Do mergers/amalgamations trigger consent rights?
It is not uncommon for a national corporate tenant (especially those with international roots) to be part of a complicated organizational structure which can include cross-border elements. Tax and securities-driven reorganizations and restructurings are also not uncommon in these contexts and are frequently accomplished through amalgamations. Accordingly, leasing practitioners acting for both landlords and tenants have reason to tread cautiously when considering the consequences of a corporate tenant’s amalgamation. The age old question in this regard is whether an amalgamation is in fact a transfer of the leasehold estate which engages the transfer provisions of a lease.
The leases of most sophisticated landlords typically contain extensive provisions which contractually prohibit or restrict the tenant’s ability to amalgamate without the landlord’s consent in the same way that an assignment of the lease is restricted. Similarly, sophisticated tenants will seek to ensure that they are afforded sufficient flexibility and exemptions from the landlord’s consent requirements in order to undertake necessary reorganizations. Such exemptions will often be made contingent upon the landlord being reasonably satisfied that the amalgamated tenant’s financial covenants and continuing management and quality of business operations is not negatively affected.
In Canada, the manner in which two or more companies amalgamate is governed by corporate statute. For example, the Ontario Business Corporations Act provides at section 174 that “[t]wo or more corporations, including holding or subsidiary corporations, may amalgamate and continue as one corporation”. The Canada Business Corporations Act contains a similar provision, as do other provincial statutes. It is well-accepted practice amongst corporate practitioners that an amalgamation does not extinguish the existence of any of the amalgamating corporations but rather that the deliberate use of the word “continue” suggests that they become one. This theory was described in the Supreme Court of Canada’s decision in R. v. Black & Decker Manufacturing Co.,  1 SCR 411 (Black & Decker) as two rivers coalescing to create a homogenous whole, like a river formed by the confluence of two streams. As a result, the property and rights of each predecessor corporation continue to be the property and rights of the amalgamated corporation. While an amalgamation does not effect a transfer or assignment of the lease, the amalgamated company possesses (but does not acquire) the property of the amalgamated companies.
Black & Decker has been routinely followed. The notable exception is the decision of the Saskatchewan Court of Queen’s Bench in Crescent Leaseholds Ltd. v. Gerhard Horn Investments Ltd.,  1 W.W.R. 182 (B.C.S.C) (Crescent Leaseholds). In dismissing the “confluence of streams” theory asserted by the Supreme Court in Black & Decker and ignoring the principle of stare decisis, the court held that an amalgamation breached a restriction in a lease which prohibited an assignment by operation of law. Crescent Leaseholds has generally not been followed, and it appears safe to conclude that, absent a prohibition or restriction against amalgamations in the lease itself, the amalgamation of a tenant with another corporation will not in and of itself constitute a default under a non-assignability provision of a lease.
It follows that landlords who wish to prohibit their tenants from amalgamating must expressly so provide in the lease. If a lease merely states that an assignment thereof is prohibited and nothing more, the courts will not be inclined to read in an expansion of this restriction, and amalgamating without consent will not breach the transfer restrictions. That said, while the door has largely been closed on the arguments underlying the Crescent Leaseholds decision, it remains possible for a landlord to argue that a prohibition in a lease against assignment by operation of law extends to amalgamations.
The analysis of the lease assignment provisions in the context of an amalgamation should not end at this point. Even if an amalgamation is not restricted by the terms of the lease, where the steps of the amalgamation involve the “movement” of the amalgamated entity within its corporate structure or into the structure of another corporate family (as may be the case in the context of a merger and acquisition), restrictions on a change of control could be triggered. For example, where the majority shareholders of the tenant pre-amalgamation become the minority shareholders of the tenant post-amalgamation, the change of control provisions of the lease could also apply.
Many leases capture “effective changes of voting control”. What does this mean? Does it capture indirect changes such as changes at the parent level?
From a landlord’s perspective, a change in the control of a corporate tenant should be regulated in the same manner as a transfer of the lease. Otherwise, the tenant could successfully accomplish the equivalent of a transfer of the lease (and circumvent the restrictions therein) through a transaction which transfers control of the tenant, and by extension the leased premises, to a third party.
Most sophisticated leases will expressly prohibit or restrict a change in the control of a corporate tenant. These provisions often deem a change of control to be a transfer which triggers the landlord’s consent rights in the same way that would apply to an assignment of the lease, for example. However, there is considerable variability in the wording of change of control clauses in contemporary commercial leases. Variations range from short clauses which simply prohibit a change of control of the tenant without any expansion or definition as to what any of these terms mean, to very detailed provisions which define control, address changes of control amongst the tenant’s related entities and elsewhere in its corporate structure, together with other transactions which could affect the control of the tenant.
One of the challenges in dealing with the less explicit change of control provisions is determining whether the change of control clause is meant to cover the “bottom end” or the “top end” of the tenant’s corporate structure. In other words, consideration must be given to whether the change of control clause is intended to restrict not only a direct change of control of the tenant but also changes in the control of the tenant’s direct parent, related entities and/or its ultimate parent.
