Royal Bank of Canada v. Oxford Medical Imaging Inc., 2019 ONSC 1020

When will the Court allow a lease to be assigned over a landlord’s objections?

The Tenant operates five medical imaging clinics in and around the Regional Municipality of Waterloo. The Tenant leases commercial premises from the Landlord (the “Leased Premises”).

The Tenant is indebted to the Royal Bank of Canada (“RBC”). Following the Tenant’s involvement in certain litigation, RBC called the debt—approximately $2.6 million. Deloitte Restructuring Inc. was appointed as a Sales Officer to sell the Tenant’s assets, including the clinic occupying the Leased Premises.

The Landlord sought a declaration terminating the lease (the “Lease”) with the Tenant. The Tenant sought a declaration to restrain such termination as well as a further declaration allowing it to assign its Lease to 2617949 Ontario Limited (“261 Ont”) pursuant to an asset purchase agreement (the “APA”) entered into between the Tenant and 261 Ont on December 5, 2018. The closing of the APA was conditional on securing the consent of the Landlord to the assignment of the Lease to 261 Ont.

The Landlord argued that it had to ensure that potential tenants were compatible with its mission to provide consistent and excellent medical services. In making its determination, the Landlord typically considered such criteria as the potential tenant’s ties to the region, familiarity with the region, commitment to enhancing health care for residents in the region, relationships with existing tenants, proper licensing, and the nature of the business plan being presented. The Landlord argued that 261 Ont failed to meet these criteria.

In determining whether the Landlord has unreasonably withheld consent, the burden is on the Tenant to satisfy the Court that the refusal to consent was unreasonable because a reasonable person could not have withheld consent. Courts must consider the material information available to the Landlord at the time of the refusal, not any additional, or different, facts or reasons provided subsequently.

Further, the issue must be considered in the light of the existing provisions of the lease. The Landlord may reasonably withhold consent if the assignment will diminish the value of its rights under the Lease, or of its reversion. However, a refusal will be unreasonable if it was designed to achieve a collateral purpose or benefit to the Landlord that was not reflected in the terms of the Lease. A landlord is obliged to consider requests for a proposed assignment, particularly where the landlord has no particular reason to believe that the proposed assignee is undesirable.

The Court acknowledged the Landlord’s frustration at the slow pace at which it was receiving information from the Tenant about the sales process. It would have made good business sense for Deloitte to ensure that the Landlord was kept abreast of developments so that it could react in an informed fashion. However, the Court was also of the view that the Landlord reacted emotively to these failures.

The Court concluded that the Landlord’s refusal to provide consent was unreasonable for the following reasons: 
  • it is immaterial that 261 Ont is owned by an investor, rather than a radiologist. The Landlord did not adduce independent or credible evidence to suggest that such ownership would compromise the goal of providing an excellent health care environment;
  • the Landlord’s complaint that 261 Ont had no meaningful relationships within the Waterloo medical community had no merit. Professional relationships would inevitably develop and there was no evidence to suggest that 261 Ont lacked the professional capabilities to create those relationships;
  • none of the other four landlords in the other clinic locations had denied consent to the assignment;
  • the rigorous sales process conducted by Deloitte had received court approval; and
  • if the Landlord were successful in opposing the termination, the Tenant would have to cease operations and largely face the destruction of its business since the Leased Premises are its largest location. There would be resulting unemployment of staff and lack of services to patients, both of which are significantly damaging consequences.
Based on the above, the Court held that it was appropriate to substitute its judgment for that of the Landlord on the basis that a reasonable person could not have reached the same decision as the Landlord. The reasons provided by the Landlord were not commercially reasonable and seemed to expand based on emotive reasons, stemming from the fact that it was not kept abreast of developments for a period of time and was not served with a copy of relevant motion materials. While Deloitte and the Tenant could have done a better job of keeping the Landlord informed of ongoing developments, they did make meaningful efforts to redress their failures.

The Court dismissed the Landlord’s motion, and ordered that the assignment may be made, notwithstanding the Landlord’s refusal to consent.

CounselRachel Moses of Minden Gross LLP for the Plaintiff, Royal Bank of Canada, Robert Klotz of Klotz Associates for Dr. Jae Kim and Oxford Medical Imaging Inc., Bevan Brooksbank of BLG for Deloitte Restructuring Inc. in its capacity as Court-Appointed Sales Officer and Edward D’Agostino of Oldfield, Greaves, D’Agostina & Scriven for The INCC Corp.
 
 
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