Does BC's Commercial Tenancy Act Govern Lease Assignment on a Business Sale?

If you are buying or selling a business in British Columbia, the lease for the premises is often one of the most important assets. A restaurant, shop or clinic may be worth far less to a buyer if it cannot stay in the same location.

Many people assume a provincial statute lays out exactly how a commercial lease moves to a new owner and when a landlord must agree. This article explains what the Commercial Tenancy Act actually says on the point, and where the answer really comes from.

This article covers the law of British Columbia.

What the Commercial Tenancy Act says about assignment

The Commercial Tenancy Act, RSBC 1996, c. 57, is the provincial statute that deals with commercial leases. It is natural to look there for a rule on assigning or subletting. But the provision that addresses a covenant against assigning or subletting, s. 29(3), deals with a trustee in bankruptcy, and the Act does not set a general rule on when a landlord may refuse consent.

A covenant is simply a promise in the lease. A typical one says the tenant will not assign the lease or sublet the premises without the landlord's leave or consent. Under s. 29(3), that kind of covenant does not apply to a trustee's transfer if the Supreme Court approves it.

So the Act speaks to one specific situation, a transfer by a trustee in bankruptcy. It does not lay out a general scheme for ordinary business sales.

The bankruptcy trustee exception

Section 29(3) matters only where a trustee in bankruptcy is transferring the lease. In that case, if the Supreme Court approves the transfer, the landlord's consent requirement in the lease does not apply.

There is a protection for the landlord built in. The incoming party must give security of up to 3 months' rent.

• It applies to a trustee's transfer, not to a normal sale between a willing seller and buyer.
• It requires the Supreme Court's approval.
• It overrides a covenant requiring the landlord's leave or consent.
• It requires security of up to 3 months' rent from the incoming party.

If your business sale involves a bankrupt seller, the process is more complicated and you should get legal advice early.

Outside bankruptcy: the lease and case law decide

For an ordinary sale, the Act does not set a general rule on when a landlord may refuse consent. That means the answer comes from two places: the wording of your lease, and the case law that courts have developed when interpreting leases and consent clauses.

This is why it is risky to rely on general statements such as what a landlord can or cannot do. Whether consent can be withheld, on what grounds, and what the landlord can charge or require will depend on the particular lease and the facts. A lawyer can read the clause and tell you how it is likely to operate in your situation.

Common points of confusion

The Residential Tenancy Act does not apply to commercial premises. Residential tenancies are under a separate Act, so rules you may have heard about from renting a home should not be assumed to apply to a shop, office or restaurant space.

Read the lease closely to see what it says about transfers and what the landlord must be asked to approve, because the Act sets no general rule on consent and the lease terms and case law govern. How this applies depends on the lease and your situation, so it is worth confirming with a lawyer before you commit.

Franchised businesses add another layer. Where a franchisor has a right to approve a transfer, it must act in good faith and according to reasonable commercial standards when exercising that right. The franchise agreement itself usually sets out the approval rights and conditions, and the lease may have its own separate consent requirement.

What to do next

Treat the lease as a priority document from the start of the deal, not something to check at the end. A landlord who is approached late can hold up a closing.

• Get a complete copy of the lease, including every amendment, renewal and any guarantee.
• Find the assignment and subletting clause and note exactly what consent is needed and how it must be requested.
• Check for clauses that treat a change of control of the tenant company as an assignment.
• Look at the remaining term and renewal rights, since a buyer will care about how long the premises are secure.
• Make landlord consent a condition of the purchase agreement so the buyer is not committed without the premises.
• Ask a lawyer to review the lease and the purchase agreement together before you sign.

Frequently asked questions