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Landlord and Tenant (Commercial) - Sublet versus Assignment. V Hazelton Limited v. Perfect Smile Dental Inc.
In V Hazelton Limited v. Perfect Smile Dental Inc. (Ont CA, 2019) the Court of Appeal engages in a novel reconsideration of the distinction between a sublet and assignment:(b) Assignment
[30] In this part of my reasons, I will consider the impact of failing to reserve the last day of a head lease term on a sublessor’s property rights under the head lease.
[31] Critical to the analysis in this case is the distinction between an assignment of a lease and a sublease. When a lease is assigned to a third party, the third-party assignee becomes the tenant of the landlord and a privity of estate is established between the two. When the lease is assigned, the landlord’s privity of estate with the original tenant comes to an end, but the privity of contract remains: Crystalline Investments Ltd. v. Domgroup Ltd., 2004 SCC 3 (CanLII), [2004] 1 S.C.R. 60, at para. 29. In contrast, a sublease creates no direct relationship between the subtenant and the landlord – there is neither privity of estate nor privity of contract between them. Rather, the head tenant stands in the position of landlord vis-à-vis the subtenant, while retaining its position as tenant vis-à-vis the original landlord.
[32] There is a long line of case law dating back hundreds of years that holds that a sublease of the entire term of the head lease operates as an assignment because there is no reversionary interest in the original tenant to support a tenurial relationship: see, for e.g., Hicks v. Downing (alias Smith v. Baker) (1696), 1 Ld. Raym. 99, 91 E.R. 962; Selby; Jameson v. London and Canadian Loan and Agency Co. (1897), 1897 CanLII 4 (SCC), 27 S.C.R. 435; and Mount Citadel Ltd. v. Ibar Developments Ltd. (1976), 1976 CanLII 770 (ON SC), 73 D.L.R. (3d) 584 (Ont. H.C.). Thus, as a matter of law, the head lease is assigned unless the sublessor retains a reversionary interest by reserving for itself the last day or some other time period at the end of the term. This was the line of the authority relied on by Perfect Smile on the application.
[33] In a seminal article on leasehold interests, Professor Ralph Scane summarized the common law’s view of leasehold interests: “The Relationship of Landlord and Tenant” in Special Lectures of the Law Society of Upper Canada 1965: The Lease in Modern Business (Toronto: Richard De Boo Ltd., 1965). He described the common law position as follows, at p. 3:The common law’s view of a non-freehold estate, or a leasehold estate, is that it is a grant of exclusive possession of land for a determinate period of time, which is an interest less in quantity than the grantor himself possesses. The definition requires a determinate period of time because if the estate granted is limited to last for an uncertain period of time, you would be granting an estate of freehold. Also, at common law, the estate granted by the landlord must be a lesser estate than the landlord himself has. In other words, there must be a reversion in the landlord if, at common law, there is to be a landlord-tenant relationship. The landlord’s estate can be either freehold or leasehold, so long as it is greater than the estate granted to the tenant. [34] Current practice and more recent case law are consistent with this “ancient” common law. For example, in Sussex Square Apartments v. R., [1999] 2 C.T.C. 2143, (Tax. Ct.), at para. 31, aff’d 2000 CanLII 16119 (FCA), [2000] 4 C.T.C. 203 (F.C.A.), the court noted, “It is trite law that there is a fundamental legal difference between an assignment of a lease, where the assignor retains no reversion, and a sublease where the lessee sublets a portion of the term to a sublessee and retains a reversionary interest”. Similar comments were made by this court in Goldman v. 682980 Ontario Ltd. (2002), 2002 CanLII 20987 (ON CA), 62 O.R. (3d) 21 (C.A.), where the court noted, at para. 3, that “the leasehold interest must be supported by privity of estate and thus the assignor must reserve the last day in order to preserve the original landlord tenant relationship.” (See also Dental Co. of Canada v. Sperry Canada Ltd., 1971 CanLII 7 (SCC), [1971] S.C.R. 266; Canada Safeway Ltd. v. Surrey (City), 2004 BCCA 499 (CanLII), 35 B.C.L.R. (4th) 73, leave to appeal refused [2004] S.C.C.A. No. 577; Bengro Holdings Inc. v. Tax to Go Inc. (1996), 7 O.T.C. 283 (Gen. Div.); and Damack Holdings Ltd. v. Saanich Peninsula Savings Credit Union (1982), 19 B.L.R. 46 (B.C. S.C.).)
[35] Consistent with this well established view, an experienced commercial leasing lawyer in Ontario, writing on the topic of assignments and subleases, has said that he could not recall any transfer in which he had been involved that was for the balance of the term that was not intended to be a full assignment: Darrell M. Gold, “Assignment v. Sublease – Reserving the Last Day” in The Six-Minute Commercial Leasing Lawyer 2008 (Toronto: Law Society of Upper Canada, 2008), at pp. 22-7.
(c) Alternative Approach
[36] Notwithstanding the foregoing, cases from other jurisdictions demonstrate that some courts have interpreted the notion of a reversionary interest more expansively. In these cases, courts have found that there was a reversionary interest even where the last day was not reserved.
[37] Letourneau was such a case and, as noted above, it was cited by Hazelton to the application judge. In Letourneau, the tenant sublet the premises to a third party for the balance of the term of the lease but with a more limited option to renew than that contained in the head lease. In brief reasons, the Court of Appeal agreed with the trial judge that the sublease did not amount to an assignment. At p. 398, Belzil J.A. stated:It is evident from the fact that the trial judge awarded judgment against the original lessee Red Fort that he did not consider the sublease to be an assignment of the lease, and indeed in that he was correct because the option to renew was more restricted in the sublease than that contained in the head lease and it could not be said that the sublessor had assigned its full reversionary interest. The appellant did not argue that the lease had been fully assigned.
…It is clear that the sublessor remained tenant under the head lease and no privity between the sublessee and the appellant as head lessor was created by the sublease. [38] This case suggests that a tenant’s “full reversionary interest” is not assigned even where premises are sublet for the balance of the term of the lease, where the sublease provides for a more restricted option to renew than the head lease.
[39] Another Alberta case has similarly applied a broad notion of a “reversionary interest”: Anthem Heritage Hill Ltd. v. Just One Stop Ltd.: 2006 ABQB 113 (CanLII), 389 A.R. 1, aff’d 2006 ABCA 72 (CanLII), 384 A.R. 231. The case involved a lease between Anthem, the landlord, and Crafter’s Marketplace, the head tenant. Crafter’s retained a portion of the premises and sublet a portion to Just One Stop Ltd. The issue was whether Just One Stop had a right to renew the sublease.
[40] The head lease contained a renewal option. The sublease also included a renewal option. However, the sublease expressly noted that if Crafter’s elected not to exercise the renewal option, the sublease would terminate on the lease expiry date.
[41] Crafter’s surrendered the lease to Anthem before the lease expired. Just One Stop tried to renew the lease, but Anthem sought a declaration that the subtenant could not do so because renewal was contingent on Crafter’s renewal of the head lease. Just One Stop argued that the sublease was an assignment because Crafter’s did not retain a reversionary interest in the head lease, as it failed to reserve the last day of the head lease’s term. It further argued that it had the same right to renew as Crafter’s under the head lease, albeit in respect of the sublet premises only.
[42] The application judge agreed that on the grant of a sublease the sublessor must retain a reversion (i.e., an interest in the lease). Rooke J. noted that “[a]lmost without exception, the authorities define the requisite reversionary interest as a term-related one”: Anthem, at para. 26. He also noted that “the last day of the term of a headlease is an undoubted, and perhaps the most common, term-related reversionary interest”, but added that there were others: at para. 26. He was satisfied that Crafter’s had retained a reversionary interest in the head lease based on the language of the renewal option in the sublease. At para. 27, Rooke J. explained:Just One’s right to renew the sublease was not absolute but expressly contingent on Crafter’s Marketplace’s renewal of the Headlease. Thus, while, on the grant of the Sublease, Crafter’s Marketplace did not retain a reversionary interest in the nature of the last day of the term of the Headlease, Crafter’s Marketplace did retain a term-related reversionary interest in the Headlease in order to preserve the relationship between itself and Anthem under the Headlease in respect of the Sublease premises, that being its right to renew the Headlease. [43] Anthem’s application was granted. The Alberta Court of Appeal dismissed an appeal from Rooke J.’s decision but did not deal with the question of whether there was a sublease or an assignment because Just One Stop abandoned its argument that the sublease was an assignment.
[44] Similarly, Chater v. Elia, 1998 CanLII 2123 (NS CA), 1998 NSCA 39, 167 N.S.R. (2d) 166, involved a lease between the landlord and the tenant, Mr. Al-Farkh. Mr. Al-Farkh, in turn, entered into a sublease with Ms. Elia. It was argued that the subtenancy was really an assignment because Mr. Al-Farkh did not retain a reversionary interest in the premises. Cromwell J.A. rejected this argument at para. 14:In my opinion, Elia’s submission on this point cannot succeed. As I understand the principle involved, it is this: if a tenant gives up his or her whole interest under a head lease by a purported subtenancy, the transaction is in law an assignment. In other words, there can be no sublease when there remains no tenancy to which the undertenancy is subordinated. In this case, the subtenancy related only to a portion of the premises demised under the head lease. Thus, the tenant did not, and did not intend, to give over to the “subtenant” his whole interest under the head lease. Therefore, there was in law no assignment: see Mount Citadel Ltd. v. Ibar Developments (1976), 1976 CanLII 770 (ON SC), 73 D.L.R. (3d) 584 (Ont. H. Ct.) at 589. I conclude therefore that prior to Al-Farkh’s bankruptcy, there was, as the trial judge held, a subtenancy between Al-Farkh and Elia to which the landlord consented. [45] These three cases from other provinces, which are outliers in Canadian law, broaden the notion of a reversionary interest beyond temporal reservations.
[46] Some U.S. courts have also taken a more flexible view of what amounts to a reversionary interest. Andrew R. Berman, writing in Friedman on Leases, 6th ed. vol. 1 (New York: Practising Law Institute, 2017) explains the split in U.S. law, at pp. 7-92 - 7-93:If a tenant sublets for the balance of his term there is, a priori, no intervening time between the scheduled expiration of the prime lease and that of the sublease. If a reservation is to be found, it must be of something other than time. Courts have seized on a tenant’s right of reentry for breach by the subtenant, or of a rent or of covenants that differ from those in the prime lease, or a combination of these items. Some cases have held that a subtenant’s covenant to surrender possession on the last day of the term of the prime lease leaves a “fragmentary” reversion. These have not escaped the obvious criticism that the coterminous periods permit a simultaneous expiration with no temporal gap. There is a split of American authority on what constitutes a reversion for the purpose of making a transaction a sublease rather an assignment. This might suggest the existence of some clear distinctions. Instead, there is an inconsistent and bewildering group of cases seizing upon some item as, or as not, a reversionary interest, and with little consistency within at least several states. [Citations omitted.] [47] As Professor Berman indicates, the desire to stretch the bounds of the common law in some states has given rise to “inconsistent and bewildering” case law. Other states still apply the traditional common law approach and the practice for creating a sublease in those states is to make sure the term expires at least one full day before the stated expiration of the prime or head lease: at p. 7-96.
[48] These cases reflect an effort by some courts to avoid characterizing a putative sublease as an assignment by expanding the notion of a revisionary interest beyond temporal limits. Arguably, such judicial efforts are unnecessary in Ontario by reason of s. 3 of the CTA. I turn next to a consideration of that section.
(d) Section 3 of the CTA
[49] Neither party referred the application judge to of s. 3 of the CTA, which provides:3. The relation of landlord and tenant does not depend on tenure, and a reversion in the lessor is not necessary in order to create the relation of landlord and tenant, or to make applicable the incidents by law belonging to that relation; nor is it necessary, in order to give a landlord the right of distress, that there is an agreement for that purpose between the parties. [50] On its face, s. 3 stipulates four “negatives”:(1) The relation of landlord and tenant does not depend on tenure;
(2) A reversion in the lessor is not necessary in order to create the relation of landlord and tenant;
(3) A reversion in the lessor is not necessary in order to make applicable the incidents by law belonging to the landlord-tenant relation; and
(4) An agreement is not necessary in order to give a landlord a right of distress. [51] This provision has been part of Ontario law in some form since 1895: Ontario Law Reform Commission, Report on Landlord and Tenant Law (Toronto: Ministry of the Attorney General, 1976), at p. 5; An Act respecting the relations of Landlord and Tenant, (1895) 58 Vic. c. 26, s. 4. When first introduced, it read as follows:The relation of landlord and tenant shall be deemed to be founded in the express or implied contract of the parties, and not upon tenure or service, and a reversion shall not be necessary to such relation, which shall be deemed to subsist in all cases where there shall be an agreement to hold land from or under another in consideration of any rent. And nothing in this Act shall affect any pending litigation. [52] A year after the relevant provision was first introduced, it was amended: An Act respecting the Law of Landlord and Tenant, (1869) 59 Vic. c. 42, s. 3. The new section read as follows:(1) The relation of landlord and tenant is not hereafter to depend on tenure, and a reversion or remainder in the lessor shall not be necessary in order to create the relation of landlord and tenant; or to make applicable the incidents by law belonging to that relation nor shall any agreement between the parties be necessary to give the landlord the right of distress.
(2) It is hereby declared that the said section was intended to express the same meaning as this section and no other. [53] Justice Rose described the amended provision in Kennedy v. Agricultural Development Board (1926), 1926 CanLII 323 (ON SC), 59 O.L.R. 374 (H.C.), which is the leading case on s. 3. In Kennedy, there was a question whether an owner in fee simple could also be a tenant under an attornment clause in a mortgage agreement even if there was no reversion in the chargee. The attornment clause stated that “[t]he mortgagor hereby attorns to the Board and becomes tenant of the said lands during the term of this mortgage”. Rose J. concluded that “in Ontario the basis for holding that the attornment clause is ineffective as against persons other than the parties and their privies [was] swept away by s. 3”: at p. 376.
[54] Rose J. went on to discuss the effect of s. 3 at p. 378:The relation cannot depend on the landlord’s tenure, but, apart from the statute, it does depend upon the tenant’s tenure from the landlord. Therefore, in my opinion, the statutes of 1896 and 1914 must mean that a man can be tenant although he does not hold from the landlord; and, as I have said, if he can be tenant without holding from the landlord, I do not see what is to prevent his being at one and the same time holder in fee simple and tenant to the landlord. [55] There have been only a few cases since Kennedy that discuss the interpretation of s. 3 or even mention it. In Wotherspoon v. Canadian Pacific Ltd. (1979), 1979 CanLII 2049 (ON SC), 22 O.R. (2d) 385 (H.C.), Hughes J. commented on s. 3, at p. 523:…I should append a note about one aspect of a lease which I suggested earlier must be for a term less than the life of the interest of the lessor. Such was the invariable principle observed by the common law, but by 1896 (Ont.), c. 42, s. 3, the substance of the provision which is still s. 3 of the Landlord and Tenant Act, R.S.O. 1970, c. 236, was introduced into the law of Ontario…
So in Ontario at least the distinction between a lease and an assignment was obliterated and the term of a lease could be coterminous with the extent of the interest of the lessor. [56] The appeal from Hughes J.’s decision was allowed, although this court did not comment on s. 3. The matter went to the Supreme Court, which dismissed the appeal and allowed the cross-appeal: 1987 CanLII 2807 (SCC), [1987] 1 S.C.R. 952. The Supreme Court affirmed the “ancient” common law but noted the existence of what became s. 3 of the CTA, at p. 1016:An underlease of the whole term of a lease operates as an assignment in law… Furthermore, if a lessee for a term of years makes a lease for a term greater than his own, this second lease operates as an assignment… but see Anger and Honsberger Law of Real Property (2nd ed. 1985), vol. 1, pp. 259-64, for a comment on a possible interpretation of s. 3 of the Landlord and Tenant Act, R.S.O. 1980, c. 232 on this point. [57] In Goldman, this court considered the impact of s. 3 of the CTA on the common law rule requiring a reservation of the last day of the head lease term. In that case, the parties executed a commercial lease for two units in a shopping centre. The lease contained an option to purchase and a right of first refusal to purchase the entire shopping centre. During the term of the lease, with the consent of the landlord, the tenant entered into a sublease. The sublease was for the entirety of the leasehold term but did not include the option or the right of first refusal. Subsequently, the tenant gave notice of the exercise of the option. However, the landlord took the position that the tenant could not exercise the option due to its failure to reserve the last day of the head lease term. The landlord then brought a successful application for a declaration supporting its position, and the tenant appealed.
