Pro Tanto Assignments And Other Problems We’ve Seen (Part 2)

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Who isn’t in favor of tantos? Last week (click HERE to see), we ended the Ruminations blog posting with a promise to explain an “assignment pro tanto.” We’ll start with what “tanto” isn’t. In the leasing context, it isn’t “a Japanese short sword or dagger.” What it is, is a close cousin of the musical direction (try, on sheet music) of “tanto – too much; so much.” We’ve stalled enough, so here we go:

Assignments Pro-Tanto

Having raised the specter of an “assignment pro tanto, it is only proper that this unusual and possibly dangerous hybrid be described – especially in a treatment of common and uncommon assignment / subletting problems.  Simply speaking, this animal is the transfer, to another, of a tenant’s entire interest in a portion of leased premises, for the entire lease term.  Describing this creation as an animal may be an apt choice of terms as it may be somewhat uncontrollable.  In most jurisdictions, but not all, the landlord now has two tenants and, in effect, two leases.  The assignee may, and the operative word is: “may,” have a contractual relationship with the landlord.  If the original tenant defaults under its lease, giving rise to a lease termination, the landlord may still have a tenant, the assignee, for the portion of the leased space that was thought to merely be sublet.  The law is uncertain; there isn’t a lot of guiding case law.  But, if a tenant can assign freely under its lease, but not sublet freely, there is always the possibility of enjoying both “existences” by use of an assignment pro tanto. [Read more…]

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How Can We Get Out Of Here In One Piece? (Part 1)

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Vacation time and the living is easy. Ruminations has a big backlist of material and sometimes we cheat by reaching into it and putting an edited, usually lightly edited, version of “stuff from the vault” in the form of a blog posting. That’s what’s happening this week and at least next week. Just like a resale store, “it’s new to you.” [That is, new to at least nearly all, but not all, of our readers.] Today, tour approach adds up to the first part of a primer, from the Ruminations perspective, on assignment and subletting.

Under common law, absent a lease restriction, tenants were free to assign their leasehold interest to others or to sublet all or part of their leased space. That rule of law is of little consequence today because virtually all leases restrict assignment and subletting rights, often in excruciating detail. In addition, a small number of jurisdictions have reversed the rule by statute and there are certain kinds of leases, generally tied into personal services that are not, as a default matter, freely assignable. [Read more…]

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Be Reasonable, Whatever That Means

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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. [Read more…]

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To Recognize Or Not To Recognize? That Is The Question (Part 2)

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Last week, we began a discussion about a particular dilemma that arises out of “subletting.” [You can see that blog posting by clicking: HERE.] Basically, a subtenant has no greater rights against the actual landlord than does its sublandlord. Absent an agreement with the “real” landlord, if the underlying lease is terminated, the sublease is “over.” What kind of subtenant would invest in the subleased space or (especially in a retail project) spend time and effort to build location-specific good will if the vitality of  its sublease depends on the health of its sublandlord? In a lot of cases, the reason a tenant seeks a subtenant in the first place is because the tenant can’t “handle” the space. There is a solution, and it is called a “recognition agreement.” Last week, we presented the “problem” in some detail. Today, we’ll explore various approaches to a solution. As we disclosed last week, today’s blog is heavily based on an article we wrote more than 10 years ago. So, to the few readers who find today’s posting vaguely familiar, we apologize. [Read more…]

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To Recognize Or Not To Recognize? That Is The Question (Part 1)

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One important exit strategy for a large space tenant seeking to shed itself of leased space is to have the option of assigning its lease or of subletting all or part of its premises. Generally, a tenant who no longer needs its space will prefer assignment if it can be simultaneously relieved of its lease obligations or if the prospective assignee is adjudged to be rock solid. Otherwise, subletting is preferred because the departing tenant, stuck with continuing contingent liability, can retain control of its space. However, to get rid of the old tenant as an intermediary between it and the landlord, an incoming tenant would prefer to take an assignment of the existing tenant’s leasehold interest. Sometimes, such as when the incoming tenant’s rent is substantially lower than the rent payable under the lease, a lease assignment just won’t work. Thus, where assignment of the lease is not workable or where less than all of the leased space is to be transferred, subleasing is the preferred choice. [Read more…]

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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. [Read more…]

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A Different Take On Whether Consent To An Assignment Or Subletting Can Be Unreasonably Withheld

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What happens if a lease states merely that a tenant may not assign it or sublet the leased premises? What happens if it says the tenant may do so, but only with the landlord’s consent? A majority of jurisdictions (states), perhaps even a substantial majority, do not require a landlord to be reasonable. Even though there is such a “majority rule,” negotiators need to adapt to the minority view if the leased space is in such a jurisdiction. More importantly, the winds of “do I have to be reasonable” law are shifting. That’s because, little by little, the implied covenant of good faith and fair dealing is encroaching on the grounds where “sole discretion” used to reign. So, in jurisdictions that have required that a party act in “good faith,” even where a landlord has reserved the right to deny its consent for any reason or for no reason at all, it will not be permitted to deny its consent if doing so will defeat its tenant’s reasonably expected benefit of the bargain. Basically, the covenant, as is increasingly being interpreted, prevents a party from using a given contract right as a sword when it was intended to be a shield.

Even if at the time a lease is signed the law in a given place is pretty clear that, absent a lease saying that a landlord has to be reasonable, it can act arbitrarily, that law can change during the lease’s term. Therefore, it makes good sense, in every lease, to define the “rules” for giving or withholding consent even where you think the law is settled. [Read more…]

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A Shortcut To Drafting A Sublease That Might Be The Long Way To Get The Job Done

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A sublease is really no different than a lease other than its title and the use of different labels (subtenant instead of tenant; sublandlord instead of landlord; sublease instead of lease; etc.). It needs to convey an interest in real property and it needs to establish the contractual relationship between the subtenant and its sublandlord. One might think it to be “special” because it is constrained by a superior lease (master lease; overlease; etc.), but that’s not any different than a lease being constrained by a superior mortgage, a restrictive easement agreement, zoning laws, etc. In each case, the grantor (landlord or sublandlord) can’t give greater possessory rights than it, itself, has and can’t give any contractual rights that it has agreed (say in a mortgage) it won’t give or that the law won’t allow. Neither can a sublandlord.

But, there is an approach that crafters of subleases often use that is not available to crafters of leases. That’s by using an “incorporation by reference” form of sublease. [That’s not to say leases never incorporate parts of other documents by reference to those documents, references to laws being one example. And, its also not to say that there couldn’t be a publication with “standard lease terms” that might be incorporated by reference, as is done when requiring one party or the other to abide by ASTM, ASHRE or similar standards, just that, if that is being done out there, it’s a rare occurrence.] [Read more…]

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