How One Tenant Can Become Two Different Tenants Without A Landlord Knowing What Happened

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We think today’s subject is quite interesting, though we know that its greatest appeal will be to law “wonks.” [A “wonk” is variously “a person preoccupied with arcane details or procedures in a specialized field” or “a student who spends much time studying and has little or no social life” or “one who studies an issue or topic thoroughly or excessively” (Various sources)].

Even readers with no need to see a definition of “assignment,” might be puzzled as to the words “pro tanto.” Even those who know what those words mean probably don’t realize that you can combine “assignment” with “pro tanto” and do serious harm to one party or the other to a lease.

Simply speaking, an assignment results in one party (the assignor) turning over all of its rights to another party (the assignee). The assignor (say, a tenant), absent some other agreement with the person or entity on the other side of an agreement (say, a landlord and a lease), retains obligations under that agreement (e.g., under the “lease”), but not any rights. [That’s not entirely accurate because there are ways to retain certain rights by way of agreement between the originally contracting parties, but that’s for another day. Today, we’re going to confuse readers enough with the “pro tanto” concept, such that we don’t need to go down a tangent at this point in the posting.] Basically, the effect of a tenant assigning its interest in a lease is that the tenant under the lease changes and the landlord now has to deal with a new tenant, the assignee.

By contrast, in a subletting, the identity of the tenant under the lease doesn’t change. Even though the named tenant may have given up its right to possession of the leased space to a “subtenant” (one who is “under” or “sub” to the lease’s actual tenant), the hallmark of a sublease is that, before the lease ends, the actual tenant gets back its “possession.” Commonly, this is done by making the sublease end before the “prime” lease ends, thus putting the actual tenant back in the space for as little as a day or less at the end of the lease’s term. Whether just giving possession of less than the entire leased premises absolutely, positively, certainly, incontestably, assuredly, unmistakably will be seen as a sublease (and not as an assignment) is one of the things today’s posting will explore. [Think: FedEx and whether any package showed up a day late.]

According to Wiktionary, the etymology of “pro tanto” is from pro (meaning “for”) + tanto the ablative singular masculine form of tantus (meaning “so great” or “so much”). [No, “tantus” is not a single (unmarried) aunt.] So, this Latin phrase can be translated as “For so much; for as much as one is able; as far as it can go.”

How does this help us? We’re afraid, not very much at this point, but it might yet make sense after we’ve Ruminated about what happens when “pro tanto” follows “assignment,” as in “assignment pro tanto.”

There is one more piece of background some readers will need, and it is that a real property lease is a hybrid agreement covering both property rights and contracts rights. It both “conveys” a right to use and occupy property and also covers a whole bunch of rights and duties very much like in a contract having nothing to do with real property. In the context of a lease, there is something called: “privity.” Merriam-Webster defines it as “a relationship between persons who successively have a legal interest in the same right or property.” Take note that this definition encompasses both a “right” and “property.” It doesn’t say, “the same right IN property.” So, a tenant may be either or both in “privity of estate (property)” with its landlord or in “privity of contract (right)” with its landlord.

When a tenant assigns its leasehold interest to an “assignee,” that assignee (assuming it has accepted the assignment) has privity of estate with its landlord, not necessarily “privity of contract” with its landlord. The landlord is “stuck” with the assignee when it comes to the “estate,” but, unless the assignee agrees with the landlord to accept the “contractual” obligations under the lease, it (the assignee) is not in privity of contract with the landlord. How that works is too complicated for today (and maybe for any day). So, we’re not going there.

The core of this “estate” thing is that the tenant, in return for paying rent, has the right of exclusive use and possession of the leased premises. That right comes from the landlord (usually being the property owner). Though we are far in time from the feudal times of Merry Old England, the distinction between estate and contract still has some serious effects, such as creating our subject today, an assignment pro tanto.

What is this creature, the “assignment pro tanto”? We’ll start with an example. Suppose you have a single lease for two adjacent stores or a single lease for two adjacent office suites and the lease term expires at the very end of December 31, 2023. Now suppose you sublet one of those stores (or offices) with a sublease term that expires at the very end of December 31, 2023. Unless a court finds that the sublandlord-tenant has reserved some possessory right to the “sublet” space or unless case law in a particular jurisdiction considers the two adjacent spaces inseparable such that the right for the sublandlord-tenant to possess the space it retained somehow gives it a possessory right to what it “sublet,” THE COURT WILL FIND that what seemed like a sublease was actually an assignment of part of the leased space. Yes, before the purported sublease, the landlord had one tenant for the two spaces. Afterwards, it has two separate tenants.