In Canada, little has been written in the commercial leasing context on the interpretation of change of control provisions, and there is limited direction from the courts on this topic. In practice, the reference to “control” (to the extent not defined in the lease) appears to be most commonly understood amongst leasing practitioners as de jure (or legal) control, supported with reference to definitions of control in corporate statutes and/or the Income Tax Act (Canada). Accordingly, the percentage of ownership of the voting shares in relation to the holdings of other shareholders; shareholder agreements which impact the holding of a casting vote; and the transfer or pledge of shares by way of security are all important factors in determining control and changes thereto. Although less common, some leases are drafted broadly enough (including express references to changes in the tenant’s management) to suggest that a de facto (actual) control test must be considered in those cases.
The use of the word “effective” to describe the concept of control is often a source of consternation for those reviewing this type of clause. As noted above, the case law offers little guidance as to the meaning of “effective” in this context. A common view amongst leasing practitioners is that the use of the word “effective” brings within the transfer restrictions indirect changes of control of the tenant (perhaps of a related entity upstream in the tenant’s corporate structure), if in fact the net effect of such transaction impacts the control of the tenant. Accordingly, in the case of a conventional parent/subsidiary relationship, a transaction involving a change in control of the tenant’s parent entity would likely necessitate the landlord’s consent. Those considering whether consent is required in connection with a re-organization, merger, financing or other transaction impacting the tenant’s organizational structure will need to understand the consequence of these transactions vis-à-vis the control of the tenant when interpreting these lease provisions.
Download the PDF:Assignment of Lease Agreement
Download the PDF:Notice to assign the lease
Download the PDF:Notice to sublet the dwelling
“Breaking” the lease… with no damage done
Contrary to popular belief, a tenant may not “break his lease” with a 3 month notice at any time during the lease and for any reason.
In fact there are only 4 specific situations where the lease can be cancelled during its term:
- a tenant is allocated a dwelling in low-rental housing;
- a tenant can no longer occupy his dwelling because of a handicap;
- an elderly person is admitted permanently to a residential and long-term care centre or to private seniors' residence;
- because of the violent behaviour of a spouse or former spouse or because of a sexual aggression, even by a third party, the safety of the lessee or of a child living with the lessee is threatened.
Other reasons: purchase of a house, divorce, disagreements between co-tenants, setting up a new household, the need for a larger dwelling, financial problems, moving for employment reasons, etc., do not allow a tenant to force the landlord to cancel the lease.
The tenant can always try to come to an agreement with the landlord for the cancellation of the lease, preferably in writing.
If there is no agreement, the tenant has 2 choices: to assign his lease or sublet the dwelling to another person.
Before going any further you should be aware that you cannot assign your lease or sublet if:
- you are a student renting a dwelling in an educational institution;
- you are a tenant in low-rental housing;
- you are the tenant of a dwelling which is used as the family residence and you or your spouse (married person only) have notified the landlord of this, unless your spouse has given written consent to the assignment or sublet.
Note: In certain cases (such as joint tenancy) there may be restrictions on the right to assign or sublet. Ask for information at the Régie.
Assignment or subletting: What’s the difference?
If you are a tenant who wants to leave a dwelling, the first question to ask yourself is whether you may want to return to the dwelling.
If you are leaving temporarily for a trip, studies or a job for a few months and you wish to avoid paying rent for a dwelling that you are not living in, then subletting would be a good solution. You are still the tenant with all of your rights and obligations intact.
If, on the other hand, you are moving into a new house or to a job in another city, you would no doubt prefer to be released from your lease and its obligations. In this case, it would be best to assign your lease: you renounce to your right to return to the dwelling.
Assignment and subletting: Similarities
Here are the formalities that are identical in both situations:
- the assignor is the tenant who is assigning his lease, i.e., the person who is leaving the dwelling;
- the assignee is the person to whom the tenant assigns his lease, i.e., the one who will live in the dwelling;
- the sublessor is the tenant who sublets, i.e., the person who is leaving the dwelling;
- the subtenant is the person to whom the tenant sublets the dwelling, i.e., the one who will be living there.
Notice of assignment or sublet
You have found someone who is interested in your dwelling, as an assignee or a subtenant. Sign a written agreement right away (assignment of lease agreement or a sublet lease) which will be conditional on the landlord granting consent. Concluding the agreement will be explained later on.
Next, advise the landlord, in writing, of the name and address of the interested person: this information must be given. Needless to say you may also provide the landlord with further information as long as you have the consent of your candidate.
The notice should also include the projected date for the assignment or the sublet. We suggest that you use the models of these notices, which are available at the Régie.
Make sure that you can prove the date that the landlord received the notice because he has 15 days from this date to let you know whether he accepts or refuses the person you have proposed. If he does not reply, he is presumed to have accepted.
