The purchase and sale of a dental practice often involves the transfer of a lease. The selling tenant dentist usually must transfer the lease to the buying dentist so that the buyer may become the new tenant. However, leases generally contain terms that add conditions to this transfer, such as the requirement that the landlord give consent.
Even when the lease contains a consent requirement term, Ontario law could prevent the landlord from “unreasonably” withholding consent to a lease transfer. This article will examine what dentists need to know about the law of unreasonably withheld consent.
When do lease transfers arise in the purchase and sale of a dentistry?
Commercial leases for dental practices and other businesses often have terms that limit the tenant dentist’s ability to transfer the lease, such as by assignment or subletting. These methods of transfer have different implications for privity of contract in a lease – the legal relationship between the parties to the contract and the enforceability of the contract’s terms.
Assignment generally occurs when a tenant transfers their entire interest in the leasehold estate for the remaining term to the transferee. Privity of contract is not extinguished between the landlord and the original tenant. The original tenant may be secondarily liable under the lease, unless they sign an agreement stating otherwise with the landlord.
Subletting often occurs when a tenant transfers all or part of the leased property to a subtenant for all or part of the remaining term. Privity of contract generally does not exist between the subtenant and landlord, unless a written agreement says otherwise.
Dentists interested in selling their dental practice may be limited to do so by the restrictions on their ability to transfer the property on which their practice is located under the terms of their lease. Understanding the terms and conditions of a commercial lease is thus essential for a successful purchase and sale.
What terms for transfer do leases often contain?
Many commercial leases require that the tenant receive the landlord’s “approval” or “consent” for a lease transfer. The lease may even require the tenant to obtain the additional consent of the landlord’s lender or ground lessor.
Dentists should know whether the lease includes express terms for how transfer requests are to be made by the tenant. For example, requests for consent to transfer may require the tenant to follow certain time parameters, provide financial documents on the proposed transferee, or pay costs owed to the landlord. Some leases even contain provisions that trigger the landlord’s right to terminate the lease simply upon receiving a transfer request from the tenant.
Ideally, tenant dentist’s will want to have their lawyer negotiate with their landlord to include an express provision for deemed transfer consent by the landlord where the landlord fails to respond to the tenant’s request to transfer, typically within 15 to 30 days from receiving the request. This means that if the tenant transfers the lease and the landlord does not respond within a certain time, the lack of response by the landlord is considered as their consent.
Dentists should have their lawyer thoroughly review their lease to identify any transfer terms and conditions.
What is an unreasonable withholding of consent?
Many commercial leases state that a landlord’s consent to a lease transfer “cannot be unreasonable withheld.” Tenants will want to negotiate with their landlord to include this provision. That said, if a commercial lease restricts the tenant’s ability to transfer without specifying the standard for assessing whether that consent will or will not be granted, the implied standard as interpreted by the courts is often that the landlord’s consent may not be unreasonably withheld.
In Ontario, the requirement that consent not be unreasonably withheld is codified under statute. Under section 23(1) of the Ontario Commercial Tenancies Act, a landlord cannot unreasonably deny a lease transfer request unless the lease contains an express provision stating that unreasonable denials are permitted.
Although standard clauses for lease transfers often do not require the landlord to give reasons for any denied consent, tenants could request written reasons for a transfer denial from the landlord. Written reasons can help tenants build their case for why a transfer denial was unreasonable should they decide to legally challenge their landlord’s withholding of consent.
How do courts determine unreasonably withheld consent?
Section 23(3) of the Commercial Tenancies Act allows the Ontario Superior Court to make an order to approve a lease transfer if it finds that the transfer request was unreasonably withheld. Note that the legal standard of “reasonableness” for transfer requests can be unpredictable and greatly depends on the context.
Ontario courts apply the following six principles to determine whether a landlord acted reasonably in withholding consent to transfer:
- The tenant has the burden to prove that the landlord’s refused consent was unreasonable;
- Only the information available to the landlord and their reasons for refusal at the time of the refusal are material to the analysis;
- The court must consider the terms of the lease that define the subject matter and scope of the transfer, the tenant’s right to transfer, and the landlord’s right to withhold consent;
- Depending on the circumstances, the probability that a proposed transferee will default can be reasonable grounds for withholding consent;
- The transferee’s financial position may be relevant; and
- Reasonableness is a question of fact depending on the circumstances that include commercial market realities and the economic impact of transfer on the landlord.
Unreasonably withheld consent to transfer in the Rabin case
In Rabin v. 2490918 Ontario Inc., a 70-year-old dentist wanted to incorporate his practice into a dentistry professional corporation to sell it to two younger dentists for approximately $1.8 million. As part of the process for the sale, he sought the consent of the landlord for assignment of his commercial lease. The lease stated that prior consent from the landlord was required to assign the lease, that the landlord’s consent would not be unreasonably withheld, and that the landlord will respond to the tenant’s assignment request within 15 days. The landlord responded about one week after the 15-day deadline and would not grant consent unless the lease was amended to include a demolition clause. The landlord’s long-term plan was to demolish the property at some time in the future.
The finding of unreasonably withheld consent
One issue that the Ontario Court of Appeal (ONCA) had to determine was whether the landlord had unreasonably withheld consent to assign the lease. The court concluded that the landlord’s actions and words proved that he had unreasonably withheld consent, and it ordered that the assignment be made.
How reasonableness was assessed
In its reasoning, the court confirmed that, because the Commercial Tenancies Act does not define what is an unreasonable withholding of consent, the determination will depend on the facts of the case. The Court also confirmed the principles of determining unreasonably withheld consent listed above. Courts consider these principles in the context of the reasonable person standard, which looks at “whether a reasonable person could have withheld consent.”
Key facts that the court considered
One key fact that the court considered was the landlord’s failing to respond in time.
The court found that the landlord did not provide a reasonable excusive for failing to respond to the tenant’s request within the 15-day deadline under the lease. Additionally, the lease required that the landlord request financial information from the tenant following a request, but the landlord failed to request this information. Indeed, the court found that the record showed that the landlord “simply could not be bothered to respond in time.”
Another key fact the court considered was whether the conditional consent was unreasonable.
The court noted that the landlord sought to include a demolition clause in the lease as a precondition for giving consent. The court found that conditional consent is not consent and has been found to be an unreasonable withholding of consent by courts in the past.
When could consent be reasonably withheld?
Dentists should note that there are still many circumstances where courts will find that a landlord reasonably withheld their consent to transfer a lease. For example, reasonably withheld lease transfers include situations where the proposed transferee has a net worth that is less than the current tenant or has inadequate commercial experience.
Takeaways
Looking at the Rabin case, dentists should keep the following considerations in mind for commercial leases when buying or selling a dental practice:
- Landlords may be deemed to unreasonably withhold consent when they fail to respond to a request from the tenant under the terms of the lease;
- Courts will examine the transfer terms under the lease, the rights of the tenant and landlord under the lease, and the behaviour and communications of each party when determining whether the withholding was unreasonable;
- Courts may find unreasonably withheld consent when consent is contingent on the addition or modification of a lease term; and
- It is essential that dentist tenants conduct due diligence that carefully reviews the transfer and termination provisions of a lease.
Given the fact-specific nature of the law of unreasonably withheld consent, dentists can benefit from having a lawyer review their lease documents before planning the purchase or sale of a dental practice.
Thank you to Ephraim Barrera for his contribution to this article. The contents of this article are not to be construed as legal advice. Contact Emerge Law’s lawyers for legal assistance.