Now, we gave the example of two adjacent spaces. We didn’t have to do so. The sublandlord (inadvertently turned assignor) could simply have “sublet” a part of its space for the entire remaining term of its lease without retaining any right to get back into that space on the expiration date of the “sublease.” That could, absent some interfering factor, also turn out to be an assignment “for so much” (pro tanto) of the space that was “sublet.” Here it is, explained a little differently. Remember that a sublease has elements of a conveyance (transfer of some kind of “estate”) and elements of a contract. If a particular “sublease” gives away the sublandlord’s entire estate, the sublandlord has no estate left. It no longer has a connection to the “dirt.” It has ended its “estate” relationship with its (former) landlord. It no longer has “privity of estate” with that landlord. Yes, it still has a contractual relationship with that landlord, but its (leasehold) estate has been conveyed to what it called a subtenant. That’s why the result isn’t intuitive. In “real property terms,” a lease is just like a deed and if a deed gives the real property interest away such that it never comes back, the real property interest has been conveyed. A leasehold interest is a form of real property interest. That was good enough for King Arthur; it should be good enough for you.

Ruminations knows that many readers, in their heads, are taking the facts in those examples and twisting and turning them. Two adjacent spaces – not likely! Don’t be so quick. When a tenant ground leases land and turns it into a shopping center, the retailers there will all have subleases. That sets up a situation where, if the term of any of those subleases (each of which would only be for part of the ground tenant’s premises) ran right through the end of the ground lease’s term, they could very well turn out to be assignments. That would mean each of those particular retailers would be tenants of the ground owner, not of the shopping center developer. While their “contract” rights might come from the developer, their right of possession would actually come from the ground owner. That means the rent should be paid to the ground owner. This means that if such a “subtenant” pays its “sublandlord,” it can be forced to pay again, this time to the “real” landlord, the ground owner. It also means that only the ground owner can evict the retailer because “possession” comes from the ground owner.

[Here’s a note for those who want to argue that the way subleases are drafted, sublandlords never give up all of their rights. Check the case law in each jurisdiction where you want to make that argument. In many states, even a contingent “right of reentry” does not constitute a reservation of a right to possession though a “right of reentry” would seem to be a possessory right. This isn’t a law review article, so we’ll leave readers to look that up themselves.]

We didn’t want to do an exhaustive search of cases throughout the country to find one that illustrates our ground lease example. Instead, all we’ll do is direct readers to Middle Village Associates v. Pergament Home Centers, a New York case from the year 2000. You can find it by clicking: HERE. It will tell you about some of the case law and why this particular sublease was NOT an assignment pro tanto.

Does it matter that the parties intended a “sublease,” not some form of assignment? It appears not. “Intent” doesn’t seem to matter.

An assignment pro tanto is not limited to the inadvertent and unexpected “not really a” sublease situation. If a tenant were to assign the lease for only a portion of its space, that would create two tenants. In fact, there are times when this might be an intended result and could be used to effectuate a result that benefits the assigning tenant. For an example of how someone took advantage of an intentional assignment pro tanto, click HERE to see what the bankruptcy trustee did in the Brentano’s case. If you click there you’ll learn how this bankrupt tenant of two floors in a building designed a plan to assign its lease as it covered the fourth floor (and get money from that assignee) and then reject the pro tanto (third floor portion) of the space. Yes, create two tenants (effectively two leases) out of one tenant (and one lease), and then bail out on the third floor, leaving the landlord with a new tenant and only for the fourth floor.

Landlords, you might want to revisit your form leases and ban assignments of less than all of the tenant’s leasehold interest. You might want to ban subleases that do not end at least a day before the expiration date you’ll be inserting in the lease itself. You’ll want to review those requests for consent to an assignment or subletting a little more carefully in the future. After all, a few thousand people will have read today’s blog posted and they are now better armed to do mischief.

Now, Ruminations will return to “pro tanto,” but in a different context. Remember that it can be translated as ““For so much; for as much as one is able; as far as it can go.” Well, this is “pro tanto” for Ruminations but for the bonus that follows.

Here’s a bonus for those who reached this point and who were either wonks when they started or became one by reason of today’s posting. In the year 1578, English courts decided what is known as Dumpor’s Case. That case resulted in a “rule,” not surprisingly, the “Rule of Dumpor’s Case.” And, though intuitively wrong, it still applies, 437 years later, in many, though not all, states. It says that absent a specific provision to the contrary in a lease, once the landlord gives its consent to an assignment of the lease by its tenant (or if it acquiesces without formally consenting), a lease covenant saying that the tenant needs its landlord’s consent to an assignment is waived. Yes, even though a lease doesn’t say that the “tenant needs landlord’s consent” is for the “first” assignment only, that’s what the Rule of Dumpor’s Case says. The Rule doesn’t apply to sublettings. So, if you are a landlord and don’t like to be dumped upon, you’ll want even your shortest form of plain English lease to say that giving consent to any particular assignment or acquiescing to an assignment is not a waiver of Tenant’s obligation to seek consent to every other subsequent assignment.

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Comments

  1. This is so interesting, and your exposition is very clear. Reading it was like being in a math class with a good teacher!

  2. Merle Sustersich says:

    Subleases frequently have a rent that is either higher or lower than the prime lease. Would you consider that transaction an assignment? What would the subtenant pay the landlord if the tenant disappears?

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