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American Bar Association - Defending Liberty, Pursuing Justice

FALL 2009

Vol. 6, No. 1

 

REAL ESTATE

 

Tenant’s Remedies for Landlord’s Unreasonable Refusal to Consent to a Sublease

Good news! Someone is interested in leasing space in your client’s building. Unfortunately, the transaction is a sublease, not a direct lease, and even though your client’s lease with the lucky sublandlord prohibits your client, as landlord, from unreasonably withholding his consent to the sublease, he impulsively sends a letter to the tenant refusing to consent to the sublease, without giving any explanation as to why he will not consent. Later, he panics and calls you to see how much his letter might cost him. The purpose of this brief article is to answer that question.

Property Law Versus Contract Law

As an initial matter, you’ll want to know whether the state in which the property is located considers a lease to be a conveyance of an interest in property or a contract. The majority of states still consider a lease to be a conveyance, and a tenant’s duty to pay rent absolute. In those states, if the lease is silent as to whether the landlord may withhold its consent to a sublease unreasonably (i.e., the relevant section simply provides that tenant may not sublease without first obtaining landlord’s consent), then landlord may withhold its consent arbitrarily. In contrast, states that regard leases as contracts impose upon landlords and tenants a duty of good faith and fair dealing, and landlord’s agreement not to unreasonably withhold consent to a sublease is read into the lease.

Possible Remedies

A tenant’s cause of action for a landlord’s unreasonable withholding of consent will depend in part upon whether the state’s courts consider the lease to be a contract or a conveyance. If it is a contract, the tenant might bring a cause of action for a breach of the contract in lieu of a tort such as intentional interference with contractual relations. In Parr v. Triple L & J Corp., 107 P.3d 1104 (Colo. App. 2004), the court applied the “economic loss” rule, that is, if tort claims are based on contractually imposed obligations (e.g., the obligation not to unreasonably withhold consent to a sublease), then contract—not tort—law provides remedies for economic losses. The Parr court also allowed a tort claim for emotional distress, however, and further noted that although punitive damages would not normally be allowed for a breach of contract claim, the court was allowed to award punitive damages because there was also an award for emotional distress. Other courts are not as concerned with distinguishing between breach of contract and tort claims. (See Campbell v. Westdahl, 715 P.2d 288 (Ariz. Ct. App. 1985), a case in which the jury seemingly arbitrarily divided the $72,752 award to tenant for landlord’s unreasonable withholding of consent to an assignment into a $5,750 breach of contract award and a $67,000 award for intentional interference with contract.) Regardless of whether an unreasonable withholding of consent is deemed to be a breach of contract or a tort, some of a tenant’s possible remedies against a landlord are as follows:

1. Lease Termination. Some cases hold that tenant may terminate the lease. In Ringwood Associates Ltd. v. Jacks of Route 23, Inc., 379 A.2d 508 (N.J. Sup. 1977), the court held that where a landlord refused to consent to a tenant’s request to assign, apparently because the landlord wanted to lease space to the assignee directly for higher rent, tenant was entitled to vacate the premises and stop paying rent, because “a substantial breach of a material, mutually dependent covenant in a bilateral contract excuses the injured party from further performance.” Id.at 514 . Other cases hold that a tenant is not released from performance of his duties under the lease following landlord’s unreasonable withholding of consent. See Campbell v. Westdahl, 715 P.2d 288 (Ariz. Ct. App. 1985).

2. Specific Performance. Some courts grant specific performance (i.e., landlord must consent to the proposed subtenant). See Hedgecock v. Mendel, 263 P. 593 (Wash. 1928).

3. Damages. Some of the categories of damages owed to tenant are as follows:

a. Lost bargain. This category of damages can be significant if, for example, the proposed sublease was in conjunction with a proposed sale of tenant’s business. A tenant is also sometimes entitled to reduce rent by the amount of sublease rent tenant would have received.

b. Excess subrents over prime rent. We should all be as lucky as the tenant in Assocs. Commercial Corp. v. Bayou Mgmt., Inc., 426 So. 2d 672 (La. Ct. App. 1983). He found a subtenant who was willing to pay a higher rent than the prime lease rent, and the court awarded the tenant the excess rent as damages after landlord unreasonably withheld its consent to the sublease.

c. Exemplary damages. Occasionally, the court finds the landlord’s actions to be so egregious that the court awards the tenant exemplary damages. See Parr v. Triple L & J Corp., 107 P.3d 1104 (Colo. App. 2004).

d. Damages for Emotional Distress. Again, see Parr.

e. Attorneys’ Fees and Costs. These are generally awarded when the lease specifically includes a prevailing party provision or attorneys’ fees are granted by statute.

