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When Silence Is Not Golden
Lease provisions that restrict the tenant's right to assign the lease or sublease the premises demised thereby (sometimes hereinafter referred to as “anti-assignment clauses”) are of particular concern for both landlords and tenants. This article examines anti-assignment clauses from the landlord's viewpoint; specifically, anti-assignment clauses similar to the following (referred to herein as “reasonable consent clauses”): “tenant shall not, without the prior written consent of landlord, which consent shall not be unreasonably withheld, assign this lease or any interest hereunder, or sublet the leased premises or any part thereof.”
While reasonable consent clauses are common, leases do not always define, or provide examples of, circumstances where it will be “reasonable” for the landlord to withhold consent to a proposed assignment or sublease. As a result, the landlord may be more vulnerable to judicial challenge by the tenant if it withholds consent to a particular assignment or sublease. In the event of such judicial challenge, it is likely that the court's definition of “reasonable” will be significantly narrower than the landlord's. Where the landlord withholds consent for reason(s) not recognized as “reasonable” by the court, depending on the circumstances, the tenant may have the right to terminate the lease, to force the landlord's consent pursuant to a declaratory action, to realize other equitable relief and/or to recover damages. This article: 1) sets forth the general legal principles applicable to anti-assignment clauses; 2) describes the factors typically recognized by courts as reasonable grounds for the landlord's withholding of consent; 3) gives examples of cases where the landlord was found to have unreasonably withheld consent; and 4) taking into account the factors that are actually considered by landlords, provides some guidance on how to minimize the landlord's exposure to judicial challenge of its withholding of consent where a reasonable consent clause is included in a lease.
Legal Principles Governing Anti-Assignment Clauses ' Interplay of Laws of Property and Contracts
A lease generally represents both the conveyance of a real property interest and a bilateral contract. Thus, when interpreting a particular lease provision or issue, oftentimes applicable real property law and contract law must both be examined. Such interplay between the laws of real property and contract is illustrated in the context of a tenant's desire to assign its lease or to sublease its leased premises. According to the common law of real property, which disfavors any restraints on free alienation of real property interests, a tenant has the right to assign a lease freely, or sublease the leased premises, without the landlord's consent. 1 Milton R. Friedman & Patrick A. Randolph, Jr., Friedman on Leases, ” 7.1.2-7.2 (5th ed. 2008). However, as a lease constitutes not only a conveyance but also a contract, according to the principles of contract law, the tenant's common law property right to assign freely or sublease may be restricted expressly in the lease by the landlord via anti-assignment clauses. Notably, however, where anti-assignment clauses are included in a lease, they are generally strictly construed against the landlord.
Thus, reasonable consent clauses are common in commercial leases as they are thought to offer a meaningful compromise between the tenant's desire to freely assign or sublease in accordance with its common law property rights/expectations, on the one hand, and the landlord's desire to maintain some measure of control over the occupants of its property, on the other hand. However, as described in greater detail in the paragraphs that follow, such clauses can be problematic from the perspective of the landlord, as: 1) the landlord's definition of “reasonable” will not necessarily coincide with that of the court; and 2) like all anti-assignment clauses, such clauses will be strictly construed against the landlord.
Factors Considered by Courts ' The Reasonably Prudent Man Standard
Where a tenant challenges a landlord's withholding of consent under a reasonable consent clause in court, in most jurisdictions, the tenant has the burden to prove that the landlord unreasonably withheld consent. Whether or not the landlord acted reasonably will be determined by the application of the objective standard of the “reasonably prudent man” to the applicable facts; typically, the trier of fact decides whether a landlord has reasonably withheld consent to an assignment or sublease. If the tenant succeeds in such a challenge, depending on whether the applicable jurisdiction construes a reasonable consent clause as an affirmative covenant by the landlord (as opposed to a qualification of the tenant's covenant not to assign or sublease), the landlord could be liable to the tenant for damages. Most jurisdictions construe reasonable consent clauses as including an affirmative covenant by the landlord. In applying the standard of the reasonably prudent man, courts have attempted to identify objective criteria or factors (sometimes hereinafter referred to as the “objective factors”) considered by landlords when deciding whether or not to consent to a particular assignment or sublease. Notably, the recognized objective factors are limited solely to those that relate to the landlord's interest in preserving its property and in having the terms of the applicable lease observed and performed. Given the narrow scope of the objective factors, it is probable that a court will not recognize many of the factors actually considered by landlords when deciding whether to consent to a proposed assignment or sublease. With respect to commercial leases, the objective factors that are referenced most often in the cases are as follows: 1) the financial responsibility of the assignee or subtenant; 2) the legality of the proposed use; 3) the suitability of the proposed use; and 4) the nature of the occupancy (e.g., office, industrial, retail, etc.). Additionally, certain courts have found that the financial ability of the assignee or subtenant is the most important of the objective factors, e.g., Pakwood Indus., Inc. v. John Galt Assocs., 466 S.E.2d 226, 228 (Ga. Ct. App. 1995).
