Landlords' Withholding of Consent Under a Lease

Reasonably Prudent Person Standard

In determining whether a landlord's withholding of consent is unreasonable, absent a defining statute, the majority of courts apply the traditional standard of the “reasonably prudent person” or “reasonably prudent business person” in the commercial context, holding that decisions based on considerations of personal taste and convenience are improper. When a lease provides that the landlord's consent may not be unreasonably withheld, the landlord is expected to take an objective business view, and disregard any personal dislikes, preferences or conveniences. In general, withholding consent is unreasonable if it is without fair, solid and substantial cause or reason, or if it does not consider fairness, or if no evidence of good faith can be found. Warmack v. Merchs. Nat'l Bank, 612 S.W.2d 733, 735 (Ark. 1981).

The consent requirement should not be used to take a business advantage. For example, in many states, a landlord's refusal to consent to an assignment of the lease has been found to be unreasonable if it is due to the fact that the landlord is dissatisfied with the monthly rent reserved under the existing lease, or seeks to improve his economic position under the original lease. See, e.g., Tucson Med. Ctr. v. Zoslow, 712 P.2d 459, 462 (Ariz. Ct. App. 1985). See also Dornfeld v. Hom, No. SPH 9101-58760 HD, 1991 WL 86256, at *3 (Conn. Super. Ct. Apr. 2, 1991), 1010 Potomac Assocs. v. Grocery Mfrs. of Am., Inc., 485 A.2d 199, 210 (D.C. Ct. App. 1984), Ringwood Assocs., Ltd. v. Jack's of Route 23, Inc., 379 A.2d 508, 511-12 (N.J. Super. Ct. Law Div. 1977), aff'd, 398 A.2d 1315 (N.J. Super. Ct. App. Div. 1979). However, withholding of consent has been deemed reasonable when the proposed assignment would injure the landlord's interest in the property by devaluing it and thereby reducing the benefits bargained for under the original lease. Economy Rentals, Inc. v. Garcia, 819 P.2d 1306, 1314 (N.M. 1991).

Similar decisions result when a lease provision provides that the landlord must not unreasonably withhold consent with regard to property alterations or modifications. As in the context of assignment or subleasing, arbitrary considerations of personal taste, sensibility, or convenience are not proper reasons to withhold consent. A landlord's refusal to grant consent for alterations or modifications will not be considered reasonable unless such refusal is “objectively sensible and of some significance and not based on mere caprice or whim or personal prejudice” or stated differently, the landlord must produce “valid business reasons for [his or her] decision.” Marriott Corp. v. Fisher, No. 118899, 1994 WL 1031295, at *1 (Va. Cir. Ct. Aug. 9, 1994); Safeway Inc. v. CESC Plaza Ltd. P'ship, 261 F. Supp. 2d 439, 463 (E.D. Va. 2003). For instance, in the commercial context, it may be reasonable for a landlord to withhold approval to property alterations if based on preserving the landlord's property, including protecting the structural integrity of a building located thereon. Tuchinsky v. Beacon Prop. Mgmt. Corp., 698 N.E.2d 1291,1293 (Mass. App. Ct. 1998).

Factor Tests

Another method of evaluating the reasonableness of consent to an assignment or subleasing employed by many state courts involves the consideration and balancing of various factors. For instance, subsequent to a landlord's withholding consent, courts have considered the following factors to determine if the withholding was reasonable: 1) the financial responsibility of the proposed assignee or subtenant; 2) whether the new tenant's use will require alteration of the premises; 3) the legality of the proposed use; 4) the nature of the occupancy; and 5) the “identity” or “business character” of the subtenant, i.e., suitability for the particular building. See, e.g., Amjems, Inc. v. F.R. Orr Constr. Co., 617 F. Supp. 273, 278-79 (S.D. Fla. 1985), Julian v. Christopher, 575 A.2d 735, 739 (Md. 1990), Rowley v. City of Mobile, 676 So. 2d 316, 319 (Ala. Civ. App. 1995).

