Commercial Real Estate Investors Risk Painful Losses In Post-Covid World

Commercial real estate investors and lenders are slowly confronting an ugly question – if people never again shop in malls or work in offices the way they did before the pandemic, how safe are the fortunes they piled into bricks and mortar?

Rising interest rates, stubborn inflation and squally economic conditions are familiar foes to seasoned commercial property buyers, who typically ride out storms waiting for rental demand to rally and the cost of borrowing to fall.

Cyclical downturns rarely prompt fire sales, so long as lenders are confident the investor can repay their loan and the value of the asset remains above the debt lent against it.

This time though, analysts, academics and investors interviewed by Reuters warn things could be different.

With remote working now routine for many office-based firms and consumers habitually shopping online, cities like London, Los Angeles and New York are bloated with buildings local populations no longer want or need.

That means values of city-centre skyscrapers and sprawling malls may take much longer to rebound. And if tenants can’t be found, landlords and lenders risk losses more painful than in previous cycles.

“Employers are beginning to appreciate that building giant facilities to warehouse their people is no longer necessary,” Richard Murphy, political economist and professor of accounting practice at the UK’s Sheffield University, told Reuters.

“Commercial landlords should be worried. Investors in them would be wise to quit now,” he added.

WALL OF DEBT

Global banks hold about half of the $6 trillion outstanding commercial real estate debt, Moody’s Investors Service said in June, with the largest share maturing in 2023-2026.

U.S. banks revealed spiralling losses from property in their first half figures and warned of more to come.

Global lenders to U.S. industrial and office real estate investment trusts (REITs), who supplied credit risk assessments to data provider Credit Benchmark in July, said firms in the sector were now 17.9% more likely to default on debt than they estimated six months ago. Borrowers in the UK real estate holding & development category were 4% more likely to default.

Jeffrey Sherman, deputy chief investment officer at $92 billion U.S. investment house DoubleLine, said some U.S. banks were wary of tying up precious liquidity in commercial property refinancings due in the next two years.

“Deposit flight can happen any day,” he said, pointing to the migration of customer deposits from banks to higher-yielding ‘risk-free’ money market funds and Treasury bonds.

“As long as the Fed keeps rates high, it’s a ticking time bomb,” he said.

Some global policymakers, however, remain confident that the post-pandemic shift in the notion of what it means ‘to go to work’ will not herald a 2008-9 style credit crisis.

Demand for loans from euro zone companies tumbled to the lowest on record last quarter, while annual U.S. Federal Reserve ‘stress tests’ found banks on average would suffer a lower projected loan loss rate in 2023 than 2022 under an ‘extreme’ scenario of a 40% drop in commercial real estate values.

Average UK commercial property values have already fallen by around 20% from their peak without triggering major loan impairments, with one senior regulatory source noting that UK banks have far smaller property exposure as a proportion of overall lending than 15 years ago.

But Charles-Henry Monchau, Chief Investment Officer at Bank Syz likened the impact of aggressive rate tightening to dynamite fishing.

“Usually the small fishes come to the surface first, then the big ones – the whales – come last,” he said.

“Was Credit Suisse the whale? Was SVB the whale? We’ll only know afterwards. But the whale could be commercial real estate in the U.S.”.

CUTTING SPACE

Global property services firm Jones Lang LaSalle (JLL.N) – which in May pointed to a 18% annual drop in first quarter global leasing volumes – published data this month showing prime office rental growth in New York, Beijing, San Francisco, Tokyo and Washington D.C. turned negative over the same period.

In Shanghai, China’s leading financial hub, office vacancy rates rose 1.2 percentage points year-on-year in Q2 to 16%, rival Savills (SVS.L) said, suggesting a recovery would depend on nationwide stimulus policies succeeding.

Businesses are also under pressure to slash their carbon footprint, with HSBC (HSBA.L) among those cutting the amount of space they rent and terminating leases at offices no longer considered ‘green’ enough.

More than 1 billion square meters of office space globally will need to be retrofitted by 2050, with a tripling of current rates to at least 3%-3.5% of stock annually to meet net-zero targets, JLL said.

Australia’s largest pension fund, the A$300 billion AustralianSuper, is among those on the sidelines, saying in May it would suspend new investment in unlisted office and retail assets due to poor returns.

