UNDER A COMMERCIAL LEASE, CAN A LANDLORD COLLECT RENT FROM A TENANT AFTER THE TENANT’S VALID ASSIGNMENT OF THE LEASE?
October 26, 2012 Comments Off on UNDER A COMMERCIAL LEASE, CAN A LANDLORD COLLECT RENT FROM A TENANT AFTER THE TENANT’S VALID ASSIGNMENT OF THE LEASE?
Under Arizona law, a tenant under a commercial lease remains liable to the landlord for payment of rent even after the tenant validly assigns the lease to a new tenant.
Remember Sally’s Café and the lease of space in Citywide Properties’ building at the corner of Fifth and Mill? (See my discussion of commercial leases and non-assignment clauses here.) Let’s say that Sally’s Café leased space from Citywide and later assigned the lease to Joe’s Burgers after Citywide consented to the assignment. That means the assignment is valid and enforceable in the eyes of the law.
“Privity” (I know, I know, it’s legal jargon)
In this situation, both Sally’s Café and Joe’s Burgers have liabilities under the lease with Citywide. The legal rule states that a validly assigned lease creates “privity of estate” between the landlord and the new tenant, but that the landlord and original tenant are still in “privity of contract.” In other words, the landlord and the new tenant owe obligations to each other because of the new tenant’s (valid) possession of the leased property, but the landlord and the original tenant still have obligations to each other under the lease agreement.
The most important obligation, of course, is the obligation to pay rent, which follows the assignment to the new tenant. Thus, the new tenant is obligated to pay rent to the landlord. This also applies to other obligations, such as the landlord’s obligation to make repairs or common area maintenance.
In our hypothetical case, because Citywide and Joe’s Burgers are in privity of estate, Citywide will be liable to Joe’s Burgers if Citywide fails to make a repair or maintain the building as required under the lease. Similarly, Joe’s Burgers will be liable to Citywide if Joe’s Burgers does not pay rent.
So why isn’t Sally’s Café off the hook when it validly assigns the lease to Joe’s Burger? Sally’s Café can still be held liable because Sally’s Café is in privity of contract with Citywide. If, for example, Joe’s Burgers fails to pay the rent, Citywide can sue both Joe’s Burgers and Sally’s Café for the outstanding rent. The only exception would be if Citywide had released Sally’s Café from liability under the lease.
Assignment to Third Tenant
Can the lease be assigned to a third tenant? Yes. What happens? Basically, the second tenant is released from all liability and the third tenant is in privity of estate with the landlord. In our case, Joe’s Burgers would be released from liability, and the third tenant (Valerie’s Vegan) owes the rent to Citywide. But Sally’s Café remains liable under privity of contract with Citywide.
Please remember that this is merely a general discussion of obligations and liabilities of landlords and tenants after the assignment of a commercial lease. This discussion should not be seen as legal advice, and 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.
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.
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).
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.
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.