Did It Assign Or Did It Not Assign, That Is The Question

What does it mean to assign a lease? That would seem pretty simple to answer when looking at an executed Assignment and Assumption Agreement. After all, doesn’t the title alone tell the reader that a lease has been assigned? Well, not so easy there – even well compensated lawyers can argue about this.

With slight trepidation, Ruminations will discuss this question, that trepidation based on the court decision at hand coming out of a Napoleonic civil code jurisdiction, the great State (as shouted at political nominating conventions) of Louisiana. The way the law there is described and derived may be unique among the 50, but the outcome and analysis is pretty much the same. [The case that is the underpinning for today’s blog posting can be seen by clicking: HERE.]

Here, we have a lease that permitted unlimited assignment by the tenant, but says so in this (not uncommon) way:

Tenant shall have the right at any time to assign this Lease or sublet all or any part of the Lease Premises, provided Tenant and Guarantor shall remain liable for the full performance of all terms, covenants and conditions of this Lease, and further provided, that Tenant shall give prior written notice to Landlord, and any such assignee shall agree, in writing to be bound by all the terms and provisions hereof.

So, in October of 2011, the tenant and its successor executed a document with at least the following provisions:

Assignor…shall assign, transfer and convey to Assignee all of Assignor’s right, title and interest in, to and under the Lease…effective as of the Transfer Date.

The assignment and assumption of the Lease under this Agreement shall occur and be effective on the Commencement Date as defined under that certain [other] Lease by and between Assignor and Assignee [for a store at property owned by the assignee].

Basically, the business plan was for the tenant to relocate to a nearby property owned by the “Assignee.” To induce that lease, the “Assignee” agreed to take over the tenant’s existing location and take on carrying costs and risk of not finding a replacement user. With that in mind, readers can surmise that the “Transfer Date” was the date the tenant started business in the new location. Readers can also surmise that the existing landlord’s approach to the resulting litigation was fueled, in part, by having its tenant give “oomph” to a competing shopping center.

Why was there a dispute when the tenant entered into its agreement with its future landlord? It wasn’t because the “assignment” agreement didn’t say that the “assignee” wouldn’t be bound by the terms of the lease. It was because the landlord didn’t get notice of this October, 2011 “assignment” until February of 2014, 28 months later. That was about a month before the tenant moved its store. [In the interim, in January of 2014, the “new” landlord-assignee assigned the assignment. Don’t worry; we’ll get to that “assignment.”]

We can explain the first dispute in a pretty simple way. The landlord claimed its tenant breached the lease by not giving it prior notice of the October, 2011 assignment. The tenant’s position was that the assignment was effective in February of 2014, and the notice given that January constituted prior written notice.

So, the court needed to decide if there was a “present sense” assignment of the lease. In other words, what did “prior” refer to when the lease required that the tenant give prior, written notice?

Ruminations has written so often about how agreements are interpreted by courts that providing links to those earlier blog postings would be an exhausting effort. To see some of them, try searching for “interpretation” in the search box. Today, we’ll quote the words of this Federal Court sitting in Louisiana and note that the court based its “rules of construction” on Louisiana’s Civil Code. Here are the court’s words (and they are strikingly similar to what all courts say):

Where the words of a contract are clear, explicit, and lead to no absurd consequences, meaning and intent of parties must be sought within the four corners of the instrument and cannot be explained or contradicted by parol evidence; under those circumstances, interpretation of the contract is a matter of law and summary judgment is appropriate.

Words susceptible of different meanings must be interpreted as having the meaning that best conforms to the object of the contract.

Generally, parol evidence is inadmissible to vary the terms of a written contract.

[For new readers, “parol” evidence is extrinsic material – stuff “outside” the agreement – and cannot be used to contradict the terms of a later written agreement (and, sometimes, a contemporaneous agreement).]

We’ll quickly get to what the court had to say, but first we need to tell readers one more thing about what the “assignment” said. And that is the document contained “conditions precedent” to the happening of the Transfer Date such as the issuance of a certain certificate and the new premises being in the required condition.

