March 14, 2018

The Last Word

Download PDF ArticleContract drafters should always strive for precision—language that imposes objective performance requirements and gives a court no wiggle room in its interpretations. But on matters that hinge on the future judgment of one party (the Decider), the other party might not sign the contract unless the contract obligates the Decider to have a good reason for its decisions. Generally, the parties agree that the Decider must act reasonably—that it will not withhold its approval or consent unreasonably. But what does reasonably mean? How can the Decider protect its ability to deny approval based on considerations that may not be apparent to a court?

What Is Reasonable?

Reasonable is litigation fodder. Its meaning depends on the perception of the reader, or more accurately, the court. Black’s Law Dictionary defines reasonable as “fair, proper, or moderate under the circumstances.” Black’s Law Dictionary 1293 (8th ed. 2004). There it is: fair—the four-letter F-word that can be the bane of contract interpretation. The Restatement (Second) of Property § 15.2 tells us that “[a] reason for refusing consent, in order for it to be reasonable, must be objectively sensible and of some significance and not be based on mere caprice or whim or personal prejudice.” “Objectively sensible” raises the question: “Sensible to whom?” Notwithstanding this ostensibly “objective” test, reasonable permits a court to look at a fact situation and do justice as the court sees it, which will certainly not be justice as the losing litigant sees it.

The cases on landlord consent to sublease and assignment demonstrate that courts differ on what is or is not the reasonable withholding of consent:

  • In Medinvest Co. v. Methodist Hospital, 359 N.W.2d 714 (Minn. Ct. App. 1984), the court held that a hospital landlord was reasonable in withholding its consent to a subtenant that would compete with the landlord; however, in Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hospital Service District No.1, 426 F.3d 738 (5th Cir. 2005), the court found the hospital landlord acted unreasonably in withholding its consent to a sublease based on increased competition.
  • In Losurdo Bros. v. Arkin Distributing Co., 465 N.E.2d 139, 143 (Ill App. Ct. 1984), the court recognized that a landlord may reasonably consider the “credit and financial responsibility” of a proposed subtenant. But in Caplan v. Latter & Blum, 468 So. 2d 1188, 1191 (La. 1985), the court held that a subtenant’s financial status was “immaterial” because the original tenant remained bound.

The bottom line is that courts decide what is reasonable based on their own perception of what is fair in the particular fact situation, with strong reliance on the words of the contract.

The Drafter Should Guide the Court on What Is Reasonable

Most contracting parties choose the parties with whom they do business based on particular criteria—generally their perceived ability to satisfy the contract requirements. In a lease, these requirements are often more than the payment of rent. Today’s commercial landlords often choose their tenants based on the type of business they conduct and their intended use of the property. The landlord’s lawyer must stipulate these considerations in the contract. If the landlord requires occupants with a particular net worth and operating experience, the contract must state that the landlord will be acting reasonably if it withholds its consent to a proposed subtenant or assignee that does not have this net worth or experience. If the landlord wants to avoid disputes over the property’s use, it should specify a particular use, and if the tenant insists on a reasonable right to change the use, the contract should specify that the landlord may reasonably refuse to consent to a use that competes with the landlord or other tenants. The landlord’s lawyer also may stipulate that the landlord will be considered reasonable in withholding its consent to a proposed subtenant or assignee that is already a tenant or a potential tenant of other landlord property.

Few contracts can deal precisely with all possible changes in circumstances—elasticity is needed in some areas. For that reason, the parties are generally permitted to make specified changes, like a change in the party that will occupy the premises, with the consent of the other party—the Decider. When the contract requires that the Decider be reasonable, the other party has assurance that the Decider will exercise its rights without trying to raise the rent or receive other concessions not originally contemplated by the parties. For the Decider to have the right to withhold consent based on its particular requirements, the Decider’s lawyer must identify these requirements—it must tell the court and the other party what the Decider means by reasonable.