If he agrees, the landlord has the right to be reimbursed for reasonable related expenses (for example, the cost of a credit search).
Refusal of assignment or sublet
If the landlord refuses the person you have proposed, he must inform you and give you the reasons which must be serious.
For example, unacceptable behaviour by the person or his inability to pay could be serious justification for refusal.
So it is a good idea for you to do a complete reference check before proposing your candidate.
Recourse in the case of refusal
If the landlord gives reasons which do not seem serious, you can ask the Régie to assess these reasons or to cancel your lease.
If the Régie determines that the landlord’s refusal is unjustified, it can declare valid the assignment or the sublet. The landlord may have to pay damages if his refusal has caused you a prejudice.
When you come to the hearing, bring along all the documents necessary for your proof. Make sure that the proposed assignee or subtenant is present by designating him as a witness: his presence is essential.
Assigning and subletting: Differences
Assignment and its effects
On the assigning tenant
You hand over all your rights, including the right to maintain occupancy, to the assignee. You are freed from all obligations as of the date of the assignment. Therefore, you do not have to send a notice of non-renewal of the lease.
On the assignee
The assignee is not a new tenant in the eyes of the law. Therefore, he does not have the right to ask the Régie to set the rent. However, on becoming a tenant, he acquires all the rights and obligations of the lease. As he is bound by all of the conditions of the assigned lease he should obtain a copy of it from the assigning tenant.
On the landlord
Once the assignment takes effect, the landlord is bound to the assignee. It is to the assignee that all notices concerning the lease must be given and from him that the rent must be collected. The landlord does not sign a new lease with the assignee.
The assignee takes the dwelling in the condition in which he finds it or that it was in when he visited it.
Subletting and its effects
On the tenant (sublessor)
As the tenant who sublets the dwelling, you remain entirely responsible for all the obligations of the lease.
Before the sublease is concluded you must give the subtenant a copy of the building regulations, where applicable. The sublease must indicate all the main obligations that you have toward the landlord (e.g., snow removal) or refer to the obligations.
In this last case you must give the subtenant a copy of the main lease.
As a sublessor, you are obliged to:
- deliver the dwelling in good habitable and clean condition, and in good state of maintenance and repair in all respects;
- ensure the peaceful enjoyment of the premises.
For example, if necessary repairs are not completed, the subtenant could take recourse against you, the sublessor. You would then have to oblige the landlord to respect his obligations toward you.
ATTENTION: You are still responsible for the lease. To avoid its renewal, you must give the landlord a notice of non-renewal within the appropriate time frame.
However, if the dwelling has been sublet for more than 12 months (whether consecutive or not), the landlord may put an end to the sublet. Ask the Régie for further information.
On the subtenant
The subtenant is bound by the terms of the lease he signed with you but he does not have the right of occupancy since you maintain the right to reclaim the dwelling at the end of the sublet.
You also retain the right to end your lease in the manner and time period set out in the law.
If you do not renew the lease and if the subtenant wishes to remain in the dwelling, he should try to sign a new lease with the landlord.
NOTE: The subtenant is not obliged to leave the premises unless he has received a 10-day notice to vacate from the tenant or the landlord. Ask the Régie for information on this subject.
In addition, as a new tenant in relation to you, the sublessor, the subtenant has the right to ask the Régie to fix the rent if the rent he is paying is higher than either the lowest rent paid during the 12 months before the sublet or the rent fixed by the Régie.
Therefore, according to the law, you must give him the “Notice to new tenant” at the conclusion of the lease (Section G of the lease).
On the other hand, if the landlord does not carry out his obligations, the subtenant can exercise the rights and recourses of the tenant to force the landlord to take action.
On the landlord
The landlord retains all of his rights and obligations toward the tenant who has sublet.
If the subtenant, by neglecting his obligations causes serious prejudice to the landlord, other tenants or occupants, the landlord can ask for the cancellation of the tenant’s lease or of the sublet since this recourse is specified in the law.
Concluding a lease agreement: Here’s how
The Régie du logement recommends that you use the very simple conditional agreement model which it supplies entitled Assignment of Lease Agreement and that you complete it before sending the notice of assignment to the landlord.
Before signing the agreement, give the assignee all the relevant information in your possession and let him know if you have received a notice from the landlord such as a notice of rent increase.
Concluding a sublet lease: Here’s how
First, obtain the mandatory lease form of the Régie du logement. In the box for identifying the parties, cross off the words “tenant” and “landlord” and replace them with “subtenant” and “sublandlord” respectively. Of course, the contract is conditional on the landlord’s acceptance of the sublet.
Certain conditions of the sublease may be different from those of the main lease but they must not come into contradiction with the main lease so as to give the subtenant more rights than the tenant already has. For instance, if it is forbidden in the tenant’s lease to keep an animal, the subtenant cannot keep one. On the other hand, if an animal is allowed according to the main lease, the sublease can forbid it. It would be the same for a parking space and so forth.