UPDATED: PENDING ARIZONA LEGISLATION AFFECTING INDIAN TRIBES

February 26, 2013 Comments Off on UPDATED: PENDING ARIZONA LEGISLATION AFFECTING INDIAN TRIBES

UPDATE 04/29/2013: Only two of the bills listed below have survived the legislative process so far. Versions of House Bill 2205 have passed in both the House and the Senate, and a conference committee is currently working on amendments to which both the House and the Senate can agree. HB 2205 places restrictions on ATM and point-of-sale terminals at tribal gaming facilities (see below for more information on this bill). Senate Bill 1317 passed in the Senate and is now being considered by the House. SB 1317 would authorize distributions from the State Aviation Fund for aviation facilities on tribal land (see below for more information on this bill).

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The legislation introduced in the current session of the Arizona Legislature includes a number of bills that relate to Indian tribes and Indian affairs. The following lists the major bills introduced, provides a brief summary of each bill and how it affects Indian affairs, and gives the current status of each bills. The list does not include all bills in the Arizona Legislature related to Indians and tribes.

SB 1431: Special License Plates for American Indian Veterans National Memorial

This Senate bill authorizes the Department of Transportation to issue special license plates honoring American Indian Veterans if a non-governmental entity pays an initial $32,000 to the Department and provides an acceptable design for the plate. The bill would also establish an American Indian Veterans National Memorial Fund. For each license plate, a $25 special fee would be charged, and $17 out of each $25 fee would be allocated to the Fund. The bill calls for the first $32,000 contributed to the Fund to be reimbursed to the entity that paid the initial $32,000. After the reimbursement, all other money deposited into the Fund would be used to support an in-state institution dedicated to Indian art and history that has a memorial honoring American Indian veterans. The bill is currently in committee. Click here to read the bill.

SCM 1002: Cabinet-Level Indian Affairs Department

This concurrent memorial (a type of resolution) was introduced in the State Senate and urges the Governor to establish a cabinet-level Indian Affairs Department. As support for the creation of an Indian Affairs Department, the memorial notes that Arizona is home to more than 294,000 American Indians and 22 Indian nations and tribes, and that these Indians and tribes contribute significantly to Arizona’s economy. The memorial also recognizes that New Mexico, with a smaller Indian population, established an Indian Affairs Department to address policies and programs affecting Indians and to promote a “strong, respectful and productive relationship” with Indians and tribes in New Mexico. The memorial is currently in committee. Click here to read the memorial.

HB 2522 / SB 1319: Allocation of Transaction Privilege Tax Revenue for Telecom Infrastructure and Community Development on Tribal Land

This bill was introduced in both the House and the Senate and allocates certain tax revenue for telecommunications infrastructure and community development on tribal land. Under A.R.S. § 42-5029(A)(3), the state is required to separately account for tax revenues collected from sources on Indian reservations in Arizona. This bill adds a new subsection to § 42-5029 that requires fifty percent of all transaction privilege taxes collected under § 42-5029(A)(3) be given to the Indian tribe on whose reservation the transaction occurred. Notably, the amendment also requires that the tribe use the revenue for telecommunications infrastructure and for community development. Please note that state taxation in Indian Country is a complex area of law and that the collection and sharing of revenue with an Indian tribe may require a state-tribal compact. Both the House Bill and the Senate Bill are currently in committee. Click here to read HB 2522 and here to read SB 1319.

HB 2205: Restrictions Affecting ATM and Point-of-Sale Terminals at Tribal Gaming Facilities

This house bill applies to “electronic benefit transfer” cards, or EBT cards, issued to persons who receive cash assistance under a state welfare program. Specifically, the bill would prevent a person to whom an EBT card is issued from redeeming the EBT card at ATM and point-of-sale terminals located at liquor, gaming, and adult entertainment facilities. In addition, the bill would require Indian tribes to enact a tribal ordinance that (1) prohibits placing an ATM near any gaming device, and (2) prohibits placing an ATM or point-of-sale terminal that accepts EBT cards in a gaming facility. After amendments to the bill’s language, the bill cleared the Reform and Human Services and Rules Committees and was reread on the House floor. Click here to read the bill, as amended.

