Involvements of matters relating to assignments are substantial in commercial leasing, as will be seen in this part of our ongoing series.
In respect to assignments, important developments have taken place. This is due to the fact that courts are unwilling to permit landlords to terminate a lease when a request for a transfer is made without providing an opportunity for the tenant to withdraw its request. If the landlord’s consent is based solely on securing increased rent and other financial inducements, the courts are most likely to intervene. Finally, the courts do not accept a change of corporate name as the same as a “transfer”.
Capital Corp v. David S. Cheetham Architects Ltd.
In this case, the lease was terminated by the landlord according to its right to do so under the lease upon an assignment by the tenant. The tenant assumed a new name and transferred all of its assets, including the lease, to the new corporation and considered the new corporation as sole tenant. This took place without the landlord’s consent, which is required according to the terms of the lease. The said term, or Article 10.2, of the lease provided that “the Tenant shall not assign the Lease, directly or indirectly, without the prior written consent of the Landlord, which the Landlord agreed not to unreasonably withhold or delay.” The landlord considered the lease assigned and gave the partnership fifteen days to cure the default, in other words asked the tenant to say so in writing. When the partnership did exactly that, the landlord resorted to Article 10.3 and wanted to terminate the lease. This reliance on Article 10.3 was disapproved by the chambers judge because the landlord had not given the partnership the full 15 days to cure its default.
Whether or not the landlord could terminate the lease under Article 10.3 became the issue on appeal. The Alberta Court of Appeal observed that Article 10.3 was inconsistent with Article 10.2 and the two articles could not stand together, thereby rendering 10.3 unenforceable. The court’s point of view was that the landlord’s right to terminate eliminated its obligation not to unreasonably withhold or delay its consent under Article 10.2. The tenant can always seek consent to an assignment, and the landlord can still unreasonably withhold its consent by terminating the lease, so Articles 10.2 and 10.3 cannot be read harmoniously.
The court further agreed that a landlord’s right to terminate in this context may be consistent with its covenant not to unreasonably withhold its consent depending on the wording contained in the lease. Citing prior cases, where the lease provided the tenant the opportunity to withdraw its request for consent, the court observed that those leases allowed the tenant to continue its tenancy when it withdrew is request. The crucial fact was that the mere request for consent did not jeopardize the continuing tenancy of the tenant.
Applying principles of contract interpretation, the court added that Article 10.3 was inconsistent with the overall commercial intent of the lease in the sense that serious repercussions could result to the tenant who, upon making a request for consent to assign, faced the possibility of termination of its lease with no ability to withdraw the request. It was, therefore, for the court to harmonize the conflicting terms and it did so by stating that “if an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant, and the earlier clause prevails.” While deliberating on the equities between the parties, the court felt it had to find Article 10.3 unenforceable because, in addition to being a serious detriment to the tenant, the landlord was in no worse position by continuing the tenancy of the tenant.
Tradedge Inc. (c.o.b. Shoeless Joe’s) v. Tri-Novo Group Inc.
In this case, the court declined outright to uphold the landlord’s refusal for consent to an assignment because it appeared that the landlord’s sole motive was to secure a higher rent. The tenant leased space from the landlord to operate the business “Shoeless Joe’s”. Beginning to suffer financial troubles, the tenant wanted to assign the lease and entered into a sale agreement with a proposed assignee / purchaser. As per usual, the landlord’s consent was required under the lease, but it could not be unreasonably withheld. The landlord had doubts about the proposed assignee’s financial solvency. So, it demanded an increased rent from the proposed assignee. The proposed assignee refused to sign the draft agreement on the basis that additional terms not contemplated during negotiations were inserted. As conciliation, the proposed assignee provided the landlord with a $100,000.00 letter of credit along with a letter from its bank confirming that it had been approved for a $250,000.00 loan. Even with all this security and other agreed upon terms, the landlord refused its consent to the assignment and the lease was not signed.
The court’s view was that the landlord’s desire to ask for an increase in rent was not legally tenable despite the proposed assignee’s alleged financial weakness. The court held that instead of providing additional security to the landlord, the increased rent would add to the financial burden of the assignee and therefore create a larger risk for the landlord. The court took the stance that by consenting, the landlord would not have been worse off considering that the current tenant, who had since vacated the premises, had a failing business and that the assignee appeared to be better funded despite the uncertainty of its financial provisions.
Clublink Corp. v. Pro-Hedge Funds Inc
There were several disputes between the landlord and tenant, one of which was the landlord’s suspension of the tenant’s parking rights under the lease. The tenant’s president refused to cooperate with the requests of the landlord and continued parking in his assigned spot. This caused the landlord to terminate the lease on the basis that the tenant had transferred the lease without its consent, as required by the lease. As an alternative, the landlord also maintained that the tenant had transferred the lease by allowing its sister company, LIM Inc., to temporarily use its space. The court ruled that the change of the tenant’s corporate name by articles of amendment was not a transfer of lease and did not change the identity of the tenant. It is not possible to create a new corporate identity by changing the corporate name nor does the act affect its covenant. As for the landlord’s other assertion regarding the tenant’s sister company, the court said that all the while the landlord knew that people working for LIM Inc. were using the premises, and apparently had no objections. The parking was a simple matter of permission to temporarily make use of the space. As this could be revoked at any time, there was no question of parting of possession by agreeing to share possessions.
Don’t make a move before fully understanding your rights and obligations. For more information and assistance regarding commercial leasing or Real Estate in Ontario contact Levy Zavet PC in Toronto, Ontario today.