What Rights Does an Abandoning Tenant Have?

Both commercial and residential tenants sometimes face the personal or economic need to leave leased premises before the expiration of the lease term. In times of economic recession, the problem is more serious ' both for landlords and for tenants ' than in boom times. What rights does a tenant have in this situation?

Becar v. Flues

The common law answer was clear: The tenant remained liable to the landlord for the duration of the lease term. In New York, the principle was established in Becar v. Flues, 64 NY 518, an 1876 case in which a decedent had lease a house for a year, and died one month into the lease. The decedent's executor sought to return the key, but the landlord refused the tender. The executor established that the landlord could have relet the premises for nearly as much as the decedent had agreed to pay, but the Court of Appeals nevertheless held that the landlord was entitled to recover full rent for the balance of the lease term. The court reasoned that the lease agreement had vested in the decedent full title to the lease term, and that once the tenant received the right to the term, the tenant was obligated to pay for that right.

Options

Of course, one option for the tenant was to assign or sublet the premises for the balance of the lease term. The common law recognized that the landlord had an unrestricted right to assign or sublet unless restricted by statute or lease restriction. Eten v. Lyster, 60 NY 252. But that option would be foreclosed if the lease prohibited assignment or sublease without the landlord's consent. New York courts have held that such a restriction allows a landlord to refuse consent arbitrarily, for any reason or for no reason. Dress Shirt Sales, Inc. v. Hotel Martinique Associates, 12 NY2d 339.

In the Courts

A number of other states have modified these rules. In many, for instance, upon a tenant's abandonment, the landlord is obligated to mitigate damages by attempting to relet the premises. See, e.g., Sommer v. Kridel, 378 A2d 767 (N.J.). These courts rejected the conceptual premise behind the common law rule: The landlord had relinquished all title for the balance of the lease term, and therefore could not relet the premises. Instead, these courts focused on the practical truth that the landlord will ordinarily be in a better position to locate a substitute tenant than would the original tenant, so that imposing the obligation to mitigate on landlord increased the likelihood that any loss would be avoided.

The Court of Appeals, however, has refused to abandon the common law rule. In Holy Properties Limited v. Kenneth Cole Productions, Inc., 87 NY2d 130, 134, the court rebuffed a tenant's effort to impose a mitigation obligation on the landlord, emphasizing that in property transactions, “the certainty of settled rules is often more important than whether the established rule is better than another or even whether it is the 'correct' rule.” At the same time, New York courts have continued to hold that when the lease includes a prohibition on assignment without the landlord's consent, the landlord may arbitrarily withhold consent to an assignee proposed by the tenant. See Caridi v. Markey, 148 AD2d 653. In light of these cases, a New York tenant who wants to leave before the end of the lease finds itself between a rock and a hard place.

In Rep A8LLC v. Aventura Technologies, Inc. (see p. 5, infra), the Second Department faced a tenant seeking to navigate through the New York case law. The tenant, whose lease included a prohibition on assignment without the landlord's consent, provided the landlord with names of prospective assignees. The landlord did not enter into leases with any of the assignees, but instead sought to hold the tenant liable for rent for the balance of the lease term. The tenant, recognizing that Holy Properties foreclosed an argument that landlord had failed to mitigate, relied instead on the implied covenant of good faith implied in every New York contract. See, e.g., 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 NY2d 144, 153 (“In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance.”). The tenant, argued, in effect, that the landlord's refusal to consider reasonable potential assignees, combined with the landlord's refusal to look for a substitute tenant of the landlord's own choosing, constituted bad faith and unfair dealing.

The problem with the tenant's argument, as the Appellate Division implicitly recognized, is that if the court accepted the argument, it would indirectly impose on the landlord's a duty to mitigate and/or a duty to be reasonable in withholding consent to assignments ' positions New York courts have consistently rejected. If courts have expressly held that a landlord is permitted to leave premises vacant and sue for rent due, and that a landlord is permitted to act arbitrarily in refusing consent, it is hard to see how a landlord can be acting in bad faith for taking the very actions courts have authorized them to take.

The Tenant

Where does this leave a tenant who wants to leave before the expiration of the lease term? Largely at the mercy of the landlord. Of course, a sensible landlord may prefer to relet the premises as a hedge against the original tenant's insolvency, but for the most part, a commercial tenant would be well advised to provide express protection in the original lease ' either imposing on landlord an obligation to act reasonably in evaluating proposed assignees, or imposing an express obligation to mitigate damages.

Real Property Law section 226-b leave the residential tenant somewhat better off. That section does not impose on the landlord a duty to mitigate damages, but it does restrict the landlord's right to refuse consent to an assignment. The statute does not give the tenant a right to assign, but it does provide that if a landlord unreasonably withholds consent, the tenant is entitled to be released from the lease. RPL Section 226-b(1). (Of course, if the landlord acts reasonably in withholding consent, the tenant is not released). In a building with four or more residential units, the statute gives the tenant an even broader right to sublet the premises: The tenant is entitled to sublet, subject to the landlord's written consent, but the landlord is not entitled to withhold consent unreasonably. RPL Section 226-b(2). The statute also precludes waiver of these provisions. RPL 226-b(6).

Conclusion

Section 226-b, then, provides an exit strategy for a residential tenant who no longer needs the premises: so long as the tenant makes affirmative efforts to find a substitute, through assignment or sublease, the landlord may not thwart those efforts by unreasonably withholding consent. So long as the tenant's proposed assignee or subtenant will perform the leasehold obligations, the tenant can use the substitute's payments to satisfy its own leasehold obligations.

The statute does not help the residential tenant who cannot find a substitute, and does not apply at all to commercial tenants. Those tenants are on their own ' short of legislative change or a change of mind by the Court of Appeals.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

Both commercial and residential tenants sometimes face the personal or economic need to leave leased premises before the expiration of the lease term. In times of economic recession, the problem is more serious ' both for landlords and for tenants ' than in boom times. What rights does a tenant have in this situation?

Becar v. Flues

The common law answer was clear: The tenant remained liable to the landlord for the duration of the lease term. In New York, the principle was established in Becar v. Flues , 64 NY 518, an 1876 case in which a decedent had lease a house for a year, and died one month into the lease. The decedent's executor sought to return the key, but the landlord refused the tender. The executor established that the landlord could have relet the premises for nearly as much as the decedent had agreed to pay, but the Court of Appeals nevertheless held that the landlord was entitled to recover full rent for the balance of the lease term. The court reasoned that the lease agreement had vested in the decedent full title to the lease term, and that once the tenant received the right to the term, the tenant was obligated to pay for that right.

Options

Of course, one option for the tenant was to assign or sublet the premises for the balance of the lease term. The common law recognized that the landlord had an unrestricted right to assign or sublet unless restricted by statute or lease restriction. Eten v. Lyster , 60 NY 252. But that option would be foreclosed if the lease prohibited assignment or sublease without the landlord's consent. New York courts have held that such a restriction allows a landlord to refuse consent arbitrarily, for any reason or for no reason. Dress Shirt Sales, Inc. v. Hotel Martinique Associates , 12 NY2d 339.

In the Courts

A number of other states have modified these rules. In many, for instance, upon a tenant's abandonment, the landlord is obligated to mitigate damages by attempting to relet the premises. S ee, e.g., Sommer v. Kridel , 378 A2d 767 (N.J.). These courts rejected the conceptual premise behind the common law rule: The landlord had relinquished all title for the balance of the lease term, and therefore could not relet the premises. Instead, these courts focused on the practical truth that the landlord will ordinarily be in a better position to locate a substitute tenant than would the original tenant, so that imposing the obligation to mitigate on landlord increased the likelihood that any loss would be avoided.

The Court of Appeals, however, has refused to abandon the common law rule. In Holy Properties Limited v. Kenneth Cole Productions, Inc., 87 NY2d 130, 134, the court rebuffed a tenant's effort to impose a mitigation obligation on the landlord, emphasizing that in property transactions, “the certainty of settled rules is often more important than whether the established rule is better than another or even whether it is the 'correct' rule.” At the same time, New York courts have continued to hold that when the lease includes a prohibition on assignment without the landlord's consent, the landlord may arbitrarily withhold consent to an assignee proposed by the tenant. See Caridi v. Markey , 148 AD2d 653. In light of these cases, a New York tenant who wants to leave before the end of the lease finds itself between a rock and a hard place.

In Rep A8LLC v. Aventura Technologies, Inc. (see p. 5, infra), the Second Department faced a tenant seeking to navigate through the New York case law. The tenant, whose lease included a prohibition on assignment without the landlord's consent, provided the landlord with names of prospective assignees. The landlord did not enter into leases with any of the assignees, but instead sought to hold the tenant liable for rent for the balance of the lease term. The tenant, recognizing that Holy Properties foreclosed an argument that landlord had failed to mitigate, relied instead on the implied covenant of good faith implied in every New York contract. See, e.g., 511 W. 232nd Owners Corp. v. Jennifer Realty Co. , 98 NY2d 144, 153 (“In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance.”). The tenant, argued, in effect, that the landlord's refusal to consider reasonable potential assignees, combined with the landlord's refusal to look for a substitute tenant of the landlord's own choosing, constituted bad faith and unfair dealing.

The problem with the tenant's argument, as the Appellate Division implicitly recognized, is that if the court accepted the argument, it would indirectly impose on the landlord's a duty to mitigate and/or a duty to be reasonable in withholding consent to assignments ' positions New York courts have consistently rejected. If courts have expressly held that a landlord is permitted to leave premises vacant and sue for rent due, and that a landlord is permitted to act arbitrarily in refusing consent, it is hard to see how a landlord can be acting in bad faith for taking the very actions courts have authorized them to take.

The Tenant

Where does this leave a tenant who wants to leave before the expiration of the lease term? Largely at the mercy of the landlord. Of course, a sensible landlord may prefer to relet the premises as a hedge against the original tenant's insolvency, but for the most part, a commercial tenant would be well advised to provide express protection in the original lease ' either imposing on landlord an obligation to act reasonably in evaluating proposed assignees, or imposing an express obligation to mitigate damages.

Real Property Law section 226-b leave the residential tenant somewhat better off. That section does not impose on the landlord a duty to mitigate damages, but it does restrict the landlord's right to refuse consent to an assignment. The statute does not give the tenant a right to assign, but it does provide that if a landlord unreasonably withholds consent, the tenant is entitled to be released from the lease. RPL Section 226-b(1). (Of course, if the landlord acts reasonably in withholding consent, the tenant is not released). In a building with four or more residential units, the statute gives the tenant an even broader right to sublet the premises: The tenant is entitled to sublet, subject to the landlord's written consent, but the landlord is not entitled to withhold consent unreasonably. RPL Section 226-b(2). The statute also precludes waiver of these provisions. RPL 226-b(6).

Conclusion

Section 226-b, then, provides an exit strategy for a residential tenant who no longer needs the premises: so long as the tenant makes affirmative efforts to find a substitute, through assignment or sublease, the landlord may not thwart those efforts by unreasonably withholding consent. So long as the tenant's proposed assignee or subtenant will perform the leasehold obligations, the tenant can use the substitute's payments to satisfy its own leasehold obligations.

The statute does not help the residential tenant who cannot find a substitute, and does not apply at all to commercial tenants. Those tenants are on their own ' short of legislative change or a change of mind by the Court of Appeals.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.