ALI-ABA Course of Study Modern Real Estate Transactions. July 25-28, 2007 San Francisco, California. Assignment and Subletting

Transcription

1 2225 ALI-ABA Course of Study Modern Real Estate Transactions July 25-28, 2007 San Francisco, California Assignment and Subletting By John W. Daniels, Jr. Quarles & Brady LLP Milwaukee, Wisconsin

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3 2227 ASSIGNMENT AND SUBLETTING John W. Daniels, Jr. 1 I. GENERAL PRINCIPLES AND MATTERS. Quarles & Brady LLP Milwaukee, Wisconsin A. Business and Practical Aspects of Tenant s Right to Assign and Sublet. 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.1 (4th ed & Supp. 2002). A Tenant should understand that it assumes significant liabilities when it enters into a lease and should presume that it will be responsible for performance under the lease for the entire length of the term. As a practical matter, the right to assign or sublease its interest may be of vital importance to a Tenant, who may otherwise be obligated to pay rent and maintenance costs, as well as perform other duties, for property of no economic value to the Tenant; in many cases, a Landlord does not need to find a replacement Tenant, should the original Tenant quit the premises prior to the expiration of the lease s term. B. Definition and Effects of Operative Terms. 49 AM. JUR. 2d Landlord and Tenant 1076 (1995 & Supp. 2002); RAYMOND J. WERNER AND ROBERT KRATOVIL, REAL ESTATE LAW (10th ed. 1993). 1. Assignment. An assignment is a transfer of the entire leasehold interest in all or a part of the demised premises for the unexpired term of the original lease. See New Amsterdam Casualty Co. v. Nat l Union Fire Ins. Co. of Pittsburgh, Pa., 266 N.Y. 254, 194 N.E. 745 (1935); Waller v. Comm r of Internal Revenue, 40 F.2d 892 (5th Cir. 1930). 2. Subleasing. A sublease is a transfer of only a part of the leasehold; the sublessor retains a reversion (even if only minimal). See Marcelle, Inc. v. Sol & S. Marcus Co., 274 Mass. 469, 175 N.E. 83 (1931); Coles Trading Co. v. Spiegel, Inc., 187 F.2d 984 (9th Cir. 1951). 3. Common Law on the Right to Assign. MacFadden-Deauville Hotel, Inc. v. Murrell, 182 F.2d 537 (5th Cir. 1950); Valley Oil Co. v. Barberian, 344 Mass. 759, 183 N.E.2d 109 (1962); Presby v. Benjamin, 169 N.Y. 377, 380, 62 N.E. 430, 431 (1902); 2 RICHARD POWELL AND ROY BELDEN, LAW OF REAL PROPERTY (2003); 1 AMERICAN LAW OF PROPERTY 3.75 (1952 & Supp. 1980); Annotation, Right of Lessee in Absence of Covenant to Assign Lease or Sublet Premises, 70 A.L.R. 486 (1931); 51C C.J.S. Landlord and Tenant 31 (1968 & Supp. 2002); 49 AM. JUR. 2d Landlord and Tenant 1082 (1995 & Supp. 2002); ROBERT S. 1 This outline was prepared with the assistance of Shawn D. Gould (Boalt Hall 2001), an associate in the Real Estate Practice Group of the firm. QBMKE\

4 2228 SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT 8:10 (1980 & Supp. 2003). i. Absent express restriction, general rule allows assignment or subletting (even where lease contains percentage rent provision). 49 Am. Jur. 2d Landlord and Tenant 1082 (1995 & Supp. 2002); Crestwood Plaza, Inc. v. Kroger Co., 520 S.W.2d 93 (Mo. App. 1974); Rowe v. Great Atl. & Pac. Tea Co., 61 A.D.2d 473, 402 N.Y.S.2d 593 (App. Div. 1978), rev d, 412 N.Y.S.2d 827, 385 N.E.2d 566 (1978). ii. Exceptions (farm lease, tenancy-at-will). 4. Assignment and Sublease Distinguished. 