Why is it reasonable to Ruminations to have steered clear of the “reasonableness” issue, i.e., what does “reasonable” mean? Despite having posted more than 280 times on similar issues, we’ve avoided this question. That’s because, like pornography, we think that when it comes to “what qualifies as ‘reasonable’,” you’ll know it when you see it. [Thanks to Justice Potter Stewart for his concurrence in Jacobellis v. Ohio, 378 U.S. 184 (1964), where he wrote the following explanation of pornography: “But I know it when I see it, and the motion picture involved in this case is not that.”]
We think one has to “see” the circumstances to get a “feel” as to what would constitute a reasonable denial of consent The Alabama Civil Court of Appeals gave us such an opportunity with its August 12, 2016 Opinion in Steve Evans v. W.G. Waldrop, an Opinion that can be seen by clicking: HERE.
There are a number of “main” lessons coming out of this Court’s Opinion and there are some interesting side issues. So, we’ll start with a short version of the story. Our reading of the Opinion shows (to us, at least) that the case was not well presented at trial. Therefore, our telling of the story will “bridge” some gaps and “resolve” some discrepancies in the testimony and in the evidence presented.
A retail tenant with a shopping center lease that ran from April of 1999 until March of 2004 stopped paying its rent in May of 2000 and moved out the next month. Then, it began looking for an assignee or subtenant. After some disappointments, it located someone interested in operating an “electronic-bingo parlor” at the leased premises.
The tenant called its landlord to discuss the possibility of leasing to someone who wanted to put a game room on the property. The landlord responded that it “did not want anything too ‘wild’ on the property and that [it] didn’t want any ‘carrying on’ on the property.” It stated that, “if the business was up to ‘par,’ [it] would not object.” The prospective subtenant also called the landlord to explain to it “exactly what kind of business it was to be,” and claimed that the landlord said “that was fine with” it and had “agreed to everything and … knew exactly what the [prospective subtenant] was going to do there.” Based on that conversation, the prospective subtenant concluded that the landlord was amenable to the subletting.
After those conversations, the prospective subtenant signed a sublease, paid the first month’s rent and posted a security deposit. It borrowed money, opened a bank account, and obtained a business license.
Then, only a few days later, the landlord told the tenant that it had changed its mind (or perhaps had never said “OK” in the first place), and that the subtenant was not acceptable because “other tenants had expressed disapproval of” the proposed business. In response to this, the tenant asked the subtenant if the sublease could be cancelled. The subtenant agreed because it didn’t want to be at a shopping center where its presence would be a conflict.
When the landlord sought a judgment to collect the unpaid rent, the tenant defended by saying the landlord had breached the lease either by revoking its consent or by unreasonably denying its consent in violation of a specific lease provision requiring the landlord to be reasonable. [Note: the landlord of an Alabama property has no duty to mitigate damages and can just sit back with an empty space while collecting, or chasing, the rent otherwise payable. This is the law in some states and not in others. If any reader doesn’t understand this, it would be worthwhile to that reader to do a little research into what all of that is about in each of the states that might be of interest.]
The thrust of today’s blog posting is “reasonableness,” so we’ll start with that topic by clipping some text from the Court’s Opinion. This is a tricky area and while the concepts are basically the same no matter where the property is located, case law (and sometimes statutory law) express these principles differently, so much so that the outcome of a particular dispute might not be the same everywhere even if the facts are the same. With that caveat, here we go by quoting or paraphrasing what the Alabama court had to say:
It is the tenant’s burden to show that a landlord has acted unreasonably in refusing to consent to a sublease or to an assignment of a lease.
A tenant has the burden of furnishing sufficient information about the proposed assignee to enable the landlord to determine whether it will consent to an assignment. The landlord is under no duty to seek out such information. In the absence of information concerning the proposed tenancy and the tenant, the landlord is justified in withholding consent.
Whether a landlord has acted reasonably is a question of fact for the trier of fact.
The reasonableness of a landlord’s failure to consent to [a sublease or] an assignment of a lease is judged in accordance with a commercial-reasonableness standard.
A landlord does not unreasonably withhold consent to an assignment unless the landlord is presented with – and rejects – a prospective assignee who … meets commercially reasonable standards.
Among the legitimate factors landlords may consider in assessing reasonableness are: the financial responsibility of the proposed assignee or subtenant, whether the new tenant’s use will require alteration of the premises, the legality of the proposed use, the nature of the occupancy, and the compatibility of the tenant’s use with the uses of the other tenants in the same shopping center or office building. Courts have held it improper for a landlord to reject an assignee or subtenant on considerations of personal taste, sensibility or convenience.