In the end, by analyzing the pertinent facts only in light of the objective factors, the court decides whether or not the landlord acted reasonably. When there is any doubt as to whether the landlord withheld consent based on one of the objective factors, the policy favoring construction against a restriction on alienation is likely to prevail.
Cases Where Consent Found Unreasonably Withheld
A sampling of a few cases where the courts have found the landlord to have unreasonably withheld consent illustrates the limited scope of the objective factors considered by the courts.
In a New York case, the tenant, the operator of a retail bedding and home furnishings business, sought the landlord's approval to sublet its premises to the operator of a packaging business. Astoria Bedding, Mr. Sleeper Bedding Ctr. Inc. v. Northside P'ship, 657 N.Y.S.2d 796 (App. Div. 1997). The landlord refused consent based on the fact that the subtenant's use of the premises as a packaging business was contrary to the purpose clause of the lease, which required that the premises be used only as a retail bedding and home furnishings business. The court, noting that anti-assignment clauses “are construed with utmost jealousy,” held that the landlord's reliance on the purpose clause of the lease was not reasonable where the anti-assignment clause neither expressly required that the transferee operate a retail bedding and home furnishings business nor incorporated the lease's purpose clause by reference.
In a New Jersey case, with a different set of facts, the court found that it was unreasonable for the landlord to withhold consent to a sublease due to the fact that the proposed subtenant was a tenant in another building owned by the landlord and that the landlord's consent to the sublease would result in the landlord's losing such proposed subtenant as a tenant in its other building. Krieger v. Helmsley-Spear, Inc., 302 A.2d 129 (N.J. 1973).
Other courts have found consent to have been unreasonably withheld where the landlord withheld consent because the proposed assignee or subtenant's use of the premises would compete with the business of the landlord or other tenants, e.g., Tenet HealthSys. Surgical, L.L.C. v. Jefferson Parish Hosp. Serv. Dist. No. 1, 426 F.3d 738, 744 (5th Cir. 2005); Edelman v. F.W. Woolworth Co., 252 Ill. App. 142 (1929).
Summary and Recommendations
In summary, the limited set of objective factors recognized by the courts as reasonable grounds for withholding consent do not include the myriad factors that are actually considered by landlords, which should be a cause for concern for landlords when including a reasonable consent clause in a lease. Where a landlord withholds consent based exclusively on factor(s) that the applicable court does not recognize as one of its short list of objective factors: 1) the landlord will likely be found to have unreasonably withheld consent; and 2) if the reasonable consent clause is construed as including an affirmative covenant of the landlord, the landlord will likely be liable to the tenant for damages. While some courts may recognize more objective factors than others, a preferable model would minimize the landlord's reliance on judicial interpretation of a reasonable consent clause.
Where a reasonable consent clause is included in a lease, a couple of clauses can be added to protect the landlord. First, it is important that a reasonable consent clause is accompanied by another clause that sets forth a non-exclusive list of reasonable grounds for the landlord's withholding of consent to a particular assignment or sublease (an “express factors clause”). This type of clause should include as many of the factors that the landlord could possibly consider in connection with a request for its consent to an assignment or sublease, paying particular attention to those factors that are not customarily recognized as objective factors by the courts. So long as the landlord withholds consent based on one the factors included in the express factors clause, the tenant will be less likely to challenge the landlord's withholding of consent in court. Despite the increased protection afforded by an express factors clause, to further protect the landlord in the event that it withholds consent based on a factor that is not listed in the express factors clause, the lease should also include a clause whereby the tenant waives any right it may have to assert a claim for damages based on the landlord having unreasonably withheld consent (a “damage waiver clause”). Samples of each of the clauses discussed in this paragraph are provided below; neither clause should be used without first consulting an attorney.