49 AM. JUR. 2d Landlord and Tenant 1077 (1995 & Supp. 2002); 1 HERBERT TIFFANY, REAL PROPERTY 123 (3d ed. 1939); Wallace, Assignment and Sublease, 8 IND. L.J. 359 (1939); 51C C.J.S. Landlord and Tenant 37, 43 (1968 & Supp. 2002); ROBERT S. SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT, 8:10 (1980 & Supp. 2003); 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES, n.1; Joseph Oros. Co. v. F.W. Woolworth Co., 844 F.2d 369 (6th Cir. 1988) (under Ohio law, a transfer of a leasehold for a period one day less than the term of the main lease is a sublease and not an assignment); Tidewater Investors Ltd. v. United Dominion Realty Trust, Inc., 804 F.2d 293 (4th Cir. 1986) (Virginia law); In re Miami Dyeing & Printing, Inc., 14 B.R. 947 (S.D. Fla. 1981); Walgreen Arizona Drug Co. v. Plaza Ctr. Corp., 132 Ariz. 512, 647 P.2d 643 (Ct. App. 1982); Rocklen, Inc. v. Radulesco, 10 Conn. App. 271, 522 A.2d 846 (1987); Dayenian v. Am. Nat'l Bank & Trust Co., 91 Ill. App. 3d 622, 414 N.E.2d 1199 (1980); Italian Fisherman, Inc. v. Middlemas, 313 Md. 156, 545 A.2d 1 (1988); Hardle v. Preston Energy, Inc., 374 N.W.2d 807 (Minn. Ct. App. 1985); Weeks v. Cal-Maine Foods, Inc., 522 So. 2d 725 (Miss. 1987); Capoccia v. Brognano, 135 A.D. 2d 1010, 522 N.Y.S.2d 733 (1987), appeal dismissed (N.Y. App. Div. 1987), 71 N.Y.2d 1022, 526 N.E.2d 48, 530 N.Y.S.2d 557 (1988); McSpadden v. Dawson, 117 A.D.2d 453, 503 N.Y.S.2d 357 (1986); Bostonian Shoe Co. v. Wulwick Assocs., 119 A.D.2d 717, 501 N.Y.S.2d 393 (1986), appeal dismissed; Conklin Dev. Corp. v. Acme Mkts., Inc., 89 A.D.2d 769, 453 N.Y.S.2d 930 (1982), appeal dismissed, 58 N.Y.2d 929, 460 N.Y.S.2d 532, 447 N.E.2d 80 (1983); Anchor Holding Co. v. Michael's Coffee Shop, 81 A.D.2d 535, 438 N.Y.S.2d 104 (1981); Krasner v. Transcon. Equities, Inc., 70 A.D.2d 312, 420 N.Y.S.2d 872 (1979); Neal v. Craig Brown, Inc., 86 N.C. App. 157, 356 S.E.2d 912 (1987), review denied, 320 N.C. 794, 361 S.E.2d 80 (1987); Castle v. Double Time, Inc., 737 P.2d 900 (Okla. 1986); Parr v. Farmers State Bank, 659 S.W.2d 883 (Tex. App. 1983); L & M Corp. v. Loader, 688 P.2d 448 (Utah 1984); Estate of Whitley v. Anning, 392 So. 2d 799 (La. Ct. App. 1980); Chemical Dynamics, Inc. v. Newfeld, 728 S.W.2d 590 (Mo. Ct. App. 1987); Joseph Bros. Co. v. F.W. QBMKE\

5 2229 Woolworth Co., 844 F.2d 369 (6th Cir. 1988); F.W. Woolworth Co. v. Plaza North, Inc., 493 N.E.2d 1304 (Ind. Ct. App. 1986); Maxima Corp. v. Cystic Fibrosis Found., 81 Md. App. 602, 568 A.2d 1170 (1990); Northside Station Assocs. P ship v. Maddry, 105 N.C. App. 384, 413 S.E.2d 319 (1992); Burgess Pic-Pac, Inc. v. Fleming Cos., Inc., 190 W. Va. 169, 437 S.E.2d 742 (1993); Lamonts Apparel, Inc. v. Si-Lloyd Assocs., 157 Or. App. 44, 967 P.2d 905 (1998). i. Privity of contract ("POC") and privity of estate ("POE"). First Am. Nat'l Bank v. Chicken Sys. of Am., Inc., 616 S.W.2d 156 (Tenn. Ct. App. 1980); L & M Corp. v. Loader, 688 P.2d 448 (Utah 1984) (assignor could not sue Landlord for breach of right of first refusal because right was transferred to assignee by assignment of lease); OTR v. Flakey Jake's, Inc., 112 Wash. 2d 243, 710 P.2d 629 (1989); Satellite Gateway Communications, Inc. v. Musi Dining Car Co., 110 N.J. 280, 540 A.2d 1267 (1988) (attorney fees relative to default); North Bergen Rex Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 730 A.2d 843 (1999); Cmty. Realty Mgmt., Inc. v. Harris, 155 N.J. 212, 714 A.2d 282 (1998). (a) (b) Matters prior or subsequent to transfer not covered by POE. POE affects matters "running with land." ii. iii. iv. Reservations of time, rent, re-entry, etc. 