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Examining tenant/landlord rights with lease assignment. (Insiders Outlook).

Most commercial leases contain restrictions on a tenant's ability to assign the lease or sublet the space. A typical restriction permits the tenant to assign or sublet subject to the landlord's consent, provided such consent is not "unreasonably withheld." Tenants often ask the landlord for "consent," and when the landlord, refuses the question is often litigated as to whether the landlord unreasonably withheld its consent to an assignment or sublease.

Under New York law, in order for a landlord's refusal to consent to an assignment or sublease to withstand judicial scrutiny and be deemed "reasonable," it must be based on "objective criteria", i.e., readily measurable criteria of a proposed assignee's or subtenant's acceptability from the view point of any landlord. According to New York courts, such objective criteria consist of the financial responsibility of the proposed assignee/subtenant, the identity or business character of the proposed assignee/subtenant, i.e., its suitability for the particular building, the legality of the proposed use, or the nature of the proposed use.

In one case, a court found a landlord's refusal reasonable when it had been shown that the proposed assignee had a brief operating history and sub-par financial statements. In that case, a detailed affidavit from the landlord's senior vice president regarding the assignee's financial status was sufficient to defeat the conclusory argument of the assignee that the real reason for denial was the assignee's race and gender.

In another case, a refusal was deemed reasonable when the proposed assignment involved extensive modifications of the existing lease that included extending the term of the lease, expanding the tenant's right to assign, expanding the tenant's right to make alterations, and abolishing the tenant's obligation to post a security deposit. Reasonableness was also found by a court where the proposed assignee was a previous tenant of the landlord who had been a "troublesome" tenant.

If a refusal is based on "subjective criteria," i.e., criteria based on the peculiar needs or dislikes of the landlord, it is likely to be deemed unreasonable by the courts. For example, American Book Company v. Yeshiva University Development Foundation, Inc., the Yeshiva University Development Foundation was the landlord of a commercial building. It rejected a proposed subtenant for the building. Planned Parenthood, because the Foundation found Planned Parenthood's activities to be "'inconsistent with the present use of the premises and with the education activities of [Yeshiva] University.'" The rejection was challenged in the courts and the tenant prevailed.

The court found that the grounds asserted for the rejection were based on ideological differences between the Foundation and Planned Parenthood and therefore were were subjective and thus unreasonable. The court went on to hold that "when a religious or religiously affiliated or educational institution...owns commercial property, it is to be held to the established standards of commercial responsibility, its acts and conduct being vested with no greater and no lesser sanctity than those of any other owner."

A court has found a refusal by a landlord to be unreasonable when it was proven that the reason given by the landlord to support the refusal was nothing more than a sham that enabled the landlord to place a new tenant in the space at a higher base rent. In another case, unreasonableness was found where the landlord demanded a fee as a condition to its consent when such a fee was not provided for in the lease as a condition precedent for the landlord granting its consent. Though the question of reasonableness was not reached, a court in 1990 implied that an assignor's refusal to pay the landlord's alleged $30,000 "bribe" request, could be an unreasonable refusal. This was so, even though the landlord had requested the proposed assignee's financial information, which the proposed assignee failed to provide. The landlord claimed that it refused to grant consent based upon the failure of the proposed assignee to provide its financial information. So basically, the court implied that if in later judicial proceedin gs the assignor could sufficiently prove that the alleged bribe took place, that would deem the refusal unreasonable despite the proposed assignee's failure to provide its financial data.

These cases show that a landlord should proceed cautiously when confronted by a tenant with a request to assign or sublet. If the landlord has "objective" reasons for denying the request, it should clearly state them in connection with the rejection.

Of course if there is any doubt, a landlord should confer with its legal counsel to ensure that a rejection is appropriate and will survive any subsequent judicial scrutiny. If a landlord makes a refusal that is subsequently deemed to be unreasonable by the courts, the tenant can recover, among other things, monetary damages for breach of the lease and also the assignment can be allowed to take effect despite the landlord's refusal.

However, with the aid of competent legal counsel, one could incorporate a limitation of damages clause into the lease, thus potentially preventing the assignor for suing for damages in the situation where the landlord is found to have unreasonably withheld consent. The remedy for the assignor would be a judicial declaration that the assignment was unreasonably withheld, and that the refused assignment would be considered an effective assignment.
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Author:Ward, Jon A.
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Apr 23, 2003
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