The Leasing Hotline

After various proceedings and a trial, on Feb. 5, 2003, the trial court held that the management agreement constituted a sublease in violation of the lease. Hasan appealed, arguing that no sublease existed because the Shannaks were employees of Mighty Mart and that Hasan retained full control over the premises. Hasan further argued that even if the management agreement was a sublease, Tillimon was aware of the agreement and had consented to it for 6 months prior to the February 2001 proceedings. The appellate court affirmed. Although it could find no authority distinguishing a “management agreement” from a “sublease,” it concluded that any transfer of less than the entire estate for the balance of the term of the lease is a sublease. In this case, the management agreement gave the Shannak brothers the exclusive use of the premises for at least 1 year and the brothers took responsibility of all of the debts of the business, including the rent obligations and other payments to the landlord under the lease. Furthermore, Tillimon did not waive his right to object to the management agreement because the record indicated that Tillimon was never made aware of the agreement and none of the rent checks received was ever signed by the Shannak brothers.

'SUBLESSOR' OR 'ASSIGNEE'

A possessor of property may be held to be a sublessor and not an assignee based on the conduct of the original tenant and the sublessor. Abernathy v. Abdulazize Adous and Griffith Petroleum, CA03-640, Court of Appeals of Arkansas, Divisions Three and Four, Feb. 25, 2004.

Abernathy and GPI entered into a 10-year lease for a gas station. Subsequently, GPI and Adous entered into a sublease agreement whereby Adous made monthly lease payments to GPI and GPI made payments to Abernathy. Abernathy was not aware of the sublease agreement. GPI then failed to pay rent to Abernathy, and Abernathy notified GPI that it intended to terminate the lease and seek repossession for nonpayment of rent. Adous continued to remain on the property and make monthly rent payments to the court during the litigation that ensued.

After a trial, the trial court held that Adous was not a sublessor, but was a “bona fide assignee” and was entitled to remain on the property under the original lease between Abernathy and GPI. The court of appeals reversed. It held that the conduct of GPI and Adous evidenced intent of a sublease and not an assignment. It considered that GPI and Adous characterized the relationship as that of a sublease, including GPI's right to re-enter and repossess the property. The court noted that it would not intervene in equity, even though Adous proved himself to be a responsible tenant. Abernathy had never waived his right to forfeiture under the sublease, and Adous was not entitled to equitable consideration under his status as a sublessor. Two justices dissented, stating that Adous' status as a sublessor or an assignee was irrelevant because under principles of equity, Adous, as a tenant able to perform under the lease, was entitled to avoid forfeiture of the sublease.

CORPORATE DEBT

A principal is not personally liable for a corporation's debts where the corporation properly existed, even if not by local District of Columbia authority, at the time the debt was formed. BDC Capital Properties LLC v. Quan Trinh, Civil Action No. 03-0935 (RMC), U.S. District Court for the District of Columbia, March 8, 2004.

Washington Work, Inc. leased space from BDC Capital in Washington, D.C. in August 1992. Quan Trinh was the only principal of Washington Work. In April 2000, Washington Work defaulted on the lease. After BDC filed a lawsuit seeking possession of the premises and rent from Washington Work, the parties entered into a settlement agreement. In September 2001, Washington Work's Certificate of Authority in Washington, D.C. was revoked. However, Trinh still continued to possess a certificate of incorporation from Maryland, which was also eventually forfeited, but not until after Trinh made his final representation on behalf of Washington Work. Washington Work failed to make any payments under the settlement agreement, and BDC sued Trinh personally for the rent.

Trinh filed a motion to dismiss, arguing that BDC failed to make a claim under which relief could be granted. BDC argued that under the District of Columbia code, Trinh was acting as a corporation without authority to do so, and therefore Trinh was liable for the debts of Washington Work. The district court disagreed and held that because Trinh made representations on behalf of Washington Work at the time when it was still a legal Maryland corporation, he could not be held personally liable for the debts of the corporation.

NOTICE TO TERMINATE

Where the relevant state statutes that require a 30-day notice to vacate a lease only specify residential leases, commercial leases are not subject to the same notice requirements. Maggiore v. Kovach D.B.A. All Tune & Lube, Nos. 2003-0002 and 2003-0020, Supreme Court of Ohio, March 3, 2004.