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.403a (4th ed & Supp. 2002). Majority rule. This is also called the English Rule and states that an assignment, rather than a sublease, exists only if the transfer of the leasehold interest is complete and the transferee does not retain a reversion. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.403a (4th ed & Supp. 2002); Davidson v. Minn. Loan & Trust Co., 158 Minn. 411, 197 N.W. 833 (1924); Minority rule. Courts adopting this view look at the intent of the parties to determine whether the transfer of the leasehold interest is an assignment or a sublease. See Jaber v. Miller, 219 Ark. 59, 239 S.W.2d 760 (1951); Ernst v. Conditt, 54 Tenn. App. 328, 390 S.W.2d (1965); but see Northside Station Assocs. P ship v. Maddry, 105 N.C. App. 384, 413 S.E.2d 319 (1992). C. Lessor Assignment. A number of states have statutes permitting a Landlord to transfer its interest in the leased premises without the consent of the Tenant, as long as the lease itself does not expressly prohibit such transfer. See RESTATEMENT (SECOND) OF PROPERTY, 15.1 stat. n. 3 (1977 & Supp. 2003). D. Statute of Frauds and Other Requisites. 49 AM. JUR. 2d Landlord and Tenant (1995 & Supp. 2002). QBMKE\

6 2230 II. APPLICABILITY OF RESTRICTIONS ON ASSIGNMENT AND SUBLEASING. A. Statutory, Tenancy-at-Will, Concessions. RESTATEMENT (SECOND) OF PROPERTY, 15.2 (1977 & Supp. 2003); 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES (4th ed & Supp. 2002). B. Standard of Strict Construction. 49 AM. JUR. 2d Landlord and Tenant 1088, 1090, 1092, 1093 (1995 & Supp. 2002); 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES (4th ed & Supp. 2002). 1. Limited to the Category Described (i.e. merely stating that assignments are prohibited may not prohibit subleases). 2. Prime Lease Limitation Effect On Sublease. 49 AM. JUR. 2d Landlord and Tenant 1157 (1995 & Supp. 2002). 3. For Benefit of Lessor. 49 AM. JUR. 2d Landlord and Tenant 1148 (1995 & Supp. 2002). i. Transfer in violation not void but voidable. ii. Transferee has "limited" right to raise breach as defense. 4. Part or Whole. 49 AM. JUR. 2d Landlord and Tenant 1166 (1995 & Supp. 2002). C. Express Restrictions. Courts generally look with disfavor on non-assignment clauses and strictly construe them against the Landlord, because they are viewed as restraints on the free alienation of property. See ROBERT S. SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT 8:16, 583 (1980 & Supp. 2003); 1 AMERICAN LAW OF PROPERTY, 358 (1952 & Supp. 1977). The Restatement would propose that a restraint on the alienation of either the Tenant s or the Landlord s interest without the consent of the other party be valid, but that the other party s consent may not be unreasonably withheld unless a freely negotiated provision in the lease gives the other party the absolute right to withhold consent. See RESTATEMENT (SECOND) OF PROPERTY 15.2 (1977 & Supp. 2003); see also Paul J. Weddle, Pacific First Bank v. New Morgan Park Corporation: Reasonable Withholding of Consent to Commercial Lease Assignments, 31 WILLAMETTE L. REV. 713 (1995); Martha Wach, Withholding