Articles and commentary addressing the complexities of drafting assignment provisions in commercial leases abound. Notwithstanding the complexities of these provisions, however, save for unique events exempt from consent (e.g., transfers to affiliates) or certain detailed situations in which a landlord may withhold its consent (e.g., when the proposed assignee is currently negotiating vacant space with the landlord), assignment provisions in a lease often boil down to the following seemingly simple, but more often than not complex, standard: that the lease may only be assigned or the premises subleased with the landlord’s consent, not to be unreasonably withheld. The following examples of case law illustrate how courts have construed this provision under various circumstances.
Withholding Consent for Objective Business Reasons Is Likely Reasonable
Van Sloun v. Agans Bros., 778 N.W.2d 174, 182 (Iowa 2010): The landlord’s refusal to consent to a sublease to an Indian grocery store that prepared snacks was reasonable based on the following “genuine and objective” reasons: 1) the premises already had a Sudanese grocery store on the premises, and the landlord was concerned that another ethnic grocery store would impair such existing tenant’s business; 2) the proposed subtenant’s desire to sell prepared food would require substantial modifications to the space for kitchen equipment and venting; 3) food odors from the proposed use could travel through the common ventilation system and affect other retail and office users; and 4) food deliveries to the proposed grocery store might interfere with deliveries to the landlord’s retail business.
Warmack v. Merchants Nat’l. Bank of Fort Smith, 612 S.W.2d 733, 735 (Ark. 1981): The court held it was reasonable for the owner of a mall to refuse to consent to the proposed sublease of a bank tenant’s lease to a savings and loan (even when the subtenant guaranteed payment of rent) because: 1) the proposed savings and loan already had a facility in the mall, 2) the original lease required the tenant to build and operate a drive-in bank on the premises; and 3) while similar to a bank, a savings and loan would not attract the same customers to the mall. The court found persuasive the testimony of the landlord as well as an expert in marketing who explained that to be economically successful, a mall must have a “good mix of tenants,” and that if the savings and loan were allowed another branch with a drive-in option outside of the mall, the number of potential customers for the other stores in the mall would suffer. Id. at 735. The court also recognized that a “mall complex was no ordinary landlord-tenant arrangement” and that the mere guarantee of rent could not outweigh other potential harms that could affect the shopping center and each tenant’s contribution thereto. Id.
Withholding Consent Due to Philosophical Differences Is Likely Unreasonable
Am. Book Co. v. Yeshiva Univ. Dev. Found., Inc., 297 N.Y.S.2d 156 (N.Y. Sup. Ct. 1969): The landlord, Yeshiva University Development Foundation, Inc. (Yeshiva) withheld its consent to a proposed sublease of office space in a building it owned by the American Book Company to Planned Parenthood Federation of America. Yeshiva refused to consent to the sublease, stating the “‘activities of proposed subtenant to be inconsistent with the present use of the premises and with the educational activities of the University.’” Id. at 158. The Yeshiva court found that while “[d]ifferences of creed may be taken into account when the property is owned by a religious institution and is used ‘for religious purposes,’” when the landlord is a religious or religiously affiliated educational institution, if it “operates a commercial enterprise or owns commercial property, it is to be held to the established standards of commercial responsibility.” Id. at 163.
Withholding Consent to Protect Against Losing Other Tenants May Be Unreasonable
Brigham Young Univ. v. Seman, 672 P.2d 15 (Mont. 1983): Brigham Young University (BYU) owned office space in a building in Montana. The original tenant relocated to a different building in town and proposed assigning its lease to the Montana Board of Parole and Probation (MBPP). As BYU’s building manager considered the proposal, several existing tenants in the building expressed their opposition to MBPP as a co-tenant. Responding to these reservations, the building manager sent a questionnaire to existing tenants to gauge opposition to the proposed tenancy to which he received several negative responses. The manager also sought advice of counsel in response to one tenant’s threat to sue BYU if MBPP was allowed to lease the office space. Ultimately, BYU refused to consent, fearing that other tenants would not renew their leases if MBPP became a tenant. The trial court found that BYU’s withholding of consent was unreasonable because: 1) MBPP had leased office space in other buildings in the city and no complaints of misconduct had been made by other tenants based on the behaviors of visitors to such offices; 2) there were several criminal defense attorneys leasing office space in BYU’s building at that time; and 3) the questionnaire sent to the existing tenants was “biased in that it was not designed to evoke a favorable response.” Id. at 17. The court upheld the trial court’s finding of fact that BYU’s withholding of consent was unreasonable and not “governed by principles of fair dealing and commercial reasonableness.” Id. at 18. In making its determination, the appellate court also noted that BYU had previously attempted to lease the premises to MBPP directly. Id.
Withholding Consent to a Proposed Assignment or Sublease to a Competitor May Be Reasonable or Unreasonable
Tenet HealthSys. Surgical, L.L.C. v. Jefferson Par. Hosp. Serv. Dist. No. 1, 426 F.3d 738 (5th Cir. 2005): Landlord, the operator of an adjacent hospital, leased space in a shopping center to an outpatient surgical center. When the surgical center sought to assign its lease to an occupational medical clinic, the landlord withheld consent because the proposed assignee intended to use the premises in a way that competed with the landlord. Id. at 740. Applying Louisiana law, the court held that “refusal of consent to the assignment of the lease on the basis of increased competition was unreasonable;” the landlord’s denial of consent was “wholly personal to [the Landlord] and does not relate in any way to an objective evaluation of [assignee] as a tenant.” Id. at 744.
Pay ‘N Pak Stores Inc. v. Super. Ct. of Santa Clara Cty., 258 Cal. Rptr. 816 (Cal. Ct. App. 1989): Pay ‘N Pak Stores, Inc. (PNPS), which was both the landlord and the operator of a home improvement store in a shopping mall, refused to consent to two different proposed subleases by a mall tenant who was going out of business. In each instance, PNPS refused to consent to a proposed subtenant because it sold competing products: fireplace inserts, ceiling fans, light fixtures, and other related items. Id. at 818. The original lease restricted use of the premises for the “sale of children’s apparel, furniture and accessories and for and [sic] office” and no other purpose without the landlord’s consent. Id. at 817. The appellate court reversed summary judgement against PNPS. The court stated that “by virtue of the right to reasonably withhold consent, combined with the right to restrict the property to existing uses, [PNPS] could deny consent to competitors which would hurt its business and put it in a worse position than it originally enjoyed[.].” Id. at 820. The court also stated that “[i]t is reasonable to argue that protection from competition which diminishes the landlord’s business is not general economic protection but is specific protection in his ownership of the particular property.” Id. at 819. However, the final determination of whether the landlord acted reasonably under the circumstances was an issue for the trier of fact. Id. at 820. But see, Edelman v. F.W. Woolworth Co., 252 Ill. App. 142, 145 (Ill. App. Ct. 1929) (“The provision against subletting is to be construed most strongly against the landlord, and if, in the instant case, plaintiffs had desired to prevent the subletting of the premises to a business competitor they should have so stated in the lease. Not having done so, we think their objection to the subtenant, namely, that he would be a business competitor of the plaintiff is arbitrary and unwarranted.”).
Withholding Consent Based on Expectations of Percentage Based Rent May Be Reasonable or Unreasonable
Haack v. Great Atl. & Pac. Tea Co., 603 S.W.2d 645 (Mo. Ct. App. 1980): Haack leased a building to A&P and the lease required percentage rent in excess of the base rent if A&P exceeded $1,440,000 in annual sales revenue. During the 12 years A&P operated the store, A&P’s annual sales never met this threshold and no percentage rent was ever paid. Id. at 648. A&P eventually closed and sought to sublease the premises to a retail furniture business. Haack refused consent to the sublease stating there was “no reasonable likelihood that this proposed tenant would approach [$1,440,000]” in annual sales. Id. at 649. The trial and appellate courts found that Haack’s refusal was reasonable because the refusal was not arbitrary but instead a “reasonable exercise of business judgement.” Id. at 652. See also, Worcester-Tatnuck Square CVS, Inc. v. Kaplan, 601 N.E.2d 485 (Mass. App. Ct. 1992) (while a landlord has no right to withhold consent solely to improve its economic position, it was not unreasonable to withhold consent to a sublease when there was an expectation of percentage rent, and the proposed subtenant made no showing it could generate percentage rent). But see, B.M.B. Corp. v. McMahan’s Valley Stores, 869 F.2d 865, 868–69 (5th Cir. 1989) (because commercial reasonableness in granting or withholding consent is determined by reference to the original lease provisions, and not by what the landlord later finds economically advantageous, the landlord did not act reasonably in conditioning its consent to assignment on the assignee’s guarantee of a certain level of percentage rent when the lease contained no covenant to maximize percentage rent).
Withholding Consent Because Sub-Lessee Is a Current Tenant of Landlord Elsewhere May Be Reasonable or Unreasonable
Krieger v. Helmsley-Spear, Inc., 302 A.2d 129 (N.J. 1973): The court held the landlord’s refusal to consent to a proposed sublease of office space was unreasonable where the landlord’s sole objection was that the proposed subtenant occupied space in another building owned by the landlord and the proposed sublease would cause the landlord to “lose him as a tenant in its other building.” Id. The court found this justification unreasonable as a matter of law, holding that the clause conditioning consent “is for the protection of the landlord in its ownership and operation of the particular property — not for its general economic protection.” Id. But see, Fourchon Docks, Inc. v. Milchem Inc., 849 F.2d 1561, 1564–65 (5th Cir. 1988) (applying Louisiana law, the court found that a landlord may reasonably withhold consent to a short term sublease with a subtenant who already leases adjacent property from the landlord when: 1) execution of the new sublease would cause the subtenant to terminate its preexisting direct lease on the adjacent property thereunder causing economic loss to the landlord; 2) the subtenant refused to detail its proposed activities at the property; and 3) the short-term nature of the sublease could potentially devalue the property).
The above cases demonstrate that while landlords generally may not withhold their consent to assignments or subleases for personal predilections or to generally improve their economic positions, the terms and bargained-for benefits set forth in the original lease, together with objective business and economic factors directly related to the subject property, are important factors for consideration in determining reasonableness.
Marisa L. Byram, a member of this newsletter’s Board of Editors, is a member of Lewis Rice LLC, practicing in the Real Estate and Corporate Departments. Wheeler Frost is an associate at Lewis Rice LLC, practicing in the Real Estate and Corporate Departments. They thank Griffin Lowry, summer intern, for his assistance with this article.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.