A sublease is a type of lease agreement under which the tenant agrees to give a new tenant, referred to as the subtenant, the right to share or take over the premises. The original lease agreement between the tenant and landlord remains in place while the subtenant pays rent to the tenant. This can be a useful arrangement for a tenant if they are, for example, unable to continue operating their business at the premises and do not have a right to terminate the lease early.
But is subleasing under a commercial lease permitted? Further, what happens if the landlord refuses to consent to the tenant’s request? This article considers both of these issues, with reference to a recent decision of the Court of King’s Bench of Alberta, in which a landlord rejected the tenant’s request for a sublease.
The terms of the commercial lease are crucial
A commercial lease sets out the contractual terms that apply between the landlord and tenant who operates a business from the leased premises. Given the importance of this document and the financial commitment involved, it is imperative to obtain the advice of an experienced commercial real estate lawyer during lease negotiations.
To minimize the chances of future disputes, it is important that the lease contains very clear terms and adequately addresses issues that may impact the business.
Commercial leases often require landlord consent to sublet the premises
Often, commercial leases require the tenant to obtain the consent of the landlord before subleasing the premises to someone else.
While the detailed requirements will vary depending on the specific terms of the particular lease, it is possible that a commercial lease may require:
- the consent of the landlord to be obtained in writing;
- the landlord not to unreasonably withhold consent to a sublease; and
- the tenant to provide specified information and documents to the landlord when requesting consent for a sublease.
Tenant leased premises for a Tae Kwon Do studio
In the recent case of Suri Holdings Inc. v Jung, the plaintiff landlord owned commercial premises in Southwest Calgary and rented the second floor to the defendant tenant until July 2019. The tenant operated a Tae Kwon Do studio at the leased premises.
The tenant sought to sublease the premises in the fall of 2018. However, the lease agreement between the parties contained the following term:
“The Tenant shall not… sublet the… premises unless it shall have first requested and obtained the consent in writing of the Landlord thereto. The Landlord shall not unreasonably withhold its consent… Any request for such consent shall be in writing and shall be accompanied by a true copy of any offer to take a… sublease… as well as a copy of the proposed… sublease… and the Tenant shall furnish to the Landlord all information available to the Tenant or requested by the Landlord as to the business and financial responsibility… of the proposed… subtenant…”.
Landlord refused to consent to a sublease and sued the tenant for unpaid rent
The tenant gave the landlord an executed sublease with RK Fight Lab (“RK”), a martial arts gym. The landlord refused the sublease on October 1, 2018, citing noise concerns.
The tenant paid rent until the end of October 2018, then moved out and returned the keys on November 1, 2018. The premises were not used for the remainder of the lease’s term.
The landlord sued for unpaid rent for the balance of the term. The tenant counterclaimed for loss of revenue under the refused sublease.
The trial judge found the plaintiff’s refusal of the sublease to be unreasonable
The trial judge decided that the tenant was liable for unpaid rent for the remainder of the lease’s term.
However, the judge found that the landlord did not know any difference between the tenant’s use of the premises and the proposed use by RK. In addition, the landlord did not request any information about RK before refusing to give its consent to the proposed sublease. As a result, the judge found that the landlord’s refusal of the sublease was unreasonable and constituted a breach of the lease.
As a result, the landlord was liable for the lost rent under the refused sublease. The judge awarded the landlord approximately $5,000 – the difference between the amount of unpaid rent by the defendant and the amount of lost revenue due to the landlord’s refusal of the sublease, which the landlord appealed.
Court agreed that consent was unreasonably withheld
The landlord alleged several errors on appeal, including that the tenant should not be entitled to his counterclaim because he breached the lease by vacating the premises early.
Justice Devlin of the Court of King’s Bench rejected this argument, explaining that a contractual wrong does not necessarily prevent the offending party from exercising contractual rights. The landlord did not rely on the tenant’s breach as the reason for refusing the sublease.
The landlord also argued that the trial judge erroneously focused on the landlord’s failure to request information about RK in circumstances where the lease required the defendant to give all information available or requested by the landlord.
Justice Devlin also rejected this argument, finding that it was open to the trial judge to find that there was no obvious reason why one martial arts instruction business would not be a suitable replacement for another. While the lease agreement required the tenant to provide information about the proposed subtenant, the Court found that the landlord would be hard-pressed to reasonably consider the proposed sublease where it did not communicate specific concerns or ask questions.
Contact the Commercial Real Estate Team at DBH Law in Calgary for Assistance with Commercial Leasing Disputes
The skilled team of commercial real estate lawyers at DBH Law in Calgary assists its clients with all their commercial real estate needs, including advising purchasers and sellers on transactions and landlords and tenants on commercial lease negotiations, renewals and subleases. In the event of a lease dispute or litigation, our lawyers are prepared to advocate on your behalf and ensure that your interests are protected. Please contact us online or by phone at 403-252-9937 to schedule a confidential consultation.