SB 1317: Distributions from State Aviation Fund to Indian Tribes for Aviation Facilities on Tribal Land

Senate Bill 1317 permits Indian tribes to receive money from the State Aviation Fund if the funds are used for the planning, development, land acquisition, and construction of airport facilities. The airport must be publicly owned and operated on land that is owned by an Indian or owned by an Indian tribe. This bill now proper for consideration by the State Senate. Click here to read the bill.

HB 2338: Partnerships to Establish Regional Water Augmentation Authorities

This bill allows for the formation of Regional Water Augmentation Authorities (RWAA) by two or more public and private organizations, including Indian tribes. An RWAA may also partner with an Indian tribe as part of its work in the delivery and treatment of water. The bill is still in committee. Click here to read the bill.

For more information on the legal services offered by the Law Office of James D. Griffith, P.L.L.C., please call (480) 275-8738 or use the “Contact Us” page on our website.

GOVERNMENT CONTRACTING OPPORTUNITIES FOR MINORITY- AND WOMEN-OWNED BUSINESSES

January 27, 2013 Comments Off on GOVERNMENT CONTRACTING OPPORTUNITIES FOR MINORITY- AND WOMEN-OWNED BUSINESSES

Minority- and women-owned businesses have a competitive edge when submitting bids for certain federal, state, and local government contracts in Arizona. In particular, minority- and women-owned businesses may be interested in the Small Business Administration’s Section 8(a) program and the Arizona Department of Transportation’s Disadvantaged Business Enterprise program.

Small Business Administration’s Section 8(a) Program

The SBA’s 8(a) program is designed as a launch pad for minority- and women-owned businesses. The 8(a) program works closely with other governmental programs to promote economic growth in economically disadvantaged areas. Only small businesses qualify for the 8(a) programs, and eligibility is determined by a cap set on annual receipts, which varies by industry. The owner of the business must qualify as “socially or economically disadvantaged,” but there is a presumption that most minority and women business owners are socially or economically disadvantaged. In addition, the business must be controlled and managed on a day-to-day basis by a minority or woman owner of the business. For more information on the 8(a) program and other SBA programs, click here.

Disadvantaged Business Enterprise Program

The Disadvantaged Business Enterprise (“DBE”) program is a federal program, but administered by state departments of transportation in connection with federal funding for state highway, transit, and airport projects. The purpose of the DBE program is to remedy past and current discrimination against minority- and women-owned businesses, especially in contracts involving highway, transit, and airport programs.

In Arizona, the Arizona Department of Transportation, the City of Phoenix, and the City of Tucson utilize the database of minority- and women-owned businesses that are certified under Arizona’s program. The general requirements for certification are:

  1. A small business that is at least 51% owned by one or more minorities and/or women.
  2. The business may not be a subsidiary of another business and the minority or women owners must control day-to-day operations.
  3. The business must be organized as a for-profit business.
  4. The personal net worth of the minority or woman owner must not exceed $1.32 million, after deducting the owner’s interest in the DBE business and the owner’s equity in a place of residence.

For more information on Arizona’s DBE program and the certification process, click here.

For assistance with the 8(a) Program or the DBE Program, or for more information on the legal services offered by the Law Office of James D. Griffith, P.L.L.C., please call (480) 275-8738 or use the “Contact Us” page on our website.

MODEL TRIBAL SECURED TRANSACTIONS ACT AND TRIBAL ECONOMIC DEVELOPMENT

December 22, 2012 Comments Off on MODEL TRIBAL SECURED TRANSACTIONS ACT AND TRIBAL ECONOMIC DEVELOPMENT

Does the Model Tribal Secured Transactions Act (MTSTA) really promote tribal economic development? The drafters of the MTSTA believe it will provide certainty and protection for lenders and borrowers in Indian Country, but at least one law-review article has taken a critical view of the MTSTA. In the end, however, each tribe must make its own choice whether to adopt the MTSTA.

