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Oops, did I accidentally assign my lease?

in Commercial Lease by admin / September 19,2019

What happens when you sublet your commercial space but fail to reserve the last day of the head lease term? Have you completely assigned your lease over to your subtenant? The Court of Appeal answers this question in V Hazelton Limited v. Perfect Smile Dental Inc., 2019 ONCA 423.

The issue arose when a head tenant sought to exercise its option to renew under its lease with its landlord. Although the parties initially entered into renewal negotiations, those ultimately broke down with the landlord claiming the tenant had assigned its entire interest to its subtenant without reserving the last day of the head lease term to itself (the “ancient common law” position).

The resolution to the problem lay in the somewhat obscure section 3 of the Commercial Tenancies Act, which expressly provides that a reversion in the lessor is not necessary to create a landlord/tenant relationship. Section 3 does not say what is necessary to create that legal relationship. The Court of Appeal took it to mean that even if the last day of the head lease is not reserved, there may yet be a sublease if there is sufficient evidence of the parties’ objective intentions, as reflected in the sublease, not to create an assignment.

In this case, despite the failure to reserve the last day of the head lease, the sublease made clear that the head tenant had a right to renew the lease and was not obliged to renew its sublease with the subtenant, whose rights expired at the end of its term. As a result, there had been no assignment and the head tenant maintained the right to renew the lease, which it had rightfully exercised.

This interpretation of section 3 maintains the distinction between assignments and subleases, as well as the paramountcy of the parties’ objective intentions.