COMMERCIAL LEASE ASSIGNMENTS
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What You Should Know About The Change in Control?
The world of business is full of change and uncertainty. When a business falls on hard times, it is often forced to downsize, sell its venture, or even shut its door completely. If the business has been leasing a commercial property for its operations, the situation may become even more dire for the owners as most leases cannot be easily broken or terminated early. As a result, commercial tenants may be forced to commit to the lease term they initially contracted for.
Sometimes the only option commercial tenants are left with to free themselves of the rental obligations is to transfer their interest in their lease to a third party by way of an assignment of the lease. However, according to the law, this transfer is not as easy as it seems.
Before diving into the challenges of assignments, let us first understand what commercial lease assignments are.
What is a Commercial Lease Assignment?
A commercial lease assignment occurs when a commercial tenant transfers the rights and interests under their lease to a new, third-party tenant. In this case, the original commercial tenant will be called the assignor and the new tenant the assignee.
Under this type of assignment, the assignee takes on all the lease responsibilities and obligations of the original lease, therefore releasing the assignor from such future obligations. However, please note that the assignor will maintain their obligations up until the assignment.
When Can I Assign My Commercial Lease?
Commercial leases are contracts. Thus, people who sign the commercial lease are subject to, and bound by the conditions and provisions of that contract. Typically, a well-drafted commercial lease agreement will dictate whether the tenant has the right to assign their lease to a third party and will outline any terms related to such an assignment. One of the most common conditions is the landlord’s consent to the tenant’s proposed assignment and a subsequent clarification that this consent cannot be withheld unreasonably. In contrast, a commercial lease may explicitly state that an assignment is prohibited. In both these cases, the tenant must adhere to such terms due to the binding nature of contracts.
Sometimes a commercial lease is silent in regard to the rules or clauses relating to assignments. When a tenant is faced with this type of lease, the law states that in certain circumstances the tenant is allowed to assign. Section 23(1) of the Commercial Tenancies Act states:
“23 (1) In every lease made after the 1st day of September, 1911, containing a covenant, condition or agreement against assigning, underletting, or parting with the possession, or disposing of the land or property leased without licence or consent, such covenant, condition or agreement shall, unless the lease contains an express provision to the contrary, be deemed to be subject to a proviso to the effect that such licence or consent is not to be unreasonably withheld. R.S.O. 1990, c. L.7, s. 23 (1).”
Thus, as long as the contract does not state that lease transfer is prohibited, the tenant may proceed with the assignment of the lease with the consent of the landlord. However, the landlord can only refuse to provide consent if they have a strong and reasonable reason not to provide it.
What is Considered Reasonable?
We now know that landlords are not allowed to refuse an assignment arbitrarily. However, what exactly does “reasonable” means, and in what circumstances are landlords allowed to say “no” to assignments?
When it comes to commercial lease assignments, the issue of whether a landlord’s refusal of consent is provided reasonably remains a litigious concern in the world of commercial real estate. While we hope that the language of lease contracts would provide a certain level of clarity, both landlords and tenants often arrive at drastically different interpretations of the meaning of the contractual provisions resulting in courtroom battles of who is right and wrong.
After many contentious cases were brought before judges to ask these exact questions, the courts have concluded that reasonableness strongly depends on the unique factors of each person’s case.
Although this does not seem very helpful, recent court decisions suggest that, unfortunately for the tenants, commercial landlords have great discretion in whether or not to grant the tenant consent to assign the lease.
Older cases favoured the tenant’s point of view since they limited the landlord’s reasons for refusal of consent to where the assignment would increase the burden on the landlord or when the landlord only entered into the lease with the original tenant due to that tenant’s confidences, skills or special characteristics, those which the new tenant did not have.
However, modern cases allow for a broader approach that favours the landlord. Recent cases enable the landlord to raise many concerns and factors such as the surrounding circumstances of the lease including the landlord’s and tenant’s financial position, the commercial realities of the marketplace, the economic impact of the proposed assignment, the financial position of the assignee, and the probability of default.
Although the courts do not provide any rigid rules surrounding the reasons as to why consent may be refused, generally landlords cannot refuse consent if the reason behind the refusal revolves around personal opportunistic reasons, the aim to secure a more favorable lease, or to take advantage of the tenant.
In either case, the burden falls on the original tenant to satisfy the judge that the landlord’s refusal to consent was withheld unreasonably, not on the landlord to prove they acted reasonably.
If a judge arrives at the opinion that a landlord’s consent was truly unreasonably withheld, the judge may grant the tenant to assign the lease. This would be equated to any consent given directly from the landlord himself. Nevertheless, courts prefer to leave the decision-making up to the parties to the commercial lease and allow wide discretion for landlords in making their choice. Thus, tenants should take extra precautions when signing a commercial lease.
The Importance of a Termination Clause in a Commercial Lease
After our discussion about the complexity of a commercial lease assignment, you now hopefully understand the necessity of a well-drafted commercial lease agreement. Most importantly, a commercial lease should contain a termination clause that will allow you to free yourself from the lease obligations without having to experience the trouble of assignments.
In a commercial lease, a termination clause is a provision under which you may end your lease early. General termination clauses will list situations when one or both parties to the lease can cancel the agreement. Some of these situations may include the breach of a term of the lease by either party, the failure to pay rent by the tenant, the bankruptcy of either party, etc.
Moreover, this clause often specifies the penalties or fees that may be paid upon early terminations. For example, either party may include a clause that states that they are allowed to terminate the lease early if they pay the other party a penalty of 3- or 6-month’s rent. Although this may amount to a large sum, it will provide you with the flexibility to break free from a lease if any unforeseen issues arise in the future.
Whatever terms you may choose to include in your clause, the provision will operate to release both parties of their obligations, while compensating the innocent party for the early end. This is a great way to avoid potential disputes and even lawsuits. Thus, it is crucial to incorporate a termination clause into your commercial lease.
Why Should You Review a Commercial Lease With a Lawyer?
A properly drafted lease agreement is an essential part of a landlord-tenant relationship. It ensures protection for both the landlord and the tenant. It forces the landlord to fulfill their obligation to keep the leased premises up to the agreed-upon standards and protects the landlord’s financial investments by forcing the tenant to continue paying rent.
Most people do not know the technicalities of commercial real estate law and their contractual rights and obligations. Commercial leases also tend to be created for much longer periods than residential leases (i.e., may last for a 5-year period or longer). As such, if you miss a small but critical term, you may lock yourself into a poor contract for a long period of time without a way out.
A lawyer knows the law and the proper terminology to draft a contract that will cover all possible altercations and situations. A lawyer can work with you to develop a personalized contract that meets your unique commercial needs and matches your intentions. If you already have an existing contract, proper legal advice can also help you negotiate the terms that will protect your side of the deal. A well-drafted agreement will save you time, money, and a great deal of stress and frustration down the line.
If you require any assistance with your commercial lease, get in touch with us at Beffa Law and we will be able to help you review or draft a contract that protects you. Beffa Law is a real estate law firm serving customers in Greater Toronto Area and beyond. We offer assistance in buying, selling, refinancing along with other practice areas. You can call us at 647.812.8462 email us at info@beffalaw.ca or set up an appointment to discuss your estate questions or concerns.
