Anonymised, illustrative composite. A platform’s add-on acquisition stalled two weeks from close over a single line in a commercial lease: assignment required the landlord’s consent, and the landlord was not going to give it for nothing.
At a glance
A private equity-backed platform in industrial distribution was acquiring a family-owned competitor as a bolt-on. The target ran out of one leased facility with roughly eleven years left on a twenty-year lease, and the deal was structured as an asset purchase so the operating business, including the lease, would land inside the platform’s existing holding structure.
The purchase agreement had already been negotiated. Financing was committed. The one open item left on the closing checklist was a single signature: the landlord’s written consent to assign the lease from the seller to the platform’s acquisition entity.
The lease said consent to assignment could not be “unreasonably withheld,” but it did not say the landlord had to accept the new tenant’s corporate covenant alone. That standard was not purely a drafting choice. Under s. 23(1) of Ontario’s Commercial Tenancies Act, a covenant against assigning without licence or consent is, “unless the lease contains an express provision to the contrary,” deemed to be subject to a proviso “that such licence or consent is not to be unreasonably withheld” — so the words in this lease restated a proviso Ontario would have implied anyway. Section 23(2) goes further: where a landlord refuses or neglects to consent, a judge of the Superior Court of Justice may on the tenant’s, assignee’s or sub-tenant’s application determine whether consent is unreasonably withheld and, if it is, permit the assignment — an order that is “the equivalent of the licence or consent of the landlord.” When the landlord’s counsel reviewed the platform entity’s financials — a newly formed acquisition subsidiary with no operating history of its own — it came back with a condition: consent, conditional on a personal guarantee from one of the platform’s operating partners.
Landlords weigh an incoming tenant on its ability to pay rent and meet its obligations under the lease, and a thinly capitalized new entity is exactly the profile that invites the ask. As the firm’s own guidance puts it, “particularly common where the buyer is a newer or thinly capitalized company, a landlord may ask for a guarantee from the buyer’s principals personally.” A holding-company acquisition vehicle with no trading history is that company by definition, whatever balance sheet stands behind it.
The second problem was separate and, in the sponsor’s view, worse: the founder’s own existing personal guarantee, given when the original lease was signed, did not evaporate just because the lease was being assigned. A guarantee is a separate contract between the guarantor and the landlord, distinct from the lease itself — and “unless the guarantee itself, or a separate release document, says the guarantor is discharged upon assignment, the guarantee typically continues to bind the guarantor.” The founder, who was retiring from the business entirely and had no operational role after closing, would otherwise have remained personally on the hook for a lease he no longer controlled.
The remaining base rent obligation over the lease’s current eleven-year term ran to several million dollars in aggregate, which is the number the landlord’s credit review was actually pricing when it asked for a personal covenant — not the purchase price, and not the platform’s consolidated balance sheet, which the acquisition subsidiary did not share for lease-covenant purposes.
No fund principal was willing to guarantee a portfolio company’s lease personally — that risk sits with the operating entity, not with the individuals who sit on its board. The operating partner slated to run the combined business, by contrast, was already taking an equity position in the platform and had a direct stake in the facility staying open.
Two separate documents needed two separate fixes, because the underlying legal relationships are separate. First, the assignment itself: the landlord’s consent, on the condition it named. Second, the guarantee: because the founder’s existing personal covenant survives an assignment unless it is expressly released, getting the founder off the hook required making release a closing condition in its own right, backed by a replacement guarantee the landlord would actually accept.
The s. 23(2) application was considered and set aside deliberately. The statute polices unreasonable refusals; it does not entitle a tenant to a landlord’s consent on the tenant’s preferred terms, and a landlord asking a newly formed acquisition vehicle with no trading history to stand behind an eleven-year rent obligation is raising the covenant-strength concern the reasonableness test exists to accommodate. Litigating it would also have cost more time than the closing timetable had. The right read of s. 23 on this deal was as leverage in the background — the landlord could not simply refuse and name any price — not as the remedy the parties were going to use.
The negotiated result: the operating partner gave a personal guarantee capped at eighteen months of base rent and expiring on the third anniversary of closing, conditional on the operating company meeting a stated net-worth threshold at that date — at which point the guarantee would terminate automatically rather than requiring a fresh landlord release. In exchange, the landlord signed the consent and, in the same document, released the founder in writing. Neither side got a boilerplate release; both got a document that said, on its face, who was and was not still on the hook.
A related term of art on the same clause worth naming here: what looked from a distance like a “change of control” problem was, on this deal, a straightforward assignment, because the acquisition was structured as an asset purchase. Had it instead been structured as a share purchase of the seller’s existing corporation, the same lease might not have required landlord consent at all — unless the lease separately defined a change in the tenant’s controlling shareholders as an assignment for these purposes, which many commercial leases now do expressly for exactly this reason.
The lease in question required consent for “any assignment,” full stop, with no carve-out for an assignment to an affiliate or to a purchaser meeting a stated net-worth test. A lease negotiated with a pre-agreed financial-strength threshold for a permitted assignee — common in more sophisticated commercial leases — would have let this transaction proceed on notice rather than on a fresh personal covenant, because the acquisition entity’s ultimate parent could have qualified against the threshold on its own financials. That kind of clause is drafted at lease signing, not at sale time, which is exactly why it belongs on any target-company lease review well before a deal is contemplated, not after an LOI is signed.
Two glossary entries carry the underlying mechanics in more detail: landlord consent to assignment and personal guarantee. Where the same premises risk shows up as a purchase-price problem rather than a consent problem, see the lease with eleven months left on it.
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