The Model Tribal Secured Transactions Act

In 2005, after several years of work, a committee of the National Conference of Commissioners on Uniform State Laws (NCCUSL) produced a final draft of the MTSTA.[1] Based primarily on Article 9 of the Uniform Commercial Code (UCC), the MTSTA provides a consistent and predictable legal framework for secured transactions involving a tribe or tribal member and personal property on tribal land.[2] Secured transactions are agreements between creditors and debtors in which the debtor gives some property interest (called a security interest) to the creditor as collateral for a loan or other financial arrangement.[3]

In some ways, the MTSTA is unique because it is a model law proposed for adoption by Indian tribes. To be suitable for use by tribes in Indian Country, the drafters had to consider issues such as tribal sovereignty, custom, and cultural traditions, yet also provide consistency and uniformity with state commercial laws and the UCC.[4] For example, in recognition of sovereign immunity, the MTSTA provides that, if a tribe is a party to a transaction with a non-member, the parties may agree whether the transaction will be governed by the MTSTA or by the law of the other party’s state or tribe.[5] For a detailed discussion of the MTSTA, see Tim Berg, Growing Indian Economies: The Model Tribal Secured Transactions Act, Ariz. Att’y, Mar. 2006, at 30-35.

The main purpose of the MTSTA is to promote economic development on tribal land. As early as the mid- to late-1990s, the NCCUSL had identified a need for a “sound legal and business infrastructure to accommodate [the] growing cross-border commercial activity” between Indian Country and businesses located outside of Indian Country.[6] Because of the importance of loans and other financing for business and entrepreneurship, the NCCUSL viewed the development of consistent and predictable commercial laws as essential to tribal economic development. As Arizona attorney Tim Berg stated in a 2006 article:

Access to financing and capital is key to economic growth, and such access is hampered in Indian Country by the lack of standard laws governing business and lending transactions. Lenders and other sources of capital want the protection of commercial laws with which they are familiar. When it comes to loans on personal property . . . they are looking for enforceability of their security interest. And when a dispute arises, they seek assurance that they have sufficient recourse to enforce that security interest.[7]

Criticism of MTSTA

At least one commentator has strongly criticized the MTSTA, arguing against tribal adoption of this model act.[8] In a 2010 law-review comment, Aaron Drue Johnson argued that tribes should “just say no” to American capitalism and to the MTSTA because the MTSTA will promote predatory lending practices by non-Indian businesses to tribal members residing on tribal land.[9]

In particular, Johnson cites data suggesting that Native Americans often lack financial literacy, have limited English proficiency, and are not experienced at dealing with off-reservation banks.[10] Off-reservation creditors, according to Johnson, will consider loans in Indian Country to be high-risk and charge higher interest rates compared to the rates offered to off-reservation debtors.[11] As further support, Johnson points to a federal study that concluded that unfair lending practices are often directed toward ethnic and racial minorities.[12]

Examining the MTSTA itself, Johnson contends that the model act is inadequate on three grounds. First, he argues that the MTSTA is inadequate because it does not distinguish between the debtor in a commercial transaction and the debtor in a consumer transaction—leaving the latter at higher risk of predatory lending. Second, the model act is inadequate because it does not limit the type of property that can serve as collateral, exposing Indian Country debtors to financial disaster. Third, Johnson argues that the MTSTA is inadequate because the term “default” is not clearly defined, which allows a creditor to define the term in a favorable way.[13]

Although he acknowledges the need for tribal economic development, Johnson believes that “the negative consequences of the MTSTA will likely outweigh its practical economic benefits.”[14]

Economic Development, Self-Determination, and MTSTA

Since the 1970s, the prevailing policy toward Indian tribes has been to foster tribal self-determination, and tribal economic development is best seen within the context of the self-determination policy.[15] Viewed from the perspective of self-determination, Johnson’s rejection of the MTSTA seems to have a rather narrow—and perhaps even protectionist—view. Johnson seems to ignore the purpose of self-determination, which allows tribes to make their own choices and determine their own future. Those choices include decisions regarding whether and how to pursue economic development on tribal land.