In addition, courts commonly consider the financial responsibility of the proposed assignee or subtenant and the legality of the proposed use. In some states, factors include the inability to fulfill the terms of the lease, the intended unlawful or undesirable use of the premises, the original tenant's unwillingness to remain obligated, and considerations that relate to a landlord's interest in preserving the property or in having the terms of the prime lease performed. See, e.g., Maxima Corp. v. Cystic Fibrosis Found., 568 A.2d 1170, 1176 (Md. Ct. Spec. App. 1990). See also Worcester-Tatnuck Square CVS, Inc. v. Kaplan, 601 N.E.2d 485, 488-89 (Mass. App. Ct. 1992), Van Sloun v. Agans Bros., 778 N.W.2d 174, 180 (Iowa 2010), Schweiso v. Williams, 198 Cal. Rptr. 238, 240 (Cal. Ct. App. 1984). Interestingly, one court has deemed the proposed subtenant's business competition with the landlord to be an impermissible basis for withholding consent, See Edelman v. F. W. Woolworth Co., 252 Ill. App. 142, 145 (Ill. App. Ct. 1929), while another has held competitive services of a proposed subtenant to be a reasonable cause for denying consent. Medinvest Co. v. Methodist Hosp., 359 N.W.2d 714 (Minn. Ct. App. 1984).

Lease Is Silent

About half of the states that have examined the issue have held that even if a lease conditions the tenant's right to sublease upon landlord approval without inclusion of a reasonableness standard, a landlord may not unreasonably and capriciously withhold his consent. The reasonableness requirement is based on the implied covenant of good faith and fair dealing in every contract. Thus, where consent has been denied, courts have examined whether there was a good faith reasonable objection to the assignment or sublease at issue.

Conversely, many states do not read a reasonableness requirement into a provision requiring the landlord's consent, taking the contract on its face, provided the language is clear and the intentions of the parties apparent. Those courts reason that if the parties had desired language limiting the landlord, they would have included it. First Fed. Sav. Bank v. Key Mkts., Inc., 559 N.E.2d 600, 603 (Ind. 1990). Broadly construing the landlord's rights, one court has held that “under Pennsylvania law, a landlord may withhold consent arbitrarily and capriciously, for any reason or for no reason, if the lease does not expressly require that such refusal be reasonable.” See 421 Willow Corp. v. Callowhill Ctr. Assocs., Nos. 1848, 1851, 2003 WL 21361362, at *5 (Pa. C.P. May 23, 2003). An Oregon court has declared that “[w]here a subletting or assignment of the leased premises without the consent of [the landlord] is prohibited, [the landlord] may arbitrarily withhold [its consent] without giving any reasons, and in granting [its consent] may impose such conditions as [it] sees fit.” Pac. First Bank v. New Morgan Park Corp., 876 P.2d 761, 764 (Or. 1994), (quoting Abrahamson v. Brett, 143 Or. 14 (1933)). These cases clearly illustrate the risk assumed by the tenant who fails to negotiate a reasonableness standard for landlord consent.

Likewise, when a lease prohibits the making of alterations or modifications to the property without the permission of the landlord, and there is no provision requiring that consent may not be unreasonably withheld, some courts have read in a reasonableness requirement into the provision. See, e.g., Prestwick Landowners' Ass'n v. Underhill, 429 N.E.2d 1191, 1195 (Ohio Ct. App. 1980), while others have held that consent may be withheld even though based on arbitrary and unreasonable motives. See, e.g., Katz v. Williams, 211 A.2d 723, 726-27 (Md. 1965); Nguyen v. Manley, 363 S.E.2d 613, 614 (Ga. Ct. App. 1987). Reasoning similar to the sublease context has been applied, either that there is an implied covenant of good faith that should be read into every contract, or that the contract should be taken on its face when it is not ambiguous.

'Sole Discretion' Clause

Even among the courts favoring a reasonableness standard for the withholding of consent, almost all the cases agree that the reasonableness standard is only applicable where the lease does not affirmatively state otherwise. Leases that include a provision that a landlord may withhold her consent at her “sole discretion” receive fairly uniform interpretation by the courts. Most courts view the provision as a freely negotiated clause in the lease giving the landlord an absolute right to withhold consent, and therefore withhold consent for any reason whatsoever. Thus, a contract provision allowing a landlord to withhold consent to a tenant's proposed assignment or sublease, or to an alteration or modification of the property, at the landlord's sole discretion, would not be subject to a commercial reasonableness standard. See, e.g., Shoney's LLC v. MAC E., LLC, 27 So. 3d 1216, 1223 (Ala. 2009). Very few courts have injected a reasonableness requirement into such a provision.

