acquisition without risk of defaulting.
6. The question of reasonableness is determined based on the circumstances of each case, such as current commercial realities and the economic impact on the landlord. Under this principle, decisions in cases are not strict precedents that determine the results of following cases.[1]

A landlord cannot negligently hold off on responding to a tenant either. In Rabin v 2490918 Ontario Inc., 2023 ONCA 49, A landlord’s neglect to respond within the time period given in the lease can amount to an unreasonable withholding of consent. In Rabin, the court made this finding after the landlord failed to respond within a 15-day period, despite being given advance notice and receiving the formal request, reviewing it, and forwarding it to his lawyer within the period.[2]

Each instance of reasonableness for withholding consent is determined on a case-by-case basis, which begs the question what constitutes as a good reason for a landlord to not consent for an assignment or sub-lease.

Landlords may withhold consent for many reasons, such as the financial credit worthiness of the tenant i.e. poor credit history or inability to make to rent payments or being provided with insufficient information of the new tenant. In 1405593 Ontario Inc. v Westridge Shopping Centres Limited, the landlord’s refusal was justified as they were not provided with sufficient information on the tenant to make an informed decision i.e. did not demonstrate the financial means and capabilities to operate their business as required under the lease.[3]

Therefore, a landlord may have legitimate grounds to withhold consent to an assignment or sub-lease, but the refusal must be supported with justified considerations. A landlord cannot simply refuse out of preference, nor delay in providing a response to a request. Ultimately, whether a refusal is reasonable depends on obtaining sufficient information of the proposed new tenant. For both landlords and tenants, a clear lease provision highlighting the consent process would prevent any commercial disputes.

For any questions related to commercial lease agreements, please contact our commercial lawyer. Ridhima Pathak (ridhima@sorbaralaw.com).