Since its final draft, the MTSTA has been considered important to tribal economic development. In 2006, William H. Henning, former Executive Director of NCCUSL, reported that one tribe had adopted the MTSTA, that eight tribes were considering whether to adopt it, and that eleven other tribes were seeking funding from the Department of the Interior “with a view toward ultimate enactment.”[16] Currently, the Bureau of Indian Affairs and the Federal Reserve Bank are jointly sponsoring a series of training workshops on the MTSTA for tribal judges and attorneys.[17]

Contrary to Johnson’s suggestion, the MTSTA will not force American capitalism onto the Indian tribes, thereby exposing them to inevitable exploitation. Rather, like all uniform laws, the MTSTA is offered as a choice to those Indian tribes that desire to promote the economic development on tribal land. Very few people, if any, will deny the existence of predatory lending, but the choice for Indian tribes is one between continued dependent nation status with few good options and the opportunity for self-directed economic development. Given the number of tribes interested in the MTSTA, a significant number of tribes appear to be pursuing in the latter. The reason is simple: they do not want to be left behind as a complex and technological global economy rushes into the future.

In the end, the policy of self-determination allows each tribe to make its own choices about its social and economic interactions with the off-reservation world. Based on this policy, a tribe’s decision to adopt the MTSTA should be left to the tribe.

For more information on the legal services offered by the Law Office of James D. Griffith, P.L.L.C., please visit our website.

Endnotes

[1] Tim Berg, Growing Indian Economies: The Model Tribal Secured Transactions Act, Ariz. Att’y, Mar. 2006, at 32 (Mr. Berg is the chair of the NCCUSL committee that drafted the MTSTA), available at http://www.myazbar.org/AZAttorney/PDF_Articles/0306Tribal.pdf.

[2] Nat’l Conference of Comm’rs on Unif. State Laws, Implementation Guide and Commentary to the Model Tribal Secured Transactions Act 13 (2005) [hereinafter Implementation Guide], available at http://www.uniformlaws.org/shared/docs/mtsta/mtsta_implemguide_jun05.pdf.

[3] Id.

[4] Berg, supra note 1, at 34.

[5] Model Tribal Secured Transactions Act § 9-117 (2005), available at http://www.uniformlaws.org/shared/docs/mtsta/mtsta_aug05_final.pdf.

[6] Implementation Guide, supra note 2, at 14.

[7] Berg, supra note 1, at 32.

[8] Aaron Drue Johnson, Just Say No (to American Capitalism): Why American Indians Should Reject the Model Tribal Secured Transactions Act and Other Attempts to Promote Economic Assimilation, 35 Am. Indian L. Rev. 107 (2010).

[9] Id. at 120-23, 140.

[10] Id. at 116-18.

[11] Id. at 118-20.

[12] Id. at 119-20.

[13] Id. at 120-23.

[14] Id. at 107.

[15] Nell Jessup et al., Cohen’s Handbook of Federal Indian Law § 1.07 (2005 ed.).

[16] William H. Henning, A History and Description of the Model Tribal Secured Transactions Act Project 3 (2007) (presentation at 2007 annual conference of Int’l Ass’n of Commercial Adm’rs), available at http://www.iaca.org/iaca/wp-content/uploads/MTSTA_Article.pdf.

[17] Fed. Reserve Bank of San Francisco, Tribal Courts and Secured Transactions Law Workshops, http://www.frbsf.org/community/resources/2013/0131-Tribal-Courts-and-Secured-Transactions-Law-Workshops/index.html (last visited Dec. 22, 2012).

JUDGE ORDERS ATTORNEYS TO MEET FOR LUNCH: The Power of “Legal Levity”

December 7, 2012 Comments Off on JUDGE ORDERS ATTORNEYS TO MEET FOR LUNCH: The Power of “Legal Levity”

This week I was reminded of the lighter side of the law when I recalled the time a Maricopa County Superior Court judge ordered two attorneys to meet for lunch (at their own expense, of course). The judge’s tongue-in-cheek order is quite humorous, and I thought I’d share it for anyone not familiar with this bit of “legal levity.”