Sample Clauses
Example of Express Factors Clause
(This clause will vary for industrial, office or retail projects and such clause should be developed jointly by the landlord and its attorney.)
Not to the exclusion of any other factors landlord may consider in reasonably withholding its consent to any request by tenant that landlord consent to an assignment of tenant's interest in this lease or to a sublease of all or any portion of the leased premises, landlord will be deemed reasonable in withholding its consent to any such request based on any one or more of the following: (i) the poor business reputation of the proposed assignee or sublessee; (ii) the poor financial condition of the proposed assignee or sublessee; (iii) the fact that the use of the proposed assignee or sublessee is not in keeping with the nature of the building of which the premises is a part (the “Building”), may affect the marketability of the Building, or will violate any of the use restrictions in this lease; (iv) the fact that proposed assignee or sublessee is an existing tenant of the larger development of which the Building is a part (the “Project”), or is a prospective tenant with respect to space in the Project; (v) the fact that the use contemplated by the proposed assignee or sublessee would violate an exclusive granted by landlord to another tenant of the Project or otherwise; (vi) the fact that the proposed assignee or sublessee is a governmental subdivision or agency or any person or entity who enjoys diplomatic or sovereign immunity; (vii) the fact that the proposed assignee or sublessee is an entity or person (or is an affiliate of any such entity or person) with whom United States persons or entities are restricted from doing business under OFAC regulations or any anti-terrorism laws, such as the USA Patriot Act; (viii) the fact that the assignment or sublease will result in the Lease constituting a nonexempt, prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended; (ix) the fact that the tenant is then in default under this lease; or (x) the fact that the assignment or sublease is not permitted pursuant to the terms of the landlord's mortgage loan documents.
Example of Damage Waiver Clause
With respect to any provision of this lease that provides that the landlord's approval and/or consent will not be unreasonably withheld, the tenant, in no event, shall be entitled to make, nor shall the tenant make any claim, and the tenant hereby waives any claim, for money damages, nor shall the tenant claim any money damages by way of set-off, counterclaim or defense, based upon any claim or assertion by tenant that landlord has unreasonably withheld or unreasonably delayed any such consent or approval.
Kelly Riggle is an Associate in the Real Estate Finance and Investment Practice Group of the Atlanta office of Alston & Bird LLP. Allison Ryan is a Partner in the group.
'
Lease provisions that restrict the tenant's right to assign the lease or sublease the premises demised thereby (sometimes hereinafter referred to as “anti-assignment clauses”) are of particular concern for both landlords and tenants. This article examines anti-assignment clauses from the landlord's viewpoint; specifically, anti-assignment clauses similar to the following (referred to herein as “reasonable consent clauses”): “tenant shall not, without the prior written consent of landlord, which consent shall not be unreasonably withheld, assign this lease or any interest hereunder, or sublet the leased premises or any part thereof.”
While reasonable consent clauses are common, leases do not always define, or provide examples of, circumstances where it will be “reasonable” for the landlord to withhold consent to a proposed assignment or sublease. As a result, the landlord may be more vulnerable to judicial challenge by the tenant if it withholds consent to a particular assignment or sublease. In the event of such judicial challenge, it is likely that the court's definition of “reasonable” will be significantly narrower than the landlord's. Where the landlord withholds consent for reason(s) not recognized as “reasonable” by the court, depending on the circumstances, the tenant may have the right to terminate the lease, to force the landlord's consent pursuant to a declaratory action, to realize other equitable relief and/or to recover damages. This article: 1) sets forth the general legal principles applicable to anti-assignment clauses; 2) describes the factors typically recognized by courts as reasonable grounds for the landlord's withholding of consent; 3) gives examples of cases where the landlord was found to have unreasonably withheld consent; and 4) taking into account the factors that are actually considered by landlords, provides some guidance on how to minimize the landlord's exposure to judicial challenge of its withholding of consent where a reasonable consent clause is included in a lease.
