Subleases: Seeking the Landlord's Consent
In most commercial leases the right of the tenant to assign or sublease is going to be controlled by the landlord. A tenant who intends to sublease excess space as part of an exit strategy from leased premises or who intends to assign the lease as part of a corporate transaction will need to be aware of the specific lease terms and the general common law principles before embarking on the process.
Most commercial leases will require the landlord's consent to an assignment or sublease and provide that the landlord's consent will not be unreasonably withheld. The lease may well go on to set out specific information that must be brought to the landlord in respect of the proposed subtenant or assignee, such as financial information and business history. The lease may also provide the landlord with a specific time period in which to respond and it will be necessary to make sure any agreements to sublease or assign conform to that time limit. There may also be some specific prohibitions against certain uses that will need to be taken into account in marketing the space.
It is also very common in a commercial lease to give the landlord a right to terminate the lease in lieu of granting a consent. This right is often triggered simply by the application for consent. Landlords put this provision in their standard forms in order to have the ability to retain control of the space where necessary. It is uncommon for a landlord to use this right, as it lets the tenant off of the lease obligations. However a landlord may use this when it wishes to get the space back for another use or tenant or perhaps to capture increases in market rent on the space. While in many cases the tenant seeking to sublease will be ecstatic that the landlord is instead taking the space back and setting the tenant free from the lease obligations, in other cases (such as a business transaction that includes an assignment of one or more leases) it will be important for a tenant to know whether this right might be triggered before it seeks such consent. In negotiating leases, landlords will often agree to a step-down allowing a tenant to withdraw its application for consent should the landlord trigger the termination right.
When Can a Landlord Withold Consent?
As noted above, typically a landlord has to be reasonable in withholding consent. The lease terms may give some specific examples of when a landlord will be deemed to be acting reasonably in withholding its consent. For example, the lease may provide that the landlord is deemed to be acting reasonably when the tenant is in default or when the proposed use would be in contravention of an existing use restriction granted to another tenant by the landlord. In fact, the common law would find the landlord to be acting reasonably in refusing consent in either of those situations irrespective of whether they were set out in a lease.
Other situations where courts have found the landlord to be acting reasonably in withholding consent include the following:
- the proposed use is more demanding on the building than the existing use;
- the proposed use in a retail setting would create a traffic and parking problem for other tenants; and
- again in a retail setting, the proposed use would adversely affect the business of other stores in the shopping centre (even where those other stores do not have an exclusive right).
On the other hand, the courts have found a landlord to be unreasonable in withholding its consent in the following situations:
- the landlord had ulterior motives such as wanting to make another use of the property;
- the landlord insisted on new terms to the lease agreement; and
- the landlord simply refused to respond to the request for consent.
Documenting the Consent
Most commercial landlords will have a form of three-party agreement that will be required under the lease to be entered into by the landlord, the tenant and the subtenant or assignee. Generally this is a landlord form that benefits only the landlord, in that it gives the landlord direct contractual rights against the subtenant or assignee. While it would have some rights against an assignee at common law, a subtenant is one step removed from the landlord and without such an agreement the landlord would not have any direct contractual rights.
The three-party agreement will also confirm that the original tenant remains fully liable for all lease obligations. This will in all likelihood have been stated in the lease but landlords use a consent agreement to confirm such. The continuing liability is one reason that a sublease is a much more common structure than an assignment to effect the transfer of leased premises. Since the original tenant remains liable for the rent and all other lease obligations, it wants to remain in the picture and as a sublandlord it would have the ability to get back the space and continue to use it should the subtenant default. As an assignor it could find itself in a situation of continuing to have all of the lease obligations but no rights to the space should the assignee default and the landlord take back the space.
Typically the lease will give the landlord a right to charge its legal costs and perhaps even an administration fee for implementing the consent.
The general process for an assignment or sublease is summarized above. Obviously the terms of any particular lease will prevail and an important point is to be familiar with those before undertaking the process.
This article appeared in Lang Michener's Real Estate Brief Fall 2010.