Background

In 2006, the attorney for the plaintiff in a commercial litigation case asked the attorney for the defendant to meet for lunch. The plaintiff’s attorney wanted to discuss the schedule and deadlines for pretrial investigation of facts (referred to as “discovery”), but the defendant’s attorney was suspicious of plaintiff’s attorney’s motives. When the defendant’s attorney did not respond to these requests, the plaintiff’s attorney filed a “Motion to Compel Acceptance of Lunch Invitation” with the judge. In other words, he wanted the judge to order the defendant’s attorney to meet for lunch.

The Order

Judge Gaines, a well-respected judge in Maricopa County, saw an opportunity for little fun and entered an order granting the motion. Major portions of his order follow:

The Court has searched in vain in the [procedural rules, case law, and] leading treatises on federal and Arizona procedure, to find specific support for Plaintiff’s motion. Finding none, the Court concludes that motions of this type are so clearly within the inherent powers of the Court and have been so routinely granted that they are non-controversial and require no precedential support.

The writers support the concept. Conversation has been called “the socializing instrument par excellence” (Jose Ortega y Gasset, Invertebrate Spain) and “one of the greatest pleasures in life” (Somerset Maugham, The Moon and Sixpence). John Dryden referred to “Sweet discourse, the banquet of the mind” (The Flower and the Leaf).

Plaintiff’s counsel extended a lunch invitation to Defendant’s counsel “to have a discussion regarding discovery and other matters.” Plaintiff’s counsel offered to “pay for lunch.” Defendant’s counsel failed to respond until [this] motion was filed.

Defendant’s counsel distrusts Plaintiff’s counsel’s motives and fears that Plaintiff’s counsel’s purpose is to persuade Defendant’s counsel of the lack of merit in the defense case. The Court has no doubt of Defendant’s counsel’s ability to withstand Plaintiff’s counsel’s blandishments and to respond sally for sally and barb for barb. Defendant’s counsel now makes what may be an illusory acceptance of Plaintiff’s counsel’s invitation by saying, “We would love to have lunch at Ruth’s Chris with/on . . .” Plaintiff’s counsel. [Here, the judge added a footnote: Everyone knows that Ruth’s Chris, while open for dinner, is not open for lunch. This is a matter of which the Court may take judicial notice.]

. . . .

There are a number of fine restaurants within easy driving distance of both counsel’s offices, e.g., Christopher’s, Vincent’s, Morton’s, Donovan’s, Bistro 24 at the Ritz-Carlton, The Arizona Biltmore Grill, Sam’s Café (Biltmore location), Alexi’s, Sophie’s and, if either counsel has a membership, the Phoenix Country Club and the University Club. Counsel may select their own venue or, if unable to agree, shall select from this list in order. The time will be noon during a normal business day. The lunch must be conducted and concluded not later than August 18, 2006.

. . . .

The cost of the lunch will be paid as follows: Total cost will be calculated by the amount of the bill including appetizers, salads, entrees and one non-alcoholic beverage per participant. [Another footnote added by the judge: Alcoholic beverages may be consumed, but at the personal expense of the consumer.] A twenty percent (20%) tip will be added to the bill (which will include tax). Each side will pay its pro rata share according to number of participants.

Judge Gaines then ordered that the attorneys discuss pretrial discovery motion, protective order, and out-of-state depositions, which the attorneys were disputing. Here, a footnote states: “The Court suggests that serious discussion occur after counsel have eaten. The temperaments of the Court’s children always improved after a meal.” The judge then ordered that the attorneys file a “joint report detailing the parties’ agreements and disagreements regarding these motions [and] filed with the Court not later than one week following the lunch . . . .”

The court docket shows that a “Joint Report on Outstanding Discovery Disputes” was filed by the attorneys to comply with the order. Just goes to show that, sometime, a little bit of “legal levity” can be as powerful as “legal logic.” Click here for a full copy of the order.

For more information on the legal services offered by the Law Office of James D. Griffith, P.L.L.C., please visit our website.