Legal Principles Governing Anti-Assignment Clauses ' Interplay of Laws of Property and Contracts
A lease generally represents both the conveyance of a real property interest and a bilateral contract. Thus, when interpreting a particular lease provision or issue, oftentimes applicable real property law and contract law must both be examined. Such interplay between the laws of real property and contract is illustrated in the context of a tenant's desire to assign its lease or to sublease its leased premises. According to the common law of real property, which disfavors any restraints on free alienation of real property interests, a tenant has the right to assign a lease freely, or sublease the leased premises, without the landlord's consent. 1 Milton R. Friedman & Patrick A. Randolph, Jr., Friedman on Leases, ” 7.1.2-7.2 (5th ed. 2008). However, as a lease constitutes not only a conveyance but also a contract, according to the principles of contract law, the tenant's common law property right to assign freely or sublease may be restricted expressly in the lease by the landlord via anti-assignment clauses. Notably, however, where anti-assignment clauses are included in a lease, they are generally strictly construed against the landlord.
Thus, reasonable consent clauses are common in commercial leases as they are thought to offer a meaningful compromise between the tenant's desire to freely assign or sublease in accordance with its common law property rights/expectations, on the one hand, and the landlord's desire to maintain some measure of control over the occupants of its property, on the other hand. However, as described in greater detail in the paragraphs that follow, such clauses can be problematic from the perspective of the landlord, as: 1) the landlord's definition of “reasonable” will not necessarily coincide with that of the court; and 2) like all anti-assignment clauses, such clauses will be strictly construed against the landlord.
Factors Considered by Courts ' The Reasonably Prudent Man Standard
Where a tenant challenges a landlord's withholding of consent under a reasonable consent clause in court, in most jurisdictions, the tenant has the burden to prove that the landlord unreasonably withheld consent. Whether or not the landlord acted reasonably will be determined by the application of the objective standard of the “reasonably prudent man” to the applicable facts; typically, the trier of fact decides whether a landlord has reasonably withheld consent to an assignment or sublease. If the tenant succeeds in such a challenge, depending on whether the applicable jurisdiction construes a reasonable consent clause as an affirmative covenant by the landlord (as opposed to a qualification of the tenant's covenant not to assign or sublease), the landlord could be liable to the tenant for damages. Most jurisdictions construe reasonable consent clauses as including an affirmative covenant by the landlord. In applying the standard of the reasonably prudent man, courts have attempted to identify objective criteria or factors (sometimes hereinafter referred to as the “objective factors”) considered by landlords when deciding whether or not to consent to a particular assignment or sublease. Notably, the recognized objective factors are limited solely to those that relate to the landlord's interest in preserving its property and in having the terms of the applicable lease observed and performed. Given the narrow scope of the objective factors, it is probable that a court will not recognize many of the factors actually considered by landlords when deciding whether to consent to a proposed assignment or sublease. With respect to commercial leases, the objective factors that are referenced most often in the cases are as follows: 1) the financial responsibility of the assignee or subtenant; 2) the legality of the proposed use; 3) the suitability of the proposed use; and 4) the nature of the occupancy (e.g., office, industrial, retail, etc.). Additionally, certain courts have found that the financial ability of the assignee or subtenant is the most important of the objective factors, e.g.,
In the end, by analyzing the pertinent facts only in light of the objective factors, the court decides whether or not the landlord acted reasonably. When there is any doubt as to whether the landlord withheld consent based on one of the objective factors, the policy favoring construction against a restriction on alienation is likely to prevail.
Cases Where Consent Found Unreasonably Withheld
A sampling of a few cases where the courts have found the landlord to have unreasonably withheld consent illustrates the limited scope of the objective factors considered by the courts.
In a
In a New Jersey case, with a different set of facts, the court found that it was unreasonable for the landlord to withhold consent to a sublease due to the fact that the proposed subtenant was a tenant in another building owned by the landlord and that the landlord's consent to the sublease would result in the landlord's losing such proposed subtenant as a tenant in its other building.