So, using the “rules of construction” quoted above, the court breezed right though to its conclusion that the tenant’s agreement with its new landlord was:

“an agreement to assign, and not an assignment of the Lease. ‘Assignor desires to assign,’ ‘Assignor . . .  shall assign . . .,’ and ‘[t]he assignment  . . . of the Lease under this Agreement shall occur,’ do not rise to a present assignment at execution. A conclusion to the contrary, which [the landlord] encourages, would largely moot the inclusion of “conditions precedent.”

So, because the assignment took place on the “Transfer Date,” and not when the assignment agreement was signed, giving the required notice more than two years after the agreement was signed, but before the effective date of the assignment, met the requirements in the lease.

Now, for those readers who remember, Ruminations “mentioned” a second assignment. Let’s remember that the tenant and its new landlord for the nearby location signed their agreement late in 2011, the tenant gave notice to its old landlord in February of 2014, and the assignment became effective in March of 2014. Along the way, actually in January of 2013, the new landlord assigned the “assignment” to a retailer. No notice of that assignment of the assignment was ever given to the landlord. Without any explanation, the court ruled that this document was an “assignment” as contemplated by the lease and ruled that the tenant, now a “guarantor” by reason of remaining liable on the lease after the earlier assignment, was liable to the landlord for this breach of the lease (i.e., because no notice of this transaction had been given)

Frankly, we’re puzzled and don’t have enough clues to understand why the court ruled this way. We are also puzzled as to why the tenant didn’t give notice of the second “assignment” instead of, or at the same time as it gave notice of, the first one. The facts recited by the court clearly show that the tenant was aware of the second assignment.

As to what we can’t figure out about the court’s ruling, it doesn’t make sense that it could rule that the second assignment took place before the first given that the court had already found that the first “assignment” was not effective until after it had, itself, been assigned to the ultimate user. After all, there appears to have been only one assignment of the lease itself. All the second transaction did was to change the identity of the assignee. Basically, there was only one assignment of the lease and the lease only required that the landlord get notice of the fact of an assignment of the lease. [Granted, we haven’t seen the entire lease, only the handful of words the court extracted for its own purposes.]

Despite our puzzlement, Ruminations learned something from this case. We never thought about the nature of an “assignment” of an “assignment.” We don’t know how the assignment of an assignment was drafted between the parties in this case, but we’re thinking that there is a way to prepare one that clearly is not an assignment of the lease itself. One thing that can be done is to clearly say that it isn’t an assignment of the lease (- that would be a real property conveyance -), and that it is ONLY an assignment of the assignment itself (- that would be a contract for personal property -). Is this ever a valid distinction? Ruminations thinks so. After all, a mortgage is a real property transaction and governed by real property law (and gets recorded in the land records). In contrast, a collateral assignment of the mortgage as collateral for a loan is a personal property transaction, governed by the Uniform Commercial Code (UCC) and the associated note is secured by meeting the requirements of the UCC, not by recording the collateral assignment. Technical? Yes. Structuring opportunity? Also, “Yes.”

Why might someone do that? Under the right circumstances, perhaps this way. Suppose a lease prohibits assignment by the tenant to all but affiliates. So, let the tenant assign the lease to a newly formed, wholly owned subsidiary. Then, before the assignment becomes effective, have the subsidiary CLEARLY assign the assignment, NOT the lease, to an unrelated party. Then argue that restrictions on alienability (such as by assignment) are to be strictly construed and point out that the only assignment of the lease was from the original tenant to its affiliate. After all, the assignee wasn’t the “tenant”or even a “tenant.” Form over substance? For sure. A possible way out? Well, some judges will buy it, and in doing so you’ll hear: “A court will not make a better deal for the parties than they made for themselves.” More importantly, uncertainty of result creates bargaining power. Do we predict legal success? Certainly not, but it is possible. Do we think that today’s blog posting will send us back to look at how our assignment provisions are written? Simply stated, “Yes.”