Commercial Lease: A Tenant’s Perspective

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During the pandemic, many businesses have faced multiple challenges, including insolvency leading to the repudiation of a commercial lease. In these circumstances, strapped for cash businesses, which were ineligible for rent relief programs and coronavirus funding, have been left trying to navigate contract and property law. Businesses have at least four choices: (1) dissolve and subsequently deplete assets, (2) repudiate a lease by a tenant and abandon the unit, (3) assigning their property interest in a leased unit to another tenant or assignee, and (4) subleasing to another commercial tenant, that is, subtenant. While the first option is outside of the scope of this blog, we will briefly discuss the last three options.

Assigning v Subletting

A difference between assigning a lease and subletting the premises is based on the landlord-tenant relationship. In a nutshell, a tenant and the landlord are in a relationship for better or for worse. Based on the common law principles of property law, there is privity of estate, that is, the landlord-tenant relationship is tenurial. The term “tenurial” came from England where all land was organized in a tiered or hierarchical landholding consisting of pyramidal mediated or unmediated relationships and reciprocal obligations to the Crown.  In a tenurial system, a tenant should carefully consider the inherent rights and responsibilities when subletting or assigning commercial property even though there could be no privity of contract between the parties.

In a scenario where a sublease is created, the original landlord neither has privity of contract nor privity of estate with the subtenant if the tenant granted less than the full remainder of the term of the lease. That is, the subtenant is one degree removed from the original landlord. As a result, a sub-tenancy serves as sort of a financial buffer for the original tenant, which is not absolute and dependent on the terms of the original lease. 

In another situation where a current commercial tenant assigns their property interest to another party, they remain in a contractual relationship with the landlord and privity of estate remains as well. The landlord will come knocking on their door if the tenant’s assignee fails to pay rent on time. This leads to the tenant still being on the hook for the rent under the initial term of the lease as in Crystalline Investments.[1]

Based on the tenurial relationship and the terms of the original lease that may explicitly state these conditions, the tenant must obtain the landlord’s consent to assign the lease to the third party, although the landlord cannot withdraw their consent unreasonably. This scenario was explored in Rabin.[2]

Dr. Rabin, the appellant, is the Unit 8 tenant at the medical plaza building, located at 2630 Kipling Avenue in Toronto. The unit is 1,280 sq ft. On August 1, 2015, the appellant signed the current lease, with a five-year option to renew, with Humberview Medical Centre Ltd., the former landlord. The lease expires on December 31, 2025.

Dr. Rabin decided to gradually retire, work part-time and assign his lease to two young dentists. In this case, Dr. Rabin did not fully satisfy the landlord’s request for the financial and business information of the potential assignees. Instead of engaging in further negotiations with the landlord, Dr. Rabin retained litigation counsel to invoke the provisions of the Commercial Tenancies Act, 1990,[3]arguing that the landlord unreasonably refused to give a licence or consent to the assignment or sublease.

The goal of Dr. Rabin’s application was to obtain court-ordered consent.[4] On the surface, this route seems easy; however, the legal test to meet under Dominion Stores[5] and Shanley v Ward[6] is burden-some and favours the landlord. In addition to an assorted variety of factors that the landlord may consider in withholding consent, “the onus is on the tenant to show that the consent has been unreasonably withheld.”[7] Finally, there are three factors for the commercial tenant to consider. They are as follows: (1) whether the refusal to consent is “merely capricious” or “arbitrary,” (2) whether the landlord acted in good faith when withholding consent and “not for a collateral purpose,” and (3) whether the landlord acted without “opportunism,” that is, “as a means to secure a collateral or ulterior purpose or a new advantage such as higher rents or a more favourable lease.”[8]   

Rabin was dismissed without prejudice to be reopened at a future date. Although this recent 2021 case is not the final word of the highest court on the matter, it offers three important takeaways. First, commercial tenants should take full advantage of the negotiations with the landlord when trying to assign or sublet the premises before trying to invoke the Commercial Tenancies Act, 1990. Second, the parties to the lease should be mindful of a legal relationship and co-ownership of the leased property, since “they are married to the land with obligations one to the other.”[9] Finally, when it comes to litigating the matter, parties should avoid “spoiling a brewing legal stew,”[10] that is, avoid aggressive litigation strategies or personal attacks.