The likelihood of a proposed new tenant’s success is a legitimate concern under the commercial reasonableness standard. A key factor in determining whether a landlord’s refusal is unreasonable is whether the landlord may be assured that the covenants of the lease, particularly the covenant to pay rent, will be met.
Clearly, the standard for reasonableness, in this case for commercial reasonableness, is an objective, not a subjective, personal one. That means: “What would the ordinary landlord do, one who doesn’t have the peculiar “viewpoint” the consent-dispense might have?” A man’s home may be his castle, but his shopping center is his hassle. Basically, if the ordinary landlord would consent to a particular assignment or subletting, the reasonableness standard (if that’s what the lease calls for) requires that the obligated landlord do so as well. In many jurisdictions, absent a contrary provision in a lease, a reasonableness standard will be implied (i.e., read into the lease).
But, isn’t “reasonable” a vague standard, one that should be avoided in contracts? Ruminations has heard that refrain many times over the years. Even though that is often heard, most often from the inexperienced, we reject that argument in all but uncommon, specific cases. For the most part, situations can be cataloged in three categories: those clearly calling for approval; those clearly supporting rejection; and the smallest group, those that could go either way. [For our earlier Ruminating about the usefulness of weasel words such as reasonable, click: HERE.] Basically, in our view (or that of Justice Stewart’s), you’ll know it when you see it.
Well, we promised to touch on a few point also made by the Alabama Court. So, we will.
The lease required that all consents be in writing. So, why was there a lengthy treatment of whether the landlord had given its consent on the phone to the tenant and acknowledged its willingness to accept the subtenant in a telephone conversation with the prospective subtenant? The answer is a one-word one: “waiver.” As we have “warned” in a previous blog posting (seen by clicking: HERE), a party can orally waive a requirement that something be in writing and can even orally waive the requirement that “everything” be in writing. In fact, the Alabama Supreme Court had ruled in another case that the landlord in front of it, “by orally consenting to a sublease, had waived the right to consent in writing.” In the case at hand, however, the tenant didn’t raise the “waiver” argument at trial, and the appellate court, therefore, was unwilling to entertain the waiver argument on appeal, though it did treat the verbal consent as if it were valid. Seemingly, it did so to be able to get to another important concept, that of mutual rescission.
The tenant argued that its landlord, once having given its consent to the sublease, could not change its mind. Unfortunately for the tenant, two factors weighed against it. First, and dominantly so, the tenant agreed to accept the reversal and got its subtenant to agree to terminate the sublease. As the Court pointed out, parties can mutually agree to “rescind” an earlier agreement, such as the agreement to give and accept the “consent” in question. The tenant tried to argue to the Court that it was coerced into agreeing to the withdrawal of “consent,” but there was no evidence to support that assertion. Secondly, it appears that the landlord’s “change of mind” came before the sublease was signed and that meant there was no reliance on the verbal consent on the tenant’s part. This seemed to be an important factor because in this Court’s distinguishing the case at hand from that ruled-upon by the Alabama Supreme Court (i.e., the one that gave “power” to the oral consent to the sublease), here, the tenant was able to revoke the sublease after the landlord withdrew its oral consent.
One puzzling aspect of the case we’ve brought to the table is that the Court said it wasn’t clear as to whether it was dealing with an assignment of the lease or with a subletting of the premises. It doesn’t say why it wasn’t clear. Perhaps the purported sublease was for the entire quantum of the lease, that being for all of the space and for all of the lease term. Absent some other meaningful “reservation” or reversion right held by the “subletting” tenant, that would constitute a lease assignment no matter what the document called itself. Nonetheless, the Court chose to treat the document as a sublease. Would there have been a different result has it chosen “assignment”? We don’t think so, but we believe that one of the factors raised by the Court should have been different – the one having to do with being able to pay the rent. Ruminations has argued and will continue to argue, that a subtenant’s ability to pay the rent should not be a controlling factor in most cases because the rent in question is between the subtenant and its sublandlord. The tenant is the one obligated to the landlord and whatever the credit of the subtenant might be (and whatever its rent paying ability might be), it can only improve that of the tenant. The combination is also more financially worthy that either than that of either the tenant or subtenant by alone. [If interested, click: HERE to see an earlier blog posting on this topic.]
That’s all she wrote. If you have any thoughts to share with the Ruminations community, we invite you to do so by adding your comments in the place provided below.