Conclusion

Many commercial and residential leases employ a reasonableness standard to evaluate landlord decisions and actions, often providing that a landlord may not unreasonably withhold consent to an assignment or sublease, or to an alteration or modification of the property. However, what is “reasonable” is subject to interpretation, and may be based upon the reasonably prudent business person standard and/or the balancing of various factors. Although there is a general consensus, at times the state courts have arrived at divergent conclusions, particularly when the lease is silent as to reasonableness.

Therefore, it is important when drafting a lease to be clear about the parties' intent as to how much discretion the landlord has to withhold consent. It is not enough merely to eliminate language requiring reasonableness because in some states, even absent a clause requiring the withholding of landlord consent to be reasonable, courts will nevertheless impose a reasonableness standard on the landlord. Thus, it is imperative for the parties to familiarize themselves with the laws of their state, and draft lease language accordingly.

Melissa A. Semidey is an attorney with Phillips Lytle LLP, resident in the Buffalo, NY, office. She can be reached at 716-847-7039 or [email protected]. Donna Hoelscher Suchan is a former associate with the firm.

Real estate practitioners are accustomed to seeing lease terms and conditions that are subject to a reasonableness standard. In fact, one of the most common revisions to real estate contracts and leases during negotiations is the repeated insertion of the word “reasonable” in front of the parties' rights and remedies. Yet we rarely examine the substantive effect of that word.

This article summarizes the results of a 50-state survey of case law addressing this issue. (Only 38 states and the District of Columbia have opined on this issue.) More specifically, these cases examine the authority for withholding of consent when a lease is silent as to the landlord's right to do so, as well as the criteria used to determine what constitutes a landlord's unreasonable withholding of consent. The courts' holdings on these issues vary significantly from state to state. While there are numerous contexts in which the reasonableness standard applies, this article focuses on cases regarding assignment and subleasing, and alterations to the leased premises, as these are the issues courts around the country have most commonly reviewed.

It should be noted, of course, that there are statutory bases for what constitutes a per se unreasonable withholding of consent when selling or renting real property. For example, the Fair Housing Act of 1968 prohibits any refusal to sell or rent housing to an individual on the basis of race, religion, color, sex, or national origin. If a landlord withholds consent for any of these reasons, it is presumptively unreasonable and illegal. State legislation has also codified other forms of unlawful discrimination. As another example, California's Fair Employment and Housing Act makes it unlawful to discriminate based on race, color, religion, sex, sexual orientation, marital status, national origin, ancestry, familial status, source of income, or disability, when renting, purchasing or leasing a property. Cal. Gov't Code ' 12955(k) (West 2013).

Reasonably Prudent Person Standard

In determining whether a landlord's withholding of consent is unreasonable, absent a defining statute, the majority of courts apply the traditional standard of the “reasonably prudent person” or “reasonably prudent business person” in the commercial context, holding that decisions based on considerations of personal taste and convenience are improper. When a lease provides that the landlord's consent may not be unreasonably withheld, the landlord is expected to take an objective business view, and disregard any personal dislikes, preferences or conveniences. In general, withholding consent is unreasonable if it is without fair, solid and substantial cause or reason, or if it does not consider fairness, or if no evidence of good faith can be found. Warmack v. Merchs. Nat'l Bank , 612 S.W.2d 733, 735 (Ark. 1981).

