Assigning a commercial lease when you sell or buy a business in Prince Edward Island

In Prince Edward Island, the Landlord and Tenant Act, R.S.P.E.I. 1988, Cap. L-4, published by the province’s Legislative Counsel Office, speaks directly to assigning a lease. Section 12 reads a reasonableness limit into an anti-assignment covenant unless the lease expressly says otherwise, and gives the tenant a route to court if the landlord refuses. Other parts of the Act, on forfeiture, distress and insolvency, also bear on a business sale. The copy read for this page was current to August 1, 2023. This page covers Prince Edward Island only. For the general picture, see what happens to the commercial lease when you buy a business.

The deemed limit on withholding consent

Under section 12(1), in every lease containing a covenant, condition or agreement against assigning, subletting, or parting with possession or disposing of the land leased without licence or consent, the covenant is, unless the lease contains an express provision to the contrary, deemed subject to two provisos. The first is that the licence or consent shall not be unreasonably withheld. The second is that no fine or sum in the nature of a fine is payable for the licence or consent, although the landlord may still require payment of a reasonable sum for legal or other expense incurred in relation to it. The first step is therefore to read the lease for an express provision that says otherwise.

When the landlord refuses or does not answer

Section 12(2) covers a landlord who refuses or neglects to give a licence or consent. A judge of the Supreme Court, on the application of the tenant, assignee or subtenant and after notice to the landlord, may make an order determining whether the consent is unreasonably withheld and, if it is, permitting the assignment or sublease. The order is the equivalent of the landlord’s consent, and the assignment is not a breach of the covenant. Costs of the application are in the judge’s discretion under section 12(3). Whether the court would find a particular refusal unreasonable is a legal question for a lawyer, not something this page can predict.

Forfeiture and the assigning covenant

Section 15 protects a tenant against forfeiture for a breach of a covenant other than one for payment of rent, where the breach is capable of remedy or of compensation in money: the right of re-entry or forfeiture is not enforceable unless and until the landlord serves a notice specifying the breach and requiring it to be remedied or compensated, and the tenant fails, within a reasonable time, to remedy it or to compensate to the landlord’s satisfaction. Section 15(9)(a), however, provides that the section does not extend to a covenant or condition against assigning, underletting, parting with possession or disposing of the land leased. Section 15’s protections, including the notice requirement and the court’s power to grant relief, therefore do not extend to a breach of the covenant against assigning. Where an action to enforce a right of re-entry or forfeiture is for non-payment of rent, section 15(5) ends the cause of action if the tenant pays into court all rent in arrears and the costs before judgment.

Distress after the lease ends or goods are removed

Under section 26, on the determination of a lease the landlord may, within six months after it, and during the continuance of the landlord’s title or interest and the tenant’s possession, distrain for rent due and in arrears. Section 32 deals with goods fraudulently or clandestinely removed, while rent recoverable by distress is in arrears, to prevent distress: the landlord, or a person duly authorized, may within thirty days after the removal seize them wherever found. Under section 32(2), property sold or disposed of for valuable consideration before the seizure to a person without notice of the fraud cannot be taken. Ask a lawyer before moving equipment or inventory around closing, and ask the landlord to confirm in writing what rent is paid.

If the tenant becomes insolvent

Sections 73 and 74 apply when a tenant makes an assignment for the general benefit of creditors or a tenant company is wound up. Under section 73(4), despite any lease term, the assignee or liquidator may stay in occupation for thirty days for liquidation, and by notice given at least ten days before those thirty days end may retain possession for an additional thirty days, subject to the payment of rent. Section 74 lets the assignee or liquidator, while in occupation for liquidation and before giving notice of surrender or disclaimer, elect by written notice to retain the premises for the unexpired term; before electing, surrender possession or disclaim the lease by written notice; and assign the lease on payment of all overdue rent to a person who meets the conditions in section 74(2) and is approved by a judge. Subject to the rights of secured creditors, the federal Bankruptcy and Insolvency Act separately lists the lessor’s arrears for the three months before a bankruptcy among its priority claims, within that Act’s limits.

What to ask the seller for

• The signed lease and every amendment, with the assignment clause marked, and any express provision that changes section 12.
• The landlord’s written consent, or a request already made and the reply, so the record shows how consent was sought.
• The landlord’s written statement of rent paid, and any notice of breach under section 15.
• Equipment financing documents; the province’s Personal Property Security Act counts fixtures as goods, which matters for equipment attached to the premises.

BDC’s guide to commercial lease terms says it is always best to have your lawyer, preferably one specializing in commercial real estate, review your agreement before you sign. For where this sits in a sale, see selling a business in Prince Edward Island.