Consent to Alienate: If Your Landlord is in a Bad Mood, Can He Prevent You From Alienating Your Lease?, 43 DUKE L.J. 671 (1993); Todres and Lerner, Assignment and Subletting of Leased Premises: The Unreasonable Withholding of Consent, 5 FORDHAM URB. L.J. 195 (1977); Annotation, When Lessor May Withhold Consent Under Unqualified Provision in Lease Prohibiting Assignment or Subletting of Leased Premises Without Lessor's Consent, 21 A.L.R. 4th 188 (1983 & Supp. 2002); 49 AM. JUR. 2d Landlord and Tenant 1090 (1995 & Supp. 2002); Effect of Leasehold Provisions Requiring the Lessor's Consent to QBMKE\

7 2231 Assignment, 21 HASTINGS L.J. 516 (1970); 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES, (4th ed & Supp. 2002). 1. Absolute Restriction (i.e. no mention of Landlord s consent): e.g. Tenant shall not assign or sublet its interest under this Lease. 2. Assignment with Consent of Landlord: e.g. Tenant shall not assign or sublet its interest under this Lease without Landlord s prior written approval. See Effect of Leasehold Provisions Requiring the Lessor's Consent to Assignment, 21 HASTINGS L.J. 516 (1970); Annotation, 54 A.L.R. 3d 679 (1973 & Supp. 2002). There is a great deal of variance in the application of the consent standard, but the majority rule is that, if the lease is silent, the Landlord need not be reasonable in withholding its consent. See 421 Willow Corp. v. Callowhill Center Assocs., 2003 WL (Pa. Com. Pl. 2003) (holding that Pennsylvania follows the majority rule and that no requirement of acting reasonably will be imposed upon Landlord s right to consent to assignments); but see Morgan Products, Ltd. v. Park Plaza of Oshkosh, Inc., 229 Wis.2d 231, 598 N.W.2d 626 (1999) (holding that Landlord must be reasonable in refusing consent, but that Tenant bears the burden of proving Landlord s unreasonableness); Carey v. Lincoln Loan Co., 165 Or. App. 657, 998 P.2d 724 (2000) (holding that the phrase which consent shall not be unreasonably withheld is engrafted onto clauses merely stating that Tenant may not assign with Landlord s consent). For other cases addressing this issue, see the following: Manley v. Kellar, 47 Del. 511, 94 A.2d 219 (1952); Trusghinger v. Pak, 513 So. 2d 1151 (La. Ct. App. 1987); Lilawanti Enter., Inc. v. Walden Book Co., 670 So. 2d 588 (La. Ct. App. 1996); 68 Beacon Street, Inc. v. Sohier, 289 Mass. 354, 194 N.E. 303 (1935); Gruman v. Investors Diversified Serv. Inc., 247 Minn. 502, 78 N.W.2d 377 (1956); Segre v. Ring, 103 N.H. 278, 170 A.2d 265 (1961); Mann Theatres Corp. v. Mid-Island Shopping Plaza Co., 94 A.D.2d 466, 464 N.Y.S.2d 793 (1983); Ithaca Assocs. Co. v. Plataniotis, 274 A.D.2d 640, 710 N.Y.S.2d 688 (2000); Isbey v. Crews, 55 N.C. App. 47, 284 S.E.2d 534 (1981); Slavin v. Rent Control Bd. of Brookline, 406 Mass. 458, 548 N.E.2d 1226 (1990); Dobyns v. South Carolina Dep t of Parks, Recreation & Tourism, 317 S.C. 353, 454 S.E.2d 374 (Ct. App. 1995); Snortland v. Larson, 364 N.W.2d 67 (N.D. 1985) (applying Minnesota law); F & L Ctr. Co. v. Cunningham Drug Stores, Inc., 19 Ohio App. 3d 72, 19 Ohio B.R. 156, 482 N.E.2d 1296 (1984); Shoney s, Inc. v. Winthan Prop., 2001 Ohio 3965 (Ct. App. 2001); Reynolds v. McCullough, 739 S.W.2d 424 (Tex. Ct. App. 1987) (writ denied); 718 Assocs., Ltd. v. Sunwest N.O.P., 1 S.W.3d 355 (Tex. Ct. App. 1999); Trinity Prof l Plaza Assocs. v. Metrocrest Hosp. Auth., 987 S.W.2d 621 (Tex. Ct. App. 1999); Twelve Oaks Tower I, Ltd. v. Premier Allergy, Inc., 938 S.W.2d 102 (Tex. Ct. App. 1996); compare Arrington v. Walter E. Heller Int'1 Corp., 30 Ill. App. 3d 631, 333 N.E.2d 50 (1975); Homa-Goff Interiors, Inc. v. Cowden, 350 So. 2d 1035 (Ala. 1977); Rowley v. City of Mobile, 676 So. 2d 316 QBMKE\