[58] This court’s analysis of the impact of s. 3 of the CTA was as follows:[4] [The application judge] would not adopt the appellant’s argument that s. 3 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7 supersedes the common law. That section provides in part, ‘[t]he relation of landlord and tenant does not depend on tenure and a reversion in the lessor is not necessary in order to create the relation of landlord and tenant . . . .”
[5] The appellant traces this provision, unique to Ontario and, at one time, Ireland, through various statutes back to 1860 in Ireland. In the only Ontario case dealing with the section, Harpelle v. Carroll (1896), 27 O.R. 240 (Q.B.) and in a context of permitting distress, Meredith C.J. had this to say at p. 246 O.R.:It is highly probable that if the framer of the Ontario Act, had had before him the caustic criticism which the Irish Act as a whole, and its several parts, including section 3, -- as would appear from the reports of the cases to which I shall afterwards refer, -- received from the Judges of the Courts of that country during the short time the Act was in force there, he would have chosen different language to express the idea which he probably had, that of doing away with the necessity of the having of the immediate reversion to entitle to distrain one who had let lands to another. [6] I would not be so dismissive of the legislative intent but do sidestep consideration of its application to the present facts. In my view, the motions judge erred in another respect, which is sufficient to dispose of the appeal, and I leave resolution of any conflict between the statute and the common law for another day when the broader ramifications of altering the course of landlord and tenant law in Ontario alone can be adequately canvassed. [59] Given the dearth of jurisprudence, academic commentary on this section is helpful. In the 1985 version of Anger & Honsberger,[1] at p. 260, the authors note:The plain language of this section would lead me to assume that a tenant could create a sublease notwithstanding his failure to reserve to himself some residue of the original term. [60] In discussing s. 3 of the CTA, these authors refer to comments by Edward Douglas Armour, Q.C., in A Treatise on the Law of Real Property, 1st ed. (Toronto: Canada Law Book, 1901). Like others, Mr. Armour expressed surprise and uncertainty about the 1895 and 1896 legislation, at p. 135:It will be noticed that the present enactment contains no affirmative declaration that the relationship is to depend on contract, but contains simply four negatives, of which one is that the relationship of landlord and tenant is not to depend on tenure. The notion of an estate in land being inseparable from tenure, it may be that the consequence of the abolition of tenure in this connection reduces the relationship of landlord and tenant to a contract of hiring of land, and that there is no such thing, properly speaking, as an estate for years in land arising from the making of a lease. It was held in Harpelle v. Carroll, however, that the first enactment did not abolish the relationship of landlord and tenant and make the bargain a mere contract, but merely altered the mode of creating the ancient relationship. If this be the effect of the enactment, then it worked no change in the law, except that the relationship may probably now exist where the so-called landlord parts with his whole interest in the land, retaining no reversion, thus extending the whole law of landlord and tenant to such a case. [Citations omitted.] [61] The current edition of Anger & Honsberger, cited above, reiterates what was said about s. 3 in the earlier edition of the text: at §7:10. The only case it cites is Kennedy. It also references Professor Scane’s article. In that article, he says that “[t]he effects of [the] section are obscure” and describes s. 3 as “curious” and “mysterious”: at pp.3-5. He muses about the section as follows, at pp. 4-5:As I sat preparing this lecture, wondering why such a curious section should be in the Ontario Act ̶ a section which politely thumbs its nose at several centuries of accumulated law, and yet sits in dusty obscurity, unnoticed by most of flipping through the Act on our way to Part III ̶ I began to wonder whether we are not missing a bet in Ontario, and whether it might not be time to drag this section into the light and have a good look at it.