MEDIATION PROVISION DID NOT WAIVE TRIBAL SOVEREIGN IMMUNITY IN STATE TRIBAL AGREEMENT

November 25, 2012 Comments Off on MEDIATION PROVISION DID NOT WAIVE TRIBAL SOVEREIGN IMMUNITY IN STATE TRIBAL AGREEMENT

The Ninth Circuit Court of Appeals recently upheld a lower court decision that the Puyallup Tribe did not waive its sovereign immunity when it entered a contract with the State of Washington that included a mediation provision. The key distinction supporting the non-waiver of sovereign immunity was that the contract did not include other terms clearly indicating a waiver of sovereign immunity by the Tribe. A copy of the decision is available here. See also Miller v. Wright, 2012 U.S. App. LEXIS 23295 (9th Cir. 2012).

Miller v. Wright.

In Miller, the Puyallup Tribe entered into a cigarette tax contract (the “CTC”) with the State of Washington. Under the CTC, the Tribe agreed to collect a $30.00 fee on all cartons of cigarettes sold by the Tribe or any tribally chartered business and to purchase cigarettes for resale only from Washington wholesalers, tribal manufacturers, or approved out-of-state wholesalers. In turn, the State agreed that it would return the fees collected to the Tribe if the fees were used for essential government services, such as health services, law enforcement, and emergency services. The CTC also provided that responsibility for enforcing the $30.00 fee would be shared by both the State and the Tribe, and that any dispute would be submitted to mediation.

A man named Miller and a woman named Lanphere, both non-Indians and non-residents of the Puyallup reservation, purchased cartons of cigarettes at a tribally chartered business operating on reservation land. Miller and Lanphere objected to the fee and filed suit. They sought a refund and an injunction against future collection of the fee. After pursuing their action in the state courts of Washington and the Puyallup tribal court system, Miller and Lanphere filed an action in federal court, which also dismissed the case. The customers then appealed to the Ninth Circuit Court of Appeals, which affirmed the dismissal.

Tribal Sovereign Immunity Protects Indian Tribes in Many Cases.

In affirming the district court, the Ninth Circuit relied on the legal principle that “[t]ribal sovereign immunity protest Indian tribes from suit absent express authorization from Congress of clear waiver by the tribe.” Cook v. AVI Casino Enterprises, Inc., 548 F.3d 718, 725 (9th Cir. 2008). The Cook case also states that this rule extends to tribal commercial activities and to corporations chartered under tribal law. The court then analyzed the CTC between the State and the Tribe and concluded, first, that the provisions of the CTC were common used in cigarette tax agreement and, second, that none of the terms supported a clear waiver by the Tribe of its sovereign immunity.

Citing a U.S. Supreme Court decision, the Ninth Circuit clarified that “an arbitration clause [in an agreement with a Tribe] may establish a clear waiver of sovereign immunity.” C & L Enterprises, Inc. v. Citizens Band of Potawatomi Indian Tribe of Okla., 532 U.S. 411, 418-19 (2001) (emphasis added). In C & L Enterprises, however, the tribe that the contract would be governed Oklahoma law and that the Oklahoma Uniform Arbitration Act applies. C & L Enterprises contrasts with Demontiney v. U.S., 255 F.3d 801 (9th Cir. 2001). In Demontiney, the contract with the Indian tribe covered only “such mundane issues as indemnity, default remedies, interest rates, and [applicable] federal laws.” The contract even stated that the tribe retained its sovereign immunity, gave the tribal court exclusive jurisdiction, and established that tribal law governed the contract.

Based on the contrast between the C & L Enterprises and Demontiney cases, the Ninth Circuit in Miller v. Wright concluded that the CTC between the Puyallup Tribe and the State was “more akin” to Demontiney. In other words, the mere inclusion of a mediation provision was not enough to establish “a clear and explicit waiver of immunity” by the Tribe. In addition, the CTC did not include any of the other provisions found in the C & L Enterprises case that established state jurisdiction over the contract’s arbitration provisions. Thus, the Puyallup Tribe did not waive its sovereign immunity when it entered the CTC with the State of Washington.

Sovereign immunity can be a difficult and complicated area of Indian. If you would like further information regarding tribal sovereign immunity, or other Indian law matters, please visit the website for the Law Office of James D. Griffith, P.L.L.C. and use one of the contact options provided.

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.

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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