Meanwhile, short-sellers continue to circle listed property landlords the world over, betting that their stock prices will sink.

The volume of real estate stocks lent by institutional investors to support shorting activity has grown by 30% in EMEA and 93% in North America over the 15 months to July, according to data provider Hazeltree.

According to Capital Economics, global property returns of around 4% a year are forecast this decade, compared with a pre-pandemic average of 8%, with only a slight improvement expected in the 2030s.

“Investors must be willing to accept a lower property risk premium,” Capital Economics said. “Property will look overvalued by the standards of the past.”

Source Reuters. Click here to read a full story

‘Worst Is Over’: Downtown Office Vacancy Rates Showing Signs Of Improvement

Suburban office markets are continuing to show lower vacancy rates than downtown areas, Colliers says

Office Developments Pivoting To Lab Space As Demand Dwindles

As demand for office space declines, developers are repurposing planned construction projects and to cater to the life sciences sector.

As demand for office space dwindles, some developers are deviating on planned projects and instead opting to cater construction to the life sciences sector.

The emerging trend is detailed in Avison Young’s Greater Toronto Office Market Report for Q2 2023, which relays that vacancy and availability rates have continued to inch upwards, with both rising 30 basis points (bps) on a quarterly basis.

The jump brought the overall office vacancy rate in the GTA to 12%, and the overall availability rate to 18.1% — 219 buildings in the GTA had more than 50,000 sq. ft of office space available in Q2.

Avison Young

The office vacancy rate in downtown Toronto also stood at 12% in Q2, a 40-bps increase from Q1, while the availability rate fell 30 bps to 17.5%. Although this marked the first quarterly decline since the onset of the pandemic, availability was still up 340 bps annually. Similarly, available sublet space dipped 50,000 sq. ft. on a quarterly basis, to 4.5M sq. ft., but was still up 1.8M sq. ft. year over year.

Across the GTA, 8.9M sq. ft of sublet space was available in Q2, a 42% annual increase. In suburban markets, sublet space as a proportion of total available space hit 19%. In downtown Toronto, it was 31%.

Despite this, seven new office buildings, totalling 480,000 sq. ft, were completed in the region in Q2, and another 6.2M sq. ft of space is under construction, equal to 3% of existing inventory.

Avison Young

With demand expected to continue on its downward trajectory, Avison Young reports that some developers have begun to repurpose new office construction projects for the life sciences sector.

It is decidedly difficult to convert existing offices into lab space, as most buildings lack the ceiling height, separate loading areas, and infrastructure required to do so. The challenges present a unique opportunity for developers to make the switch before, or even during, the construction process.

An example of this trend can be seen at 77 Wade Avenue in Toronto’s Junction neighbourhood. The 155,000-sq.-ft space was originally slated for office use until AIMCo partnered with Canadian Life Science Property Group, Avison Young said.

Another instance is the four-storey, 187,000-sq.-ft addition KingSett Capital is adding to 700 University Avenue in the Discovery District, which will now be used solely for life sciences and research space, rather than its initial mixed-use designation.

Also previously eyed for office use, The CORE at 2395 Speakman Drive in Mississauga will be the first purpose-built life science campus in the GTA, offering 400,000 sq. ft of lab and research and development space.

Avison Young expects both office vacancy and availability to continue rising across the GTA in the short term as companies continue to adjust to their new realities.

With existing options for lab space slim, particularly so in Downtown Toronto, repurposing office developments may prove to be a viable solution to promoting the region’s life science’s sector.

Source Storeys. Click here to read a full story

Resilient Canadian Retail Market Beats Recession Odds

Despite recession predictions, retail continues its strong post-pandemic growth into 2023, says a new report by commercial real estate firm Colliers.

The consumer appears resilient, with higher savings rates than pre-pandemic, and a huge demand for travel, hospitality, and entertainment. Favourable demographics, particularly strong population growth compared to other developed countries, continues to act as a tailwind for retail sales. Overall sales rose in every province but one, despite shortages in areas such as automotive, said the 2023 Retail Outlook.

“Retail rents reached all-time highs as renewed leasing demand and a lack of new developments funnelled demand to existing centres. Vacancy rates dropped nationwide, as the nadir of retail leasing in 2021 has turned around. Despite high-profile closures of US retailers such as Bed Bath and Beyond and Nordstrom, the vacant space has been rapidly absorbed in most markets,” said Colliers.