Sometimes, the damages due to a tenant when a landlord unreasonably withholds consent can be quite significant. A case that should strike terror into the heart of all landlords (including our impulsive consent-refusing client) is Toys “R” Us, Inc. v. NBD Trust Company of Illinois, No. 88 C 10349, 1995 WL 591459 (N.D. Ill Oct. 4, 1995).In that case, tenant requested landlord’s consent to sublease, and landlord refused to consent without requesting any information regarding subtenant’s finances or plans to use the space. Later, landlord offered a number of reasons for withholding consent, but it appeared that landlord actually wanted to lease space to tenant’s subtenant directly. The court rejected the landlord’s pretexts for withholding its consent and ultimately awarded tenant $1,575,754.40 in damages, $640,016.50 in attorneys’ fees, and $84,208.45 in litigation expenses. One of the noteworthy aspects of the court’s opinion is that the court assumed, for purposes of calculating damages, that both tenant and subtenant would have exercised their options to extend their lease terms, because where there is any uncertainty with respect to lease renewals, the court noted, the tenant is favored.

Limitation of Remedies

Of course, a landlord can limit a tenant’s remedies in its lease by providing that a tenant’s sole remedy for a landlord’s failure to consent to a proposed assignment or sublease is to bring an action for declaratory judgment or specific performance, and in such event, no damages will be awarded. The court in Gladliz, Inc. v. Castiron Court Corp., 677 N.Y. S.2d 662 (N.Y. Sup. Ct. 1998) noted that such a provision was specifically bargained for in the lease in question, and saw no reason why the clause shouldn’t be upheld. In that case, the language read as follows:

Wherever Landlord in this lease agrees not to unreasonably withhold his consent, it is understood and agreed that Tenant’s sole remedy in connection with any refusal on the part of the Landlord to give its consent in writing shall be limited to bringing an action for declaratory judgment or for specific performance and in no event shall Tenant bring an action for damages against the Landlord or shall Landlord be liable to the Tenant for the Landlord’s refusal to grant its consent.

Id. at 664.

Tenants with negotiating power should strike this language or, failing that, provide for some sort of summary proceeding to resolve the issue of whether landlord has unreasonably withheld its consent, because a tenant is pretty certain to lose its potential subtenant long before a lawsuit concludes. Certainly, Ernst Home Ctr., Inc. v. Sato, 910 P.2d 486 (Wash. Ct. App. 1996), a case in which a landlord finally agreed to allow retail tenant Value Village to sublease a portion of a shopping center midway through a lawsuit to determine whether landlord had unreasonably withheld its consent is the exception rather than the rule. A potential subtenant is probably as patient as Value Village was in that case only when something about the space in question is extremely unique (which is probably more common in the retail context than in the office context).

Conclusion

An ounce of prevention is worth a pound of cure. Haste makes waste. Act in haste, repent at leisure. Insert additional tired maxim here. Given how significant the damages for a landlord’s unreasonable withholding of consent can be, a landlord should plan ahead by either (a) negotiating a limitation of tenant’s damages for landlord’s unreasonable withholding of consent in its lease with a tenant, or (b) determining whether it can reasonably withhold consent before it sends a letter denying consent.

Cases
Please follow this link to a chart that describes the cases mentioned in this article, along with a few other cases. Many of the cases involve an assignment rather than a sublease, but the general rules with respect to consent should be the same. I gratefully acknowledge the assistance of Erik Jarmusz in researching case law and preparing the chart.

Ruth A. Schoenmeyer is with Jenner & Block LLP in Chicago. She can be reached at rschoenmeyer@jenner.com .

Note
“Tenant's Remedies for Landlord’s Unreasonable Refusal to Consent to a Sublease,” by Ruth Schoenmeyer, 2009, published by the ABA Section of Real Property Trust & Estate Law ABA Spring Symposia 2009. ©2009 by the American Bar Association. Reprinted With permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

 

 

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