Maggiore leased property to Kovach. When Kovach failed to pay rent from October 2001 through January 2002, Maggiore sent Kovach a hand-delivered letter dated Jan. 23, 2002, notifying Kovach that he was terminating the tenancy and requesting that Kovach vacate the premises by Feb. 28, 2002. Kovach failed to vacate the premises, and Maggiore filed an eviction action seeking possession of the property. Kovach answered, claiming that the notice was invalid under Ohio law because Maggiore failed to serve him with the required 30-day notice to demand that a tenant vacate the premises. Kovach further argued that the 30-day notice was a prerequisite to a subsequent 3-day notice to vacate the premises.

The trial court disagreed, and the appellate court affirmed. Kovach then appealed to the Ohio Court of Appeals, which affirmed the holdings of the courts below. It held that the language of the relevant Ohio statutes specifically mentions only residential leases as subject to the 30-day notice to vacate requirement. Therefore, it found that commercial leases are excluded. It reached this conclusion based on the definitions of “landlord” and “tenant” in the sections surrounding the 30-day notice provisions, which are limited to landlords and tenants in residential leases. Although the 3-day notice requirement applies to both residential and commercial leases, in this case the letter delivered to the tenant fulfilled that requirement because it provided the tenant with 40 days to vacate the premises.

SUBLEASE

A “management agreement” for a business is a sublease where the parties agree that the sublessors will have exclusive use of the business premises and assume all obligations under the terms of the lease. Tillimon v. Hasan, Court of Appeals No. L-03-1066, Court of Appeals of Ohio, Sixth Appellate District, Lucas County, Feb. 13, 2004.

On Dec. 30, 1999, the landlord, Tillimon, entered into a 10-year lease with the tenant, Hasan. Under the terms of the lease, Hasan was to lease a building from Tillimon for the purpose of operating a convenience store. At the time that the lease was signed, Hasan operated his business under the name Mighty Mart USA. After the lease was executed, Hasan incorporated the business as Mighty Mart USA. Hasan owned half the shares of the corporation, and Qamari owned the other half. On Sept. 8, 2000, Hasan and Qamari entered into a “management agreement” with the Shannak brothers, who agreed to operate the Mighty Mart and assume responsibility for all of the debts of the business in exchange for keeping all of the business profits. On Feb. 26, 2001, Tillimon sought to evict the Shannak brothers from the premises, claiming that the February 2001 rent and other expenses had not been paid. Tillimon also claimed that Hasan was in violation of the lease because the premises could not be sublet without his permission, which had not been given.

After various proceedings and a trial, on Feb. 5, 2003, the trial court held that the management agreement constituted a sublease in violation of the lease. Hasan appealed, arguing that no sublease existed because the Shannaks were employees of Mighty Mart and that Hasan retained full control over the premises. Hasan further argued that even if the management agreement was a sublease, Tillimon was aware of the agreement and had consented to it for 6 months prior to the February 2001 proceedings. The appellate court affirmed. Although it could find no authority distinguishing a “management agreement” from a “sublease,” it concluded that any transfer of less than the entire estate for the balance of the term of the lease is a sublease. In this case, the management agreement gave the Shannak brothers the exclusive use of the premises for at least 1 year and the brothers took responsibility of all of the debts of the business, including the rent obligations and other payments to the landlord under the lease. Furthermore, Tillimon did not waive his right to object to the management agreement because the record indicated that Tillimon was never made aware of the agreement and none of the rent checks received was ever signed by the Shannak brothers.

'SUBLESSOR' OR 'ASSIGNEE'

A possessor of property may be held to be a sublessor and not an assignee based on the conduct of the original tenant and the sublessor. Abernathy v. Abdulazize Adous and Griffith Petroleum, CA03-640, Court of Appeals of Arkansas, Divisions Three and Four, Feb. 25, 2004.

