Landlords Must Not be Arbitrary When Denying a Tenant’s Request To Sublease or Assign

By:  Richard Herold

So, you’re a landlord who’s entered into a 30-year lease, the lease has rent escalation clauses which are dramatically out of step with the market, and it’s your view that you are therefore losing money every month. The tenant is closing its business and wants to sublet or assign the lease to a similar business for the final seven years of the lease.  While these cases are fact-sensitive, some of the following rules may apply where the lease provides the tenant with an opportunity to ask the landlord to consent to an assignment of the lease or a sublease.[1]

 

  1. In seeking consent, the tenant must comply with the terms of the consent provision by delivering to the landlord all of the details and documents relevant to the subtenant/assignee, as required by the lease.  Typically, these provisions mandate that the tenant must advise the landlord of, at a minimum, (a) the business/proposed use of the leased space and (b) the subtenant’s/assignee’s financial condition.
  2. The landlord has no duty to seek out such information, and, if the tenant does not provide such information, the landlord is justified in withholding consent.
  3. If the tenant seeks consent after entering into the sublease/assignment, the tenant generally can thereafter request the landlord’s consent to cure the default.  Such a default may in some cases be considered an immaterial breach, and not a basis for termination of the lease by the landlord.
  4. Once the tenant complies with the lease by properly seeking the landlord’s consent, the landlord generally cannot unreasonably deny the request.  Any refusal to consent “must be objectively sensible and of some significant and not be based on mere caprice or whim or personal prejudice.”  Restatement (Second) of Property: Landlord & Tenant §15.2 comment (g).
  5. Once the tenant complies with the lease by seeking the landlord’s consent, the landlord generally cannot unreasonably condition consent on the payment of increased rent.  These are the cases where landlords have the most serious challenges.
  6. If the lease gives the landlord an absolute right to withhold consent, the landlord may be be able to do so.

 

Ultimately, if the tenant has complied with the lease by delivering a proper request for consent to the landlord, the issue of whether a landlord has acted reasonably is generally a fact-sensitive determination, meaning that many of these cases will often not be susceptible to resolution by a motion for summary judgment and may require a full trial on the merits where the jury can assess the witnesses and their credibility.  As a practical matter, whether you are a landlord or tenant, carefully consider the terms of the lease, and, if you’re the landlord, make sure you don’t deny a reasonable request based on your desire to increase the monthly rent.

 

[1] See e.g. D’Oca v. Delfakis, 130 Ariz. 470, 636 P.2d 1252 (App. 1981); Campbell v. Westdahl, 148 Ariz. 432, 715 P.2d 288 (App. 1985); Tamayo v. Lizarraga, 2008 WL 4416049 (App. 2008); Ponderosa Manufactured Homes, LLC v. EZ Ventures, Inc., 2008 WL 4853604 (App. 2008).

Author: Richard Herold | Leave a comment Tagged , , , , ,

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