“Retail investment continues to be dominated by private investors, as larger institutions and REITs continue to be net sellers. Larger players have also focused on the redevelopment aspect of retail, turning suburban assets into mixed-use developments or land assembly plays.

“Throughout the pandemic, grocery, pharmacy, discount stores, and quick-service restaurants – performed very well. These sectors have continued to attract both customers and investors into 2023, even as restrictions have disappeared . . . The retail industry of Canada has seen a focus on sustainability, partly manifested in the growth of second-hand and vintage apparel, providing an unexpected growth area going forward.”

Madeleine Nicholls, Senior Managing Director Brokerage | Vancouver, for Colliers, said the key message from the report is that Canada overall compared to other countries is outperforming many nations in both economic growth and retail sales.

Even with the various interest rate hikes, Canadians have remained resilient when it comes to retail spending, added Nicholls.

The departures of American-based retailers recently have garnered much media attention and headline news but the Canadian retail market has also seen, at the same time, expansion of existing brands and new brands entering the market.

“That’s an indicator of the low vacancy rate that we’re seeing across the country in all segments. When great locations become available, they’re very desirable,” said Nicholls.

She said a few things have fuelled retail spending in Canada including strong employment, population growth and the wealth effect that even during this environment of higher prices from homes to vehicles, people have higher savings than they did pre-pandemic.

Nicholls added that certain retail categories showing year-over-year sales growth is promising, including shoes, clothes, and food and beverage which have been solid and healthy.

“All the provinces are performing really well but what really jumps out is the spending in Alberta and Newfoundland which is extremely high. That’s perhaps driven by the fact that there has been movement to those provinces,” said Nicholls. “And in Alberta’s case, different than the oil boom, people are moving to Alberta now because of the demographic shift of young people moving there in search of affordability for the same reason that people have moved to Newfoundland as well.”

The Colliers report said retail spending dipped in the first quarter of 2023, as the unprecedented interest rate hikes of the prior year took effect. While experts forecast a mild pullback in consumer spending, it is expected to be similar to prior declines, returning to trend within two years. Rate increases of +4.25 per cent in 2022 were intended to address runaway inflation in Canada, a problem shared with much of the rest of the world.

“While inflation nominally helps retail sales numbers, it hurts it overall when we look at spending in real dollars. Clearly there has been some pullback since 2022, where spending peaked in Q2 just as interest rate increases were taking effect. Higher costs of housing, gas, cars and food have squeezed spending elsewhere,” said the report.

“Interest rate hikes have a number of benefits for retail long-term, as the goal of reducing inflation and increased housing costs will hopefully return more spending power to the household. Additionally, higher rates incentivize saving over borrowing, which can create a “wealth effect” where households spend more as they see their assets grow.”

Colliers said the extreme drop during COVID lockdowns led to years of “pent up” demand for everything from international flights to cars to live sports to music events, and the economy is only just now adjusting to these new levels of demand for “experiential” retail.

“Overall retail spending is maintaining a consistent trend, reflecting Canada’s strong population growth and robust labour market. Favourable “fundamentals” are the driver for consistent growth in the retail sector until at least 2025,” added the report.

“Prior to the pandemic, the Canadian consumer was strained, with household savings rates reaching zero or even negative levels. Despite lower inflation, rising costs in several areas combined with weak wage growth was clearly straining households.

“However, one unintended side effect of lockdowns was a drastic improvement for some in household finances. Between mortgage deferrals, income supports, business loans and the reduced costs of working from home, households suddenly experienced savings rates in excess of 20 per cent. There was nothing to spend on (no travel, shortages of many products due to shipping issues caused by lockdown) and households socked away unprecedented savings. This led to a boomerang with the “pent up demand” spending upon reopening, and the subsequent inflation that is only just now subsiding.”

While the closure of a few large occupiers such as Nordstrom garners wide coverage, there has also been a surge of new retail occupiers across Canada, explained Colliers.

“Quick-service restaurants have been thriving for years, with a highly scalable business model that was ideally suited for small urban spaces. Large expansions are planned for a number of occupiers like US stalwarts Taco Bell and Burger King, homegrown brands such as Harvey’s and Mary Brown’s Chicken, and new chains like Egg Club (Ontario) and Columbus Café (Quebec),” said the company.

