Terminating the Terminator — Alberta Court of Appeal Declares Landlord’s Right to Terminate Unenforceable
August 31, 2009
Commercial leases commonly provide that the tenant may not assign or sublet without the landlord’s consent, which landlords will typically agree not to unreasonably withhold. Many leases go on to provide that, "notwithstanding" the landlord’s covenant to act reasonably, the landlord may terminate the lease upon receiving a request for consent. This enables a landlord to recapture premises and benefit from a rising market by leasing them directly to a new tenant at a higher rental rate than provided for in the lease.
In 550 Capital Corp. v. David S. Cheetham Architect Ltd., 2009 ABCA 219, released on June 12, 2009, the Alberta Court of Appeal considered the validity of a termination right (Section 10.03) that was stated to be available to the landlord "notwithstanding" the landlord’s covenant (Section 10.02) not to unreasonably withhold its consent to an assignment or sublet. Significantly, Section 10.02 did not give the tenant an option to withdraw its request for consent if the landlord elected to terminate the lease. The tenant requested the landlord’s consent to an assignment and the landlord elected to terminate the lease in reliance on Section 10.03. The tenant refused to vacate the premises and the landlord sought an order for possession.
The court refused the landlord’s application, holding that, even though the landlord’s termination right was to apply "notwithstanding Section 10.02," it effectively negated the landlord’s covenant not to unreasonably withhold its consent, and was therefore unenforceable. The court stated that it could not have been intended that the tenant might lose its entire tenancy simply by requesting that the landlord do what it had promised to do; namely, not unreasonably withhold its consent. The court indicated that, had the tenant been provided the right to withdraw its request for consent if the landlord elected to terminate and thereby avoid jeopardizing its continuing tenancy, the landlord’s termination right would not have been unenforceable.
This decision is troubling for landlords whose leases suffer from the deficiencies identified in 550 Capital Corp. and makes it clear that the use of a "notwithstanding" clause, although a common drafting device used to subordinate one contractual provision to another, may be ineffective in some cases. In order to preserve its right to terminate, a prudent landlord will want to review its master leases to ensure that:
- the landlord’s termination right permits the tenant to withdraw its request for consent if the landlord elects to terminate (in which case the election to terminate will be nullified); and/or
- the landlord’s covenant to act reasonably is expressly conditional upon the landlord first electing not to exercise its termination right.
Real Property Development