Repudiation of Lease by a Tenant

What is good for the landlord is not necessarily good for a tenant. However, commercial tenants should carefully consider what remedies are available to the landlords before deciding whether to default on their obligations to pay rent or otherwise repudiate their lease agreement and abandon the leased properties. The tenant’s repudiation of a lease is covered in Highway Properties,[11] a leading case on this issue. Highway Properties reviewed and recognized three mutually exclusive causes of action available to the landlord under property law.

Highway Properties uses the common law doctrine of anticipatory breach. Under this doctrine, the landlord may sue for the full value of the contract (or damages) without waiting until the end of the term. In this case, the judge added the fourth option based on the contract. Under this option, the landlord can terminate the lease with notice to a tenant and claim damages, including future rent. This option comes with a catch: the landlord has to mitigate; that is, attempt to find another tenant. This last part presents a litigation opportunity for the tenant. Additionally, some courts have upheld the requirement of notice. The last point is another litigation opportunity to challenge the landlord’s choice of remedy or its application.

Ontario’s Commercial Tenancies Act[12] stipulates, when a tenant fails to pay rent the landlord can either (1) enter the premises to seize the items and equipment owned by the tenant to sell them to pay off the debt in the spirit of continuation of the lease or (2) retake possession and terminate the lease. This does not preclude the landlord from pursuing additional remedies described in the Highway Properties or Malka v Vasiliadis.[13]

In Malka, the retail business owner sued the landlord, who allegedly conspired against the plaintiff with another commercial tenant, for damages for wrongful termination and breach of a commercial lease and illegal and excessive distress of his property. The court found that the landlord validly terminated the lease and repossessed the premises following reasonable notice to the tenant. If Malka could be distinguished on the facts from a hypothetical commercial tenant’s situation and a contract was breached or terminated by a landlord, a tenant could potentially sue in trespass, conversion and conspiracy.

In response to the COVID-19 pandemic, the Ontario Commercial Tenancies Act was amended twice last year to include a new Part IV.[14] Part IV provides temporary protection for commercial tenants, including shielding against seizure of any goods, equipment or articles for non-payment of rent. The Ontario government expressed their concern over protections available to small and medium-sized businesses during the pandemic. The Ontario lawmakers took serious action by suspending the Act. While some parts of the Act remain suspended, commercial tenants may breathe a sigh of relief. Other resources are available to commercial tenants based on the current relief funding application guidelines and eligibility criteria (please see below).

Finally, contact a competent lawyer to review the terms of your original commercial lease to decide which exit strategy is best for your particular situation.

Resources:

Canada Emergency Rent Subsidy (CERS)

https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy.html
  • Next period opens: September 1, 2021: First day you can apply for claim period 12

The CERS’ Eligibility Criteria

https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-who-apply.html

[1] Crystalline Investments Ltd v Domgroup Ltd, [2004] 1 SCR 60 [Crystalline Investments].

[2] Rabin v 2490918 Ontario Inc, [2021] OJ No 1673 [Rabin].

[3] Commercial Tenancies Act, R.S.O. 1990, c. L.7, s. 23(2).

[4] Rabin at para 73.

[5] Dominion Stores Ltd. V Bramalea Ltd. [1985] O.J. No. 1874 (Dist. Ct.) [Dominion Stores]

[6] Shanley v Ward (1913), 29 T.L.R. 714 (C.A.) [Shanley v Ward].

[7] Supra note 2 at para 8.

[8] Ibid at paras 14-6.

[9] Supra note 2 at para 72.

[10] Supra note 2 at para 64.

[11] Douglas and Co. Ltd., Highway Properties Ltd. v. Kelly, [1971] S.C.R. 562 [Highway Properties].

[12] R.S.O. 1990, c. L.7, s. 40.

[13] Malka v Vasiliadis, [2011] O.J. No. 4523, 2011 ONSC 5884 (Ont. S.C.J.), affd [2013] O.J. No. 1696, 2013 ONCA 239 (Ont. C.A.), leave to appeal refused [2013] S.C.C.A. No. 229 (S.C.C.) [Malka v Vasiliadis].

[14] Commercial Tenancies Act, R.S.O. 1990, c. L.7 amended by S.O. 2020, c. 10, s. 2(1), effective June 18, 2020, and further amended by S.O. 2020, c. 23, Sch. 2, s. 2, effective October 1, 2020.

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