“In Q1 2023, Goodwill announced a large expansion, planning to open 40 new stores in more affordable markets. Across Canada and the world, second-hand shopping has surged in popularity, to economize in an inflationary environment, support local stores, and for the “thrill of the find” as opposed to the standardized and searchable environment of ecommerce.

Source Real Estate News Exchange. Click here to read a full story

Commercial Building Codes Lack Strong Wildfire-management Provisions, Indoor Air Quality Controls, Says Expert

Amid a fire season that has seen a record number of blazes, wildfires and poor air quality are top-of-mind concerns for commercial property developers, industry insiders say.

The fires have burned an unprecedented amount of land from coast to coast in Canada, entering communities not typically in harm’s way, such as the outskirts of Halifax, and triggering air quality warnings as far away as Europe.

“It’s been a major point of discussion for some time now and landlords have taken measures such as putting in a number of air exchanges and upgrading to more advanced air filtration systems,” says Samantha Sannella, managing director, consulting services, Canada at Cushman & Wakefield. “It’s something occupiers ask for.”

Ms. Sannella says the growing fire threats are forcing innovation in design and development that could include the use of fire-resistant building materials and Internet of Things technology to oversee sensors and fire suppression systems.

Business disruption

Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction (ICLR), a disaster-prevention research centre established by Canada’s insurance industry, says with the wildfire trend moving in the wrong direction as urban boundaries expand, it’s more than likely wildfires will reach urban areas.

“The more fire we see, the more it’s going to get into communities and the more businesses are going to be affected. We’re going to see businesses directly hit by wildfires and operations interrupted,” he says.

Against this backdrop, “there is a huge regulatory gap that needs to be addressed,” Mr. McGillivray says, adding that there are no specific provisions in residential or commercial building codes relating to wildfires.

“There isn’t even any guidance on how small businesses can reduce the risk of wildfires,” he says, though the building code does require that engineers attest that a building designed by an engineer or architect conforms to design standards, and that all potential hazards, such as tornadoes, floods or fires, have been considered.

In Ontario, municipal bylaws and the site-control process that examines design and technical aspects of a proposed development can address wildfire threats at the planning stage of construction, says Victoria Podbielski, press secretary for Ontario Municipal Affairs and Housing Minister Steve Clark.

Municipalities in the province are required to conduct a community risk assessment every five years to identify threats to fire safety, including from wildfires, she says.

“If any new provisions are brought into the National Building Code to address wildfire management, including additional requirements for indoor air quality controls, Ontario would consider the same for analysis and potential inclusion in its building and fire codes,” she says.

FireSmart Canada, a national program that aims to help neighbourhoods increase wildfire resistance, offers resilience guidance for the oil and gas industry that could be adapted to other commercial sectors, Mr. McGillivray says.

Wildland-urban interface

ICLR executive director Paul Kovacs says oil sands operators prepared well for the wildfires that ravaged the Northern Alberta community of Fort McMurray in 2016, relying on firebreaks and other protective measures. The flames came very close to their installations but ultimately caused no major damage or injuries.

Mr. Kovacs says industries operating in the so-called wildland-urban interface have a business case for investing in wildfire mitigation.

B.C.-based fire ecologist and consultant Robert Gray says most of the land in the interface in the province is owned by the Crown, limiting private developments in fire-prone areas.

The wildfire in the Wood Buffalo region that includes Fort McMurray remains the most damaging in Canadian history, with property and casualty insurance claims of more than $3.6-billion to date. Public Safety Canada estimates that more than 2,400 homes and businesses burned down in the region in 2016, with another 530 structures damaged.

The event skews data published by Catastrophe Indices and Quantification (CatIQ), which show that Canada’s insurance companies reported 82,692 wildfire damage claims totalling $4.1-billion for the 10 years through 2022.

This included 50,000 residential damage claims worth $2.4-billion; 7,000 small business claims of $500-million; and 474 claims from large companies for $1.1-billion. Residential and small business damage account for $2.9-billion or almost three-quarters of the total.

The 2022 total insured catastrophic loss of $3.1-billion lands the year in the top three loss years for the country.

According to a June, 2023, report by DBRS Morningstar, Canadian property and casualty insurance companies bear the weight of an above-average wildfire season.

Fire occurrence ‘off the charts’

Marcos Alvarez, global head of insurance at DBRS Morningstar, says while financial results are likely to come under pressure this year, “we expect those insured losses will remain manageable for most companies.”