8 2232 (Ala. Civ. App. 1995); Julian v. Christopher, 320 Md. 1, 575 A.2d 735 (1990); Hendrickson v. Freericks, 620 P.2d 205 (Alaska 1980); Campbell v. Westdahl, 148 Ariz. 432, 715 P.2d 288 (Ct. App. 1985); Warmack v. Merchants Nat'l Bank of Fort Smith, 272 Ark. 166, 612 S.W.2d 733 (1981); Kendall v. Ernest Pestana, Inc., 40 Cal. 3d 488, 709 P.2d 837, 220 Cal. Rptr. 818 (1985); Ilkhchooyi v. Best, 37 Cal. App. 4th 395, 45 Cal. Rptr. 2d 766 (1995); Warner v. Konover, 210 Conn. 150, 553 A.2d 1138 (1989); Fernandez v. Vazquez, 397 So. 2d 1171 (Fla. Dist. Ct. App. 1981); First Nationwide Bank v. Florida Software Serv., 770 F. Supp (M.D. Fla. 1991); Funk v. Funk, 102 Idaho 521, 633 P.2d 586 (1981); First Fed. Sav. Bank of Ind. v. Key Mkts., Inc., 532 N.E.2d 18 (Ind. Ct. App. 1988); Newman v. Hinky Dinky Omaha-Lincoln, Inc., 229 Neb. 382, 427 N.W.2d 50 (1988); Boss Barbara, Inc. v. Newbill, 97 N.M. 239, 638 P.2d 1084 (1982); Castle v. McKnight, 116 N.M. 595, 866 P.2d 323 (1993); Economy Rentals, Inc. v. Am. Toyota, Inc., 112 N.M. 748, 819 P.2d 1306 (1991); see also Basnett v. Vista Vill. Mobile Home Park, 699 P.2d 1343 (Colo. Ct. App. 1984), rev'd, 731 P.2d 700 (Colo. 1987); Sterns Gallery of Gifts, Inc. v. Corporate Prop. Investors, Inc., 176 Ga. App. 586, 337 S.E.2d 29 (1985); Citizens Bank & Trust Co. v. Barlow Corp., 295 Md. 472, 456 A.2d 1283 (1983); Healthco, Inc. v. E & S Realty Assocs., 400 Mass. 700, 511 N.E.2d 579 (1987); Jonas v. Prutaub Joint Venture, 237 N.J. Super. 137, 567 A.2d 230 (Ct. App. 1989). For a thorough analysis, see also Coskan, Assignment and Sublease Restrictions: The Tribulations of Leasehold Transfers, 22 LOY. L.A. L. REV. 405 (1989). 3. Consent of Lessor Not Unreasonably Withheld. Construction and effect of provision in lease that consent to subletting or assignment will not be arbitrarily or unreasonably withheld. 54 A.L.R. 3d 679 (1973 & Supp. 2002); 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.304c (4th ed & Supp. 2002); Annotation, 21 A.L.R. 4th 188, 198 et seq. (1983 & Supp. 2002). 4. Relevant Factors for Subparagraphs (2) and (3) above. 2 2 Numerous cases cite the Restatement (Second) as authority for what is reasonable. The Restatement, in turn, cites American Book Co. v. Yeshiva University Development Foundation, Inc., 59 Misc. 2d 31, 33, 297 N.Y.S.2d 156, 169 (Sup. Ct. 1969), for several criteria a landlord may apply to a prospective tenant, including: (i) financial responsibility (probably the single most recognized criterion); (ii) the 'identity' or 'business character' of the transferee, i.e., the transferee's suitability for the particular building; (iii) the legality of contemplated transferee s proposed use of the premises; and (iv) the nature of the occupancy (i.e., office, factory, clinic). A Florida court adopted these factors in Fernandez v. Vazquez, 397 So. 2d 1171 (Fla. Dist. Ct. App. 1981), along with the need for alteration of the premises. Friedman cites several additional factors, including avoidance of subjecting existing tenants to competition, protection of the landlