Lease Assignment vs. Sublease (Commercial)

An assignment hands over the tenant's whole interest: all of the premises for all of the remaining term. The assignee steps into the tenant's position, pays rent to the landlord and must perform the tenant's covenants. Landlords usually also have the assignee sign an assumption agreement directly with them.

A sublease carves a smaller interest out of the tenant's lease. The tenant keeps something back, either part of the space or part of the term, and becomes the subtenant's landlord. The subtenant pays the tenant, not the head landlord, and its rights can be no greater than the tenant's. If the head lease ends, the sublease normally ends with it.

At common law, a so-called sublease of the whole remaining term, with no reversion kept by the tenant, operated as an assignment. In Ontario, section 3 of the Commercial Tenancies Act softens that rule: in V Hazelton Limited v. Perfect Smile Dental Inc., 2019 ONCA 423, the Court of Appeal held that a sublease can exist without reserving the last day of the term, but only where the evidence shows the parties' objective intention, as reflected in the sublease, was not to create an assignment. Careful drafting still reserves the last day.

Most commercial leases prohibit assigning or subletting without the landlord's consent. Section 23(1) of Ontario's Commercial Tenancies Act deems that kind of covenant to be subject to a proviso that consent is not to be unreasonably withheld, unless the lease contains an express provision to the contrary. A lease that gives the landlord sole and absolute discretion may therefore displace the statutory standard, so the exact wording matters.

Section 23(2) gives the remedy. If the landlord refuses or neglects to consent, the tenant, the proposed assignee or the proposed subtenant can apply to a judge of the Superior Court of Justice. If the judge finds consent was unreasonably withheld, the order permitting the assignment or sublease is the equivalent of the landlord's consent.

Leases usually add their own machinery around consent:

• A written request with financial statements, business experience and the intended use of the assignee.
• A fixed period for the landlord to respond.
• Reimbursement of the landlord's legal and administrative costs.
• A recapture right letting the landlord end the lease instead of consenting.
• A share of any profit the tenant makes on a sublease.
• A deemed assignment on a change of control of a corporate tenant.

In Rabin v. 2490918 Ontario Inc., 2023 ONCA 49, the Ontario Court of Appeal restated the test. A dentist who had practised in the same building for over 40 years agreed to sell his practice to two younger dentists. His lease barred assignment without consent, not to be unreasonably withheld, and required the landlord to answer a consent request within 15 days. The landlord, which had bought the building with redevelopment in mind, missed the deadline, then offered consent only if the lease was amended to add a demolition clause on 24 months' notice, and later refused.

The Court of Appeal allowed the tenant's appeal, held that the landlord had unreasonably withheld consent, and permitted the assignment. Failing to respond within the lease's deadline without a reasonable excuse was itself an unreasonable withholding, and a consent conditional on a new lease term that benefited the landlord was not a consent.

The court applied settled principles:

• The tenant bears the onus of proving the refusal was unreasonable.
• The question is judged on the information the landlord had and the reasons it gave at the time.
• The terms of the lease frame the analysis.
• A probability that the assignee will default may, depending on the circumstances, justify a refusal, and the assignee's financial position may be relevant.
• Reasonableness is a question of fact, judged against commercial realities and the economic effect of the assignment on the landlord.

The practical rule: a landlord can rely on what the lease already gives it, but unless the lease says otherwise, demanding new terms, such as a demolition clause or higher rent, as the price of consent risks being found unreasonable.

Assigning a lease does not end the original tenant's liability. In Crystalline Investments Ltd. v. Domgroup Ltd., 2004 SCC 3, the Supreme Court of Canada explained that on an assignment the landlord's privity of estate with the original tenant ends, but privity of contract continues, so the original tenant remains liable on its covenants, subject to the lease and any agreement with the landlord. The court held that the assignee's later repudiation of the lease in insolvency proceedings did not, by itself, release the original tenant.

A personal guarantee or indemnity given for the original tenant usually survives too, and many leases state that renewals, extensions and amendments agreed with an assignee bind the original tenant and guarantor. A seller who assigns a lease on a business sale may still be paying rent years later if the buyer fails. Lamba Law's free personal guarantee tracker helps owners keep a record of what they have signed.

Sellers commonly negotiate for a release once the assignee meets a net worth test, a release after a period without default, liability limited to the current term, and notice of any assignee default. A full release substitutes the assignee for the original tenant and is, in substance, a novation.

Residential tenancies work differently. Section 2 of the Commercial Tenancies Act excludes tenancies governed by the Residential Tenancies Act, 2006. Under section 95 of the residential statute, the former tenant is liable for breaches relating to the period before the assignment and the assignee for those after it, a tenant may end the tenancy if the landlord refuses a general request to assign or does not answer within seven days, and the landlord may charge only reasonable out-of-pocket expenses.

Whether the lease must be assigned depends on the deal structure. In an asset purchase, the lease is one of the assets, so where the lease requires consent, as most do, the seller needs the landlord's consent, usually in a three-party consent agreement among landlord, seller and buyer that the asset purchase agreement makes a closing condition. In a share purchase, the tenant corporation stays the tenant and no assignment occurs, but a deemed assignment clause can still require consent.

Franchised locations often use a different structure: the franchisor or an affiliate holds the head lease and subleases the premises to the franchisee. See franchise head lease and sublease.

The best protection is negotiated before the lease is signed. Assignment rights tied to a sale of the business belong at the offer stage, as the guide to offers to lease and letters of intent explains, and the guide to commercial lease negotiation covers the related guarantee and renewal terms.

Ingrid Larsen's corporation sells the assets of her Oakville café to a new corporation owned by Desmond Clarke for $340,000. The lease has six years left at $9,800 a month all-in, requires consent not to be unreasonably withheld, gives the landlord 20 business days to respond, and is personally guaranteed by Ingrid.

The landlord asks for Desmond's financial statements and business plan. Because the buyer is a newly formed corporation, it also asks for Desmond's personal guarantee and a deposit equal to three months' rent, which are linked to the risk of default and the assignee's financial position. It then asks for a $1,500 monthly rent increase as a condition of consent. Ingrid's lawyer points out that the lease sets the rent and that conditioning consent on a benefit the lease does not give risks being found unreasonable; the landlord drops the increase.

Ingrid asks to be released. The landlord refuses a full release of her corporation as original tenant but agrees to release her personal guarantee after 24 months without default. The sale closes on schedule.