He added in an e-mail that insurance companies “usually pause underwriting new policies in areas affected by wildfire.” An existing policy for a property in those areas “would need to be revised to make these protections a requirement, (probably at its annual renewal process),” he said.

Michael Norton, director general of the Canadian Forest Service’s Northern Forestry Centre, said in a wildfire update posted on YouTube in early July that the total area burned in 2023 exceeds any year on record in Canada, with the 150,000 people displaced the highest in the four decades of record-keeping.

“The occurrence from coast to coast is unprecedented,” Mr. Norton said, calling the total of hectares burned versus the 10-year average of 805,196 hectares “literally off the charts.”

The Canadian Interagency Forest Fire Centre reported on July 19 that more than 11 million hectares have been consumed to date, with most of the wildfires burning in B.C. According to Natural Resources Canada data, 2023 is already the worst fire season in Canada’s history, topping the previous record of 7.6 million hectares burned in 1989 and with several weeks of fire season still to go.

Cheryl Evans, director of flood and wildfire resilience at the Intact Centre on Climate Adaptation at the University of Waterloo, says small businesses and homeowners can do simple and inexpensive things to mitigate against fire risk such as clearing debris from properties and changing furnace filters.

At the same time, she says, they can “nudge local, provincial and federal government to start moving things further along to provide wider protection.”

Source The Globe and Mail. Click here to read a full story

Canadian Developers Slow To Adopt Construction Technology

As Canada’s construction sector faces a shortage of skilled workers and tradespeople, some insiders predict that digital technology will fill the gap – but a new report shows that worksites have been slow to adapt.

A survey of 275 companies by KPMG Canada found that while Canadian property developers are keen on new digital construction technology, known as con-tech, many are not making it an investment priority.

“Nearly nine in 10 construction companies say that … digital technology can help make their labour force more effective,” says the June, 2023, report

. “Yet Canada’s construction industry, which spans residential and commercial real estate, industrial, institutional, civil and infrastructure, has been slow to adopt new digital technologies.”

The exceptions can be dramatic. For example, one Canadian project that stands out for its use of con-tech is Canada Post’s new $470-million Albert Jackson Processing Centre in east Toronto.

The designers and developers created a digital “twin” replica to solve construction issues and update plans – a process called building information modeling (BIM).

“BIM was critical to the project’s success,” says Peter Armstrong, vice-president of the project leaders’ Southern Ontario team for Colliers Canada.

Another noteworthy deployment of con-tech took place in November, 2021, when Spot the Robo-dog made an appearance at Cadillac Fairview’s 47-storey, 1.2-million-square-foot project at 160 Front. St. W in Toronto.

Spot was put to work at the site by PCL Construction Company and Pomerleau Construction. The companies equipped the techno-pooch with 360-degree cameras, a laser scanner, and air quality and GPS sensors to feed data into a smart construction tech platform.

The robot’s digital sniffing helps designers and project managers in off-site offices to work seamlessly with workers on site. It can also perform tasks in spaces where it’s too dangerous for workers to go.

“Everybody loves that robot dog,” says Jordan Thomson, a senior manager with KPMG’s global infrastructure advisory group. “It doesn’t mean humans are going to be replaced. Spending $100,000 on a robot dog can free up an engineer to do other value-added work.” (Spot sells for a reported US$74,500.)

Notably, while Spot may be the way of the future, the 160 Front St. W. project used human ironworkers to put a giant steel dome on the roof in early April, 2023.

Much of the technology on the massive site, which spans the equivalent of six Canadian Football League fields, focuses on reducing the building’s environmental footprint, for example, by covering 60 per cent of its roof with solar panels.

Tom Rothfischer, audit partner and national industry leader of building, construction and real estate at KPMG Canada, says the survey reflects the discrepancy between tentative use of con-tech in Canada and immense interest in trying it.

“We’re seeing a definite recalibration taking place in the construction sector,” says Mr. Rothfischer. “While many companies are still just at the beginning of their digital build, leaders see the power of technology to reshape the way they work and they plan to invest heavily.”

KPMG found that while 73 per cent of firms it surveyed think the Canadian construction industry lags behind other countries in adopting con-tech, 80 per cent or more are excited about its possibilities and believe that technology will make them more competitive. Yet only 46 per cent say they plan to spend more than 11 per cent of their corporate operating budgets on technology and digital transformation in the near future.

