CAN A TENANT ASSIGN A COMMERCIAL LEASE IF THE LEASE INCLUDES A NON-ASSIGNMENT CLAUSE?

October 19, 2012 Comments Off on CAN A TENANT ASSIGN A COMMERCIAL LEASE IF THE LEASE INCLUDES A NON-ASSIGNMENT CLAUSE?

Under Arizona law, the general rule is that tenants of commercial properties are free to assign their leases—regardless of any contract provision that prohibits assignment of the lease. The catch is that, if the contract prohibits assignment, the assignment also breaches the lease, and the landlord can terminate the lease.

So, if Sally’s Café leases space in a commercial building at the corner of Fifth and Mill, and the lease prohibits assignment of the lease, can Sally’s Café assign the lease to Joe’s Burgers without risking liability for breaching the lease? No, but that may not be the end of the story.

Waiver.

Sally’s Café may be able to avoid liability if the landlord—let’s call it Citywide Properties—waives the non-assignment clause. A landlord waives a non-assignment clause if the landlord knows of the assignment and does not object. Typically, a landlord waives a non-assignment clause in a commercial lease when the landlord accepts rent from new tenant, but it could also be proven by receipt of a letter from the original tenant and the landlord’s failure to respond.

So, let’s say Sally’s Café assigns its lease to Joe’s Burgers in violation of the non-assignment clause. The next day, the owner of Citywide Properties notices a new sign over the door to the property that advertises Joe’s Burgers. She stops in the restaurant and speaks to Joe, who tells her he has taken over the lease. The following day, Joe delivers a rent check to the office of Citywide Properties, and Citywide cashes the check. A week later, the owner of Citywide decides that she does not like the clientele attracted to Joe’s Burgers. Can Citywide terminate the lease? No, because Citywide learned of the lease (from Joe) and accepted rent from Joe (that is, failed to object).

Consent.

Many commercial leases, however, permit assignment of the lease by a tenant, but require the landlord’s consent before assignment. These consent clauses are permitted in Arizona, but a landlord can only withhold consent if doing so is reasonable.

So, how does our scenario change if the lease entered by Sally’s Café allowed the lease to be assigned, but required Citywide’s consent? Sally’s Café wants to assign the lease to Joe’s Burger and contacts the owner of Citywide. Citywide’s owner considers the request and decides not to consent to the assignment because Joe’s Burgers caters to biker gangs.

Was it reasonable for Sally’s Café to withhold consent? Questions of reasonableness are usually matters for a jury to decide, which makes a definitive answer difficult. In addressing the question, however, a jury might consider the credit-worthiness of the new tenant, the nature of the new tenant’s business, the general character of the area (for example, upscale retail businesses), the remaining term or length of the lease, current economic conditions, and other factors.

Conclusion.

Okay, I’ve given a basic overview of the general rules on assignment of commercial leases, but this discussion should not be seen as legal advice, since any specific situation should be considered on its own terms. If you would like further information, or have a specific situation, please contact me by using one of the contact options provided on my website.

Next time, liabilities of the original tenant and the new tenant when the assignment is valid.

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