Other courts have found consent to have been unreasonably withheld where the landlord withheld consent because the proposed assignee or subtenant's use of the premises would compete with the business of the landlord or other tenants, e.g.,
Summary and Recommendations
In summary, the limited set of objective factors recognized by the courts as reasonable grounds for withholding consent do not include the myriad factors that are actually considered by landlords, which should be a cause for concern for landlords when including a reasonable consent clause in a lease. Where a landlord withholds consent based exclusively on factor(s) that the applicable court does not recognize as one of its short list of objective factors: 1) the landlord will likely be found to have unreasonably withheld consent; and 2) if the reasonable consent clause is construed as including an affirmative covenant of the landlord, the landlord will likely be liable to the tenant for damages. While some courts may recognize more objective factors than others, a preferable model would minimize the landlord's reliance on judicial interpretation of a reasonable consent clause.
Where a reasonable consent clause is included in a lease, a couple of clauses can be added to protect the landlord. First, it is important that a reasonable consent clause is accompanied by another clause that sets forth a non-exclusive list of reasonable grounds for the landlord's withholding of consent to a particular assignment or sublease (an “express factors clause”). This type of clause should include as many of the factors that the landlord could possibly consider in connection with a request for its consent to an assignment or sublease, paying particular attention to those factors that are not customarily recognized as objective factors by the courts. So long as the landlord withholds consent based on one the factors included in the express factors clause, the tenant will be less likely to challenge the landlord's withholding of consent in court. Despite the increased protection afforded by an express factors clause, to further protect the landlord in the event that it withholds consent based on a factor that is not listed in the express factors clause, the lease should also include a clause whereby the tenant waives any right it may have to assert a claim for damages based on the landlord having unreasonably withheld consent (a “damage waiver clause”). Samples of each of the clauses discussed in this paragraph are provided below; neither clause should be used without first consulting an attorney.
Sample Clauses
Example of Express Factors Clause
(This clause will vary for industrial, office or retail projects and such clause should be developed jointly by the landlord and its attorney.)
Not to the exclusion of any other factors landlord may consider in reasonably withholding its consent to any request by tenant that landlord consent to an assignment of tenant's interest in this lease or to a sublease of all or any portion of the leased premises, landlord will be deemed reasonable in withholding its consent to any such request based on any one or more of the following: (i) the poor business reputation of the proposed assignee or sublessee; (ii) the poor financial condition of the proposed assignee or sublessee; (iii) the fact that the use of the proposed assignee or sublessee is not in keeping with the nature of the building of which the premises is a part (the “Building”), may affect the marketability of the Building, or will violate any of the use restrictions in this lease; (iv) the fact that proposed assignee or sublessee is an existing tenant of the larger development of which the Building is a part (the “Project”), or is a prospective tenant with respect to space in the Project; (v) the fact that the use contemplated by the proposed assignee or sublessee would violate an exclusive granted by landlord to another tenant of the Project or otherwise; (vi) the fact that the proposed assignee or sublessee is a governmental subdivision or agency or any person or entity who enjoys diplomatic or sovereign immunity; (vii) the fact that the proposed assignee or sublessee is an entity or person (or is an affiliate of any such entity or person) with whom United States persons or entities are restricted from doing business under OFAC regulations or any anti-terrorism laws, such as the USA Patriot Act; (viii) the fact that the assignment or sublease will result in the Lease constituting a nonexempt, prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended; (ix) the fact that the tenant is then in default under this lease; or (x) the fact that the assignment or sublease is not permitted pursuant to the terms of the landlord's mortgage loan documents.
Example of Damage Waiver Clause
With respect to any provision of this lease that provides that the landlord's approval and/or consent will not be unreasonably withheld, the tenant, in no event, shall be entitled to make, nor shall the tenant make any claim, and the tenant hereby waives any claim, for money damages, nor shall the tenant claim any money damages by way of set-off, counterclaim or defense, based upon any claim or assertion by tenant that landlord has unreasonably withheld or unreasonably delayed any such consent or approval.
Kelly Riggle is an Associate in the Real Estate Finance and Investment Practice Group of the Atlanta office of
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