“Canada is lagging behind,” says Mr. Armstrong. “A lot of new technology in Canada is being used to draw and design projects, often in 3D, but then extending this tech, for example by using computer-aided fabrication of materials, is not happening widely here.”

Canadians in the construction sector are relatively slow to invest in con-tech for several reasons, says Benjamin Shinewald, president and chief executive officer of BOMA Canada, umbrella group for building owners and managers.

“The biggest challenge to adoption is adaptation. Technology is changing so fast that the industry has to play a constant game of catch-up,” he says.

Another challenge is making sure the con-tech investment brings the right kind of change, Mr. Shinewald adds.

“Buildings may seem to be incredibly static, but in fact they are extraordinarily complex, technology-driven ecosystems. Software, hardware and innovation have an enormous impact on occupant wellness, carbon emissions, profitability and more,” he says.

An additional challenge is cost, says Mary Van Buren, president of the Canadian Construction Association. “There is a cost to investing in digitization that isn’t necessarily shared among all parties in the procurement process. Margins are slim in construction, especially for small- and medium-sized contractors, making it increasingly difficult for them to adopt these types of innovations,” she says.

Mr. Armstrong says Canadians may be slow to bring in more con-tech because skilled tradespeople in Canada are still relatively affordable, compared with other countries.

“This may change in Canada as our workforce ages and the technology is necessary to get the work done,” he says.

“The efficient allocation of trades is one of the industry’s most-pressing challenges and opportunities,” KPMG’s Mr. Thomson says. Already, 86 per cent of companies in Canada are finding that shortages of skilled tradespeople affect their ability to bid on projects and meet deadlines, he says.

There’s hardly any limit to what con-tech might be able to achieve, Mr. Rothfischer says.

“3D printing technologies have been adapted to lay concrete and build complex steel shapes. Robots can lay bricks and tie steel reinforcement bars,” he explains. “Drone-based surveying can help contractors quickly and accurately lay out work, measure quantities and monitor progress.”

Technology can also make jobs safer for workers, Mr. Armstrong adds. “For example, there are already tech-laden exoskeletons available that fit onto workers’ shoulders, to do overhead work rather than keeping their own arms above their heads for hours,” he says.

“The trick is to integrate these things into construction so that people and technology work together.”

Source The Globe and Mail. Click here to read a full story

Canada’s Industrial Market Is Slowing, But Remains Strong

As the market softens, tenants may have an opportunity to negotiate lower rents

All-Industrial Redevelopment Of Buttonville Airport Proposed

Buttonville Municipal Airport in Markham, Ont., will close at the end of November and a recent proposal from owner Cadillac Fairview plans to replace it with a 2.78-million-square-foot industrial development.

A 2011 submission for a 10-million-square-foot mixed-use development including office, retail, hotel, entertainment, public use and residential space that would have accommodated up to 7,000 residents and created thousands of jobs was shelved in 2020. This new proposal is the first indication of what Cadillac Fairview plans for the 169-acre site north of Toronto at the junction of Highway 404 and 16th Avenue.

Cadillac Fairview declined RENX’s interview request regarding its plans for the property, which is zoned as an employment area.

Cadillac Fairview, which paid almost $193 million to Armadale Properties Ltd. to acquire the 50 per cent interest in the property it didn’t already own two years ago, is proposing a multi-phased industrial development.

Ontario Court of Appeal Provides Guidance On Transfer Of Commercial Leases

In a decision from Ontario’s highest court, it was held that a landlord cannot arbitrarily refuse to allow a commercial tenant to assign its lease.

In coming to its ruling, the court looked at the applicable facts and information provided to the landlord at the time of refusal to determine whether a landlord’s refusal to consent to lease assignment is unreasonable and what constitutes “consent” in lease assignment.

The court also examined what a tenant’s waiver of reasonable performance looks like.

The case and lower court ruling

In Rabin v. 2490918 Ontario Inc. (Rabin), a 70-year-old dentist ran his practice in the same building in Toronto for over 40 years. The landlord acquired the building in 2017 with the view of redeveloping the property.

The lease between the landlord and tenant, set to expire at the end of 2025, contained a clause which provided that the tenant could not assign the lease without consent from the landlord, whose consent should not be unreasonably withheld.

