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.

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