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Is it reasonable for a commercial landlord to withhold consent until a default is cured? A general feature of real property is that it can be transferred to a new owner. Therefore, a tenant under a commercial lease is always free to assign its lease or sublet its premises, unless the lease provides otherwise.
In an Ontario Court of Appeal (the “ONCA”) decision, Tabriz Persian Cuisine v. Highrise Property Group Inc., a landlord’s refusal to consider consenting to an assignment until the tenant had satisfied certain conditions was before the Court.
The tenant operated a restaurant business under a Lease and tried to assign its Lease on three separate occasions. Each time, the Landlord refused to give its consent, The Lease required that the Landlord’s consent not be unreasonably withheld or delayed.
Without the Landlord’s consent, a patio had been built by the Tenant on the common area of the property. The Landlord had repeatedly asked the Tenant to remove the patio, but the Tenant refused. The patio did not comply with the Lease and had become the subject of a lawsuit brought by the Tenant against the Landlord. On the Tenant’s third request for consent to assign the Lease, the Landlord stated that it would not consider the request until the Tenant removed the patio and discontinued the lawsuit. As a result, the Tenant sued the Landlord once again this time for damages.
The Lower Court held that the Tenant failed to show that the Landlord acted unreasonably in withholding its consent. It found that the Landlord was reasonable in withholding consent because the patio had been installed without the Landlord’s consent and the Landlord was simply asking the Tenant to restore the premises before it left. It concluded that it is not reasonable to expect the Landlord to consent to an assignment of lease in circumstances that are going to perpetuate the patio problem that has plagued the parties for years.
However, the Lower Court also held that it was unreasonable for the Landlord to withhold its consent until the Tenant discontinued the patio lawsuit. It saw this as an attempt by the Landlord to exercise its greater power to secure a dismissal of the action in which the plaintiff may be asserting legitimate rights not connected to the request to assign the lease.
Nevertheless, the Lower Court concluded that the collateral purpose of seeking discontinuance of the patio lawsuit in exchange for the Landlord’s consent to the assignment did not render the Landlord’s refusal unreasonable.
The Tenant appealed to the Ontario Court of Appeal (“ONCA”). The ONCA held that a refusal is unreasonable if it is designed to achieve a collateral purpose that is wholly unconnected with the bargain made between the parties. It also concluded that reasonableness must be determined by considering the commercial realities of the marketplace and the economic impact of the transfer on the Landlord. In this case, the Landlord’s insistence that the Tenant rectify its breach by restoring the integrity of the premises was entirely consistent with the terms of the Lease and not “wholly unconnected.” As for the discontinuance of the patio lawsuit, the ONCA agreed that the Landlord’s refusal to consent on this basis was indeed an unreasonable collateral purpose, yet not one that “infected” the otherwise reasonable condition requiring the removal of the patio.
In the final analysis, where a landlord’s primary reason for withholding consent is reasonable, the imposition of other unreasonable conditions may not undermine the reasonable reason. Although the Landlord’s insistence on discontinuing the patio lawsuit was a collateral purpose and therefore unreasonable, the requirement did not displace or undo the primary and legitimate ground for the Landlord’s withholding of consent.