The lease also provided that the landlord was required to grant or refuse consent within 15 days of the request to assign.

In late 2020, the tenant advised the landlord that he wanted to sell his practice and assign the lease to two young dentists who would run a similar dental practice.

In early 2021, the tenant gave the requisite formal notice of the assignment to the landlord, along with additional financial information about the assignees.

The landlord did not provide a response within the 15-day deadline.

Twenty-two days after the initial formal notice, the landlord responded, stating that consent would be provided, subject to a demolition clause upon 24 months’ notice being incorporated into the lease.

The tenant refused this proposal and brought a court application seeking an order to affect the transfer.

The application judge noted that, in the past, the law greatly favoured tenants, limiting landlords’ power over lease transfers. But the legal landscape has significantly shifted recently, giving landlords more control.

Now, landlords’ decisions on lease transfers can be informed by various factors, including the lease’s context, building conditions, market realities and prospective tenant’s financial status.

However, it was also noted that landlords cannot indiscriminately deny transfers or manipulate for selfish gains. If tenants feel their transfer request is being unfairly rejected, they must prove this.

In Rabin, the court found the landlord’s demand for extensive financial data from the new tenant unreasonable. Still, it also ruled the tenant hadn’t acted in good faith by not supplying any information.

Ultimately, the court didn’t approve the tenant’s application due to its lack of cooperation. But the tenant was granted an opportunity to fulfill the landlord’s information request.

If denied a transfer, the tenant could revisit the court to reapply.

The Ontario Court of Appeal decision

The tenant appealed the decision and the Ontario Court of Appeal reversed the lower court ruling and held that the landlord provided no reasonable excuse for their failure to provide consent and respond within the 15-day lease-prescribed deadline.

In coming to its ruling, the court looked at the following principles which are used to help determine whether a landlord acted reasonably in withholding consent:

1. The burden is on the tenant to satisfy the court that the refusal to consent was unreasonable.
2. A probability that the proposed assignee will default in its obligations under the lease may, depending upon the circumstances, be a reasonable ground for withholding consent.
3. The financial position of the assignee may be a relevant consideration.
4. Reasonableness is a fact-based question, to be determined based on the case-specific circumstances, including commercial realities of the marketplace and economic impacts of the lease assignment.

In this case, the court noted at the time of the renewal request, the landlord did not require additional information from the tenant, and its response 22 days later did not mention anything other than the insertion of a demolition clause.

Further, the reasons provided for withholding consent were not adequate, especially given that the landlord was notified early that the tenant would be requesting consent for lease assignment.

It was also held that the application judge made several legal errors, such as applying the doctrine of waiver even though it had not been raised by the parties, and then erred in the application of the doctrine.

Rather, it was noted that the judge should have determined whether the landlord neglected or refused to provide consent, and if so, whether it was unreasonably withheld.

In analyzing this principle, the court looked to section 23 of the Commercial Tenancies Act (the “Act”), which provides that consent to assign a lease shall not be unreasonably withheld by a landlord.

If a landlord refuses or neglects to provide consent to a lease assignment, the Court may make an order to determine whether or not the consent is unreasonably withheld.

As such, it was held that neither the consent provision in the lease, nor the tenant’s efforts to appease the landlord and the landlord’s failure to respond, constituted a waiver of section 23 of the Act.

Waiver is only found where the waiving party has full knowledge of their rights and an “unequivocal and conscious intention to abandon them.” Waiver must therefore be explicitly expressed in the lease to constitute an exception under section 23 of the Act.

Also, the Act does not define what constitutes a refusal or neglect to consent, nor an unreasonable withholding of consent. Therefore, ordinary meaning of the terms is presumed. Notably, the court emphasized that a conditional consent (in this case consent hinging on a demolition clause) is not a consent to assign a lease.

In the end, the court ruled that the landlord unreasonably withheld consent for the tenant to assign the lease.

This decision affirms that, while landlords often have wide latitude in enforcing the provisions of a lease, when it comes to consent to the assignment of a lease the landlord must act reasonably and cannot arbitrarily withhold its consent.

Source Real Estate News Exchange. Click here to read a full story

Carbon Tax Hikes Could Mean Tough Decisions For Some Office Owners

The federally regulated carbon tax is slated to reach $170 per tonne in 2030