In the intricate world of commercial tenancies, landlord and tenant relationships can often be fraught with back-and-forth negotiations. One such scenario recently came to light before the Court of Appeal for Ontario when a dentist, seeking to assign his lease to two other dentists who were set to purchase his practice, found himself entangled in a complex battle for consent. What followed was a series of events that underscored the importance of understanding lease agreements and the boundaries of consent in the context of lease assignments.
A lease assignment refers to the transfer of a lease agreement from one tenant to another. When a tenant wishes to assign their lease, they essentially transfer their rights and obligations under the lease to a new individual or entity, known as the assignee.
In Ontario, the Commercial Tenancies Act imposes some restrictions on tenants and landlords when assigning a commercial lease. Specifically, section 23 states that the landlord is subject to the obligation that any license of consent to an assignment is not to be “unreasonably withheld.” Section 23(2) allows a tenant to apply to the Superior Court of Justice where such licence or consent has been unreasonably withheld.
The doctrine of waiver is a legal principle whereby an individual intentionally relinquishes or abandons their right, claim, or privilege afforded in a contract. Under this doctrine, if a party fails to enforce or assert a right or benefit they are entitled to under the contract terms, they may be deemed to have waived that right. In other words, by knowingly and voluntarily choosing not to exercise a certain right, the party loses the ability to claim that right later.
The elements of the doctrine were best described in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co. as “full knowledge of the deficiency which might be relied upon and the unequivocal intention to relinquish the right to rely on it.” Since then, case law in Ontario has developed to clarify the situations in which the doctrine can be applied.
The scope of unreasonable withholding and the applicability of the waiver doctrine were recently considered by the Court of Appeal in Rabin v. 2490918 Ontario Inc. At the time of the dispute, the appellant was a retiring dentist who had practiced for several decades. His practice was a tenant of a building that the respondent acquired to demolish and redevelop in the future. Through the purchase, the respondent became the landlord at the property.
The appellant had agreed to sell his practice to two younger dentists and sought the landlord’s consent to assign the lease as part of the business sale. The provision addressing lease assignments in the commercial lease required the appellant to give “prior written notice” to the landlord of his intent to transfer, and within 15 days of such notice, the landlord would notify of its consent or lack thereof.
The appellant sent the requisite notice to the landlord, but the respondent did not reply within the 15-day specified timeframe. It was not until 22 days after the notice was delivered that the landlord consented, subject to the addition of a demolition clause. The appellant refused, and the respondent withheld its consent. The parties continued their correspondence with several more requests for the landlord’s consent in the negotiations.
The application judge found that the appellant had waived the requirement under the lease for the respondent to provide consent within 15 days. In arriving at this decision, the judge was swayed by numerous emails sent by the appellant’s counsel renewing the request for consent. The judge dismissed the application.
On appeal, the Court of Appeal found that the application judge had applied the doctrine of waiver where neither party had raised it as an issue, and the judge had erred in its application.
First, the Court noted that it is well established as a matter of natural justice that “it is not open to a judge to dispose of a material issue in a proceeding on the basis that has not been raised or argued by the parties.” The application judge had applied the doctrine of waiver on his initiative, preventing the parties from making submissions on this point.
Second, the application judge did not reference the test as set out above. He made no determination on whether the appellant had the “unequivocal and conscious intention” to waive his rights in any of the correspondence. In fact, the appellant had continuously insisted on compliance with the lease. The evidence pointed to the stringent test not being met, and thus, applying the waiver doctrine was a legal error.
The Court went on to note that the application judge’s analysis should have focused on whether the consent by the landlord was “unreasonably withheld.” In doing so, the Court stated that it would look at “the information available to, and the reasons given by, the landlord at the time the landlord neglected or refused consent.” In light of the facts of the case, this burden was met. The landlord failed to respond within the necessary timeframe, no reasonable excuse was provided for its failure to respond, and attempted to trade consent for a clause for its benefit.
The Court allowed the appeal, set aside the application judge’s order, and granted the appellant’s application. The Court found that the landlord unreasonably withheld its consent to the lease assignment and ordered that the assignment be made.
There are several standard terms within a commercial lease, which often includes provisions pertaining to a lease assignment. However, if a party to the lease does not uphold their obligations to the other party, disputes can quickly arise. The trusted real estate lawyers at Baker & Company have extensive experience drafting, reviewing and negotiating commercial leases. Our lawyers will help you review documentation and ensure that you understand your legal obligations before you sign any contract. Contact us online or by phone at 416-777-0100 to schedule a consultation with a member of our property law team and learn how we can help you.