Legal Blog

Sublease

How does a sublease differ from an assignment of lease? The answer to this question informs the final question: if a sublease ends at the same time as the head lease, rather than some time (even a day) before, does the tenant who subleased the premises retain any rights in the lease, in particular the right, granted in the lease itself, to exercise a renewal of the term. These questions were answered in V Hazelton Limited v. Perfect Smile Dental Inc. 2019 ONCA 423.

Dispute

The lease had a term of seven years with a five year right of renewal. With about one year left in the original term, the tenant subleased the premises for the entire remainder of the term (no reversion for a day). The sublease specifically stated that the tenant had no right to the benefit of the renewal rights in the lease. The tenant attempted to renew the lease, with appropriate notice, but the landlord, who wanted the premises back, took the position that the tenant, having subleased the premises for the entire term, had assigned the lease and, therefore, had no right to extend the term.

Considerations

Privity of estate exists when two or more parties hold an interest in the same real property (e.g. a landlord and a tenant each have an interest in the land). Privity of contract (i.e. rights and obligations inherent to a contract) does not run with the land.

Upon an assignment of a lease, a tenant’s privity of estate with its landlord ends and vests with the assignee. Privity of contract with the landlord, however, remains. Conversely, a sublease creates no direct relationship between the subtenant and the landlord, neither privity of estate nor contract. If the lease has been assigned, no landlord-tenant relationship exists between the assignor and the assignee. With a true sublease, the parties have a landlord-tenant relationship.

For hundreds of years, a sublease of an entire term operated as an assignment unless the tenant retained some (e.g. a day) reversionary interest at the end of the term. However, courts in other provinces have broadened the notion of reversionary interests beyond temporal reservations.

Now add to the mix s. 3 of the Commercial Tenancies Act, in effect since 1895. It states among other things that:

• A landlord-tenant relationship does not depend on tenure.
• 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 relationship.”

What s. 3 does not do is set out the facts necessary to create the landlord-tenant relationship between a tenant and subtenant. It merely sets out what is not necessary.

The Court of Appeal refused to interpret s.3 to mean that a landlord and tenant relationship is always established between the purported tenant and subtenant regardless of a reversionary interest. If this were the case, the distinction between an assignment of lease and a sublease would be lost. This would be contrary to other sections in the Act that maintain the distinction.

The Court therefore interpreted s. 3 to mean that there may be a sublease without a reservation, but only when evidence shows “the objective intention of the parties, as reflected in the sublease, was not to create an assignment.” In effect, the Court gives a tenant, whose lawyer has been dumb enough not to include a one-day reversion in the sublease, the chance to demonstrate that the parties did not intend an assignment.

Result

The Court referenced the specific provision in the sublease stating that the subtenant had no right to renew the lease (which, without a provision to the contrary in the lease, an assignee would have) and that its rights under the sublease expired at the end of the stated one-year term. That section was sufficient evidence that the parties did not intend an assignment. Accordingly, given a sublease, the tenant retained privity of estate and was able to exercise the right of renewal.

Image courtesy of  mastersenaiper.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.