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The section also poses another interesting problem. Anywhere but in Ontario, or other jurisdictions, if any, having a similar section, a tenant who assigns the whole of the remaining term of his lease creates an assignment, not a sub-lease. If you desire a sub-lease, you must reserve part of the term to the original tenant. Is it possible under the Ontario statute to create a sub-lease of the entire balance of the term? On a literal reading, it would seem so. [62] It would appear that the time has come for this court to determine how s. 3 of the CTA impacts the common law requirement to reserve the last day of a head lease term in a sublease.
(e) Impact of s. 3 of the CTA on the Common Law
[63] Before turning to a consideration of the impact of s. 3 of the CTA on the common law, a word about the Canadian cases referred to above that expand the definition of a reversionary interest beyond a temporal reservation. Recall that Hazelton relied on one of these cases, Letourneau, in its submission to the application judge.
[64] I would not import these cases into Ontario law for two reasons. First, they expand the notion of a reversionary interest in a manner that appears to be results-driven and without regard to hundreds of years of jurisprudence that makes clear that an assignment is made when no temporal reservation is made. Second, the decisions of the Alberta and Nova Scotia courts to expand the meaning of a reversionary interest at common law were made in a legal milieu where there was no equivalent to s. 3 of the CTA. That said, I make no comment on the result in Elia or Anthem, which dealt with subleases of only portions of the leased premises. The sublease in the case at bar was for the whole premises.
[65] In assessing the impact of s. 3 of the CTA, it is important to focus on the breadth of the provision. The section makes clear that a reversion in the lessor is not necessary in order to create the relationship of landlord and tenant. What the section does not say is what, in fact, is necessary to create that legal relationship.
[66] If we accept, based on the plain wording of s. 3, that a reversionary interest is not required, it is possible to conclude that there is no need to reserve the last day of the lease term for there to be a landlord and tenant relationship. In that case, it would be unnecessary to engage in the type of analysis undertaken in the three outlier cases cited above, where courts searched for a reversionary interest that went beyond temporal limits.
[67] In my view, there is a danger in interpreting s. 3 to mean that a landlord and tenant relationship is always established between the purported sublessor and subtenant regardless of whether there is a reversionary interest. The danger is that the distinction between subleases and assignments would be lost. This would be contrary to the provisions of the CTA, which maintain such a distinction: see ss. 23(2) and 25. It could also have a disruptive effect on existing transfers where the last day of the head lease term has not been reserved. Recall that it was suggested by Mr. Gold that in those cases the failure to reserve the last day is usually deliberate in order to create an assignment.
[68] Reading s. 3 in context, I interpret it to mean that there may be a sublease even if the last day in the head lease is not reserved, but only when there is sufficient evidence to show that the objective intention of the parties, as reflected in the sublease, was not to create an assignment. Recognizing that a commercial lease is not only a conveyance but also a contract, courts should be permitted to consider the objective intentions of the parties to a purported sublease in order to determine the nature of the impact on the subletting party vis-à-vis its rights under the head lease. In other words, a party may demonstrate that, notwithstanding a failure to reserve the last day of the head lease term, an assignment was not intended by the parties.
[69] Interpreting s. 3 in such a way maintains the distinction between subleases and assignments, which is consistent with the scheme of the CTA. It is also consistent with the wording of s. 3.
[70] Practically speaking, this interpretation does not have the effect of forcing parties to continue a legal relationship when they have no desire to do so. In addition, I do not anticipate that the impact of this approach will be far-ranging because I expect that most parties to a commercial sublease will follow the usual practice and simply reserve the last day in order to avoid an assignment. However, in the limited number of cases where that is not done and the tenant under the head lease wishes to maintain its rights under the head lease, it may be possible to prove that an assignment was not intended by examining the terms of the purported sublease.
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