Abernathy and GPI entered into a 10-year lease for a gas station. Subsequently, GPI and Adous entered into a sublease agreement whereby Adous made monthly lease payments to GPI and GPI made payments to Abernathy. Abernathy was not aware of the sublease agreement. GPI then failed to pay rent to Abernathy, and Abernathy notified GPI that it intended to terminate the lease and seek repossession for nonpayment of rent. Adous continued to remain on the property and make monthly rent payments to the court during the litigation that ensued.

After a trial, the trial court held that Adous was not a sublessor, but was a “bona fide assignee” and was entitled to remain on the property under the original lease between Abernathy and GPI. The court of appeals reversed. It held that the conduct of GPI and Adous evidenced intent of a sublease and not an assignment. It considered that GPI and Adous characterized the relationship as that of a sublease, including GPI's right to re-enter and repossess the property. The court noted that it would not intervene in equity, even though Adous proved himself to be a responsible tenant. Abernathy had never waived his right to forfeiture under the sublease, and Adous was not entitled to equitable consideration under his status as a sublessor. Two justices dissented, stating that Adous' status as a sublessor or an assignee was irrelevant because under principles of equity, Adous, as a tenant able to perform under the lease, was entitled to avoid forfeiture of the sublease.

CORPORATE DEBT

A principal is not personally liable for a corporation's debts where the corporation properly existed, even if not by local District of Columbia authority, at the time the debt was formed. BDC Capital Properties LLC v. Quan Trinh, Civil Action No. 03-0935 (RMC), U.S. District Court for the District of Columbia, March 8, 2004.

Washington Work, Inc. leased space from BDC Capital in Washington, D.C. in August 1992. Quan Trinh was the only principal of Washington Work. In April 2000, Washington Work defaulted on the lease. After BDC filed a lawsuit seeking possession of the premises and rent from Washington Work, the parties entered into a settlement agreement. In September 2001, Washington Work's Certificate of Authority in Washington, D.C. was revoked. However, Trinh still continued to possess a certificate of incorporation from Maryland, which was also eventually forfeited, but not until after Trinh made his final representation on behalf of Washington Work. Washington Work failed to make any payments under the settlement agreement, and BDC sued Trinh personally for the rent.

Trinh filed a motion to dismiss, arguing that BDC failed to make a claim under which relief could be granted. BDC argued that under the District of Columbia code, Trinh was acting as a corporation without authority to do so, and therefore Trinh was liable for the debts of Washington Work. The district court disagreed and held that because Trinh made representations on behalf of Washington Work at the time when it was still a legal Maryland corporation, he could not be held personally liable for the debts of the corporation.

NOTICE TO TERMINATE

Where the relevant state statutes that require a 30-day notice to vacate a lease only specify residential leases, commercial leases are not subject to the same notice requirements. Maggiore v. Kovach D.B.A. All Tune & Lube, Nos. 2003-0002 and 2003-0020, Supreme Court of Ohio, March 3, 2004.

Maggiore leased property to Kovach. When Kovach failed to pay rent from October 2001 through January 2002, Maggiore sent Kovach a hand-delivered letter dated Jan. 23, 2002, notifying Kovach that he was terminating the tenancy and requesting that Kovach vacate the premises by Feb. 28, 2002. Kovach failed to vacate the premises, and Maggiore filed an eviction action seeking possession of the property. Kovach answered, claiming that the notice was invalid under Ohio law because Maggiore failed to serve him with the required 30-day notice to demand that a tenant vacate the premises. Kovach further argued that the 30-day notice was a prerequisite to a subsequent 3-day notice to vacate the premises.

The trial court disagreed, and the appellate court affirmed. Kovach then appealed to the Ohio Court of Appeals, which affirmed the holdings of the courts below. It held that the language of the relevant Ohio statutes specifically mentions only residential leases as subject to the 30-day notice to vacate requirement. Therefore, it found that commercial leases are excluded. It reached this conclusion based on the definitions of “landlord” and “tenant” in the sections surrounding the 30-day notice provisions, which are limited to landlords and tenants in residential leases. Although the 3-day notice requirement applies to both residential and commercial leases, in this case the letter delivered to the tenant fulfilled that requirement because it provided the tenant with 40 days to vacate the premises.