The consent requirement should not be used to take a business advantage. For example, in many states, a landlord's refusal to consent to an assignment of the lease has been found to be unreasonable if it is due to the fact that the landlord is dissatisfied with the monthly rent reserved under the existing lease, or seeks to improve his economic position under the original lease. See, e.g., Tucson Med. Ctr. v. Zoslow , 712 P.2d 459, 462 (Ariz. Ct. App. 1985). See also Dornfeld v. Hom, No. SPH 9101-58760 HD, 1991 WL 86256, at *3 (Conn. Super. Ct. Apr. 2, 1991), 1010 Potomac Assocs. v. Grocery Mfrs. of Am., Inc. , 485 A.2d 199, 210 (D.C. Ct. App. 1984), Ringwood Assocs., Ltd. v. Jack's of Route 23, Inc. , 379 A.2d 508, 511-12 (N.J. Super. Ct. Law Div. 1977), aff'd, 398 A.2d 1315 (N.J. Super. Ct. App. Div. 1979). However, withholding of consent has been deemed reasonable when the proposed assignment would injure the landlord's interest in the property by devaluing it and thereby reducing the benefits bargained for under the original lease. Economy Rentals, Inc. v. Garcia , 819 P.2d 1306, 1314 (N.M. 1991).

Similar decisions result when a lease provision provides that the landlord must not unreasonably withhold consent with regard to property alterations or modifications. As in the context of assignment or subleasing, arbitrary considerations of personal taste, sensibility, or convenience are not proper reasons to withhold consent. A landlord's refusal to grant consent for alterations or modifications will not be considered reasonable unless such refusal is “objectively sensible and of some significance and not based on mere caprice or whim or personal prejudice” or stated differently, the landlord must produce “valid business reasons for [his or her] decision.” Marriott Corp. v. Fisher, No. 118899, 1994 WL 1031295, at *1 (Va. Cir. Ct. Aug. 9, 1994); Safeway Inc. v. CESC Plaza Ltd. P'ship , 261 F. Supp. 2d 439, 463 (E.D. Va. 2003). For instance, in the commercial context, it may be reasonable for a landlord to withhold approval to property alterations if based on preserving the landlord's property, including protecting the structural integrity of a building located thereon. Tuchinsky v. Beacon Prop. Mgmt. Corp. , 698 N.E.2d 1291,1293 (Mass. App. Ct. 1998).

Factor Tests

Another method of evaluating the reasonableness of consent to an assignment or subleasing employed by many state courts involves the consideration and balancing of various factors. For instance, subsequent to a landlord's withholding consent, courts have considered the following factors to determine if the withholding was reasonable: 1) the financial responsibility of the proposed assignee or subtenant; 2) whether the new tenant's use will require alteration of the premises; 3) the legality of the proposed use; 4) the nature of the occupancy; and 5) the “identity” or “business character” of the subtenant, i.e., suitability for the particular building. See, e.g., Amjems, Inc. v. F.R. Orr Constr. Co. , 617 F. Supp. 273, 278-79 (S.D. Fla. 1985), Julian v. Christopher , 575 A.2d 735, 739 (Md. 1990), Rowley v. City of Mobile , 676 So. 2d 316, 319 (Ala. Civ. App. 1995).

In addition, courts commonly consider the financial responsibility of the proposed assignee or subtenant and the legality of the proposed use. In some states, factors include the inability to fulfill the terms of the lease, the intended unlawful or undesirable use of the premises, the original tenant's unwillingness to remain obligated, and considerations that relate to a landlord's interest in preserving the property or in having the terms of the prime lease performed. See, e.g., Maxima Corp. v. Cystic Fibrosis Found. , 568 A.2d 1170, 1176 (Md. Ct. Spec. App. 1990). See also Worcester-Tatnuck Square CVS, Inc. v. Kaplan , 601 N.E.2d 485, 488-89 (Mass. App. Ct. 1992), Van Sloun v. Agans Bros. , 778 N.W.2d 174, 180 (Iowa 2010), Schweiso v. Williams , 198 Cal. Rptr. 238, 240 (Cal. Ct. App. 1984). Interestingly, one court has deemed the proposed subtenant's business competition with the landlord to be an impermissible basis for withholding consent, See Edelman v. F. W. Woolworth Co. , 252 Ill. App. 142, 145 (Ill. App. Ct. 1929), while another has held competitive services of a proposed subtenant to be a reasonable cause for denying consent. Medinvest Co. v. Methodist Hosp. , 359 N.W.2d 714 (Minn. Ct. App. 1984).

Lease Is Silent

About half of the states that have examined the issue have held that even if a lease conditions the tenant's right to sublease upon landlord approval without inclusion of a reasonableness standard, a landlord may not unreasonably and capriciously withhold his consent. The reasonableness requirement is based on the implied covenant of good faith and fair dealing in every contract. Thus, where consent has been denied, courts have examined whether there was a good faith reasonable objection to the assignment or sublease at issue.

Conversely, many states do not read a reasonableness requirement into a provision requiring the landlord's consent, taking the contract on its face, provided the language is clear and the intentions of the parties apparent. Those courts reason that if the parties had desired language limiting the landlord, they would have included it. First Fed. Sav. Bank v. Key Mkts., Inc. , 559 N.E.2d 600, 603 (Ind. 1990). Broadly construing the landlord's rights, one court has held that “under Pennsylvania law, a landlord may withhold consent arbitrarily and capriciously, for any reason or for no reason, if the lease does not expressly require that such refusal be reasonable.” See 421 Willow Corp. v. Callowhill Ctr. Assocs., Nos. 1848, 1851, 2003 WL 21361362, at *5 (Pa. C.P. May 23, 2003). An Oregon court has declared that “[w]here a subletting or assignment of the leased premises without the consent of [the landlord] is prohibited, [the landlord] may arbitrarily withhold [its consent] without giving any reasons, and in granting [its consent] may impose such conditions as [it] sees fit.” Pac. First Bank v. New Morgan Park Corp. , 876 P.2d 761, 764 (Or. 1994), (quoting Abrahamson v. Brett, 143 Or. 14 (1933)). These cases clearly illustrate the risk assumed by the tenant who fails to negotiate a reasonableness standard for landlord consent.

Likewise, when a lease prohibits the making of alterations or modifications to the property without the permission of the landlord, and there is no provision requiring that consent may not be unreasonably withheld, some courts have read in a reasonableness requirement into the provision. See, e.g., Prestwick Landowners' Ass'n v. Underhill , 429 N.E.2d 1191, 1195 (Ohio Ct. App. 1980), while others have held that consent may be withheld even though based on arbitrary and unreasonable motives. See, e.g., Katz v. Williams , 211 A.2d 723, 726-27 (Md. 1965); Nguyen v. Manley , 363 S.E.2d 613, 614 (Ga. Ct. App. 1987). Reasoning similar to the sublease context has been applied, either that there is an implied covenant of good faith that should be read into every contract, or that the contract should be taken on its face when it is not ambiguous.

'Sole Discretion' Clause

Even among the courts favoring a reasonableness standard for the withholding of consent, almost all the cases agree that the reasonableness standard is only applicable where the lease does not affirmatively state otherwise. Leases that include a provision that a landlord may withhold her consent at her “sole discretion” receive fairly uniform interpretation by the courts. Most courts view the provision as a freely negotiated clause in the lease giving the landlord an absolute right to withhold consent, and therefore withhold consent for any reason whatsoever. Thus, a contract provision allowing a landlord to withhold consent to a tenant's proposed assignment or sublease, or to an alteration or modification of the property, at the landlord's sole discretion, would not be subject to a commercial reasonableness standard. See, e.g., Shoney's LLC v. MAC E., LLC , 27 So. 3d 1216, 1223 (Ala. 2009). Very few courts have injected a reasonableness requirement into such a provision.

Conclusion

Many commercial and residential leases employ a reasonableness standard to evaluate landlord decisions and actions, often providing that a landlord may not unreasonably withhold consent to an assignment or sublease, or to an alteration or modification of the property. However, what is “reasonable” is subject to interpretation, and may be based upon the reasonably prudent business person standard and/or the balancing of various factors. Although there is a general consensus, at times the state courts have arrived at divergent conclusions, particularly when the lease is silent as to reasonableness.

Therefore, it is important when drafting a lease to be clear about the parties' intent as to how much discretion the landlord has to withhold consent. It is not enough merely to eliminate language requiring reasonableness because in some states, even absent a clause requiring the withholding of landlord consent to be reasonable, courts will nevertheless impose a reasonableness standard on the landlord. Thus, it is imperative for the parties to familiarize themselves with the laws of their state, and draft lease language accordingly.

Melissa A. Semidey is an attorney with Phillips Lytle LLP, resident in the Buffalo, NY, office. She can be reached at 716-847-7039 or [email protected]. Donna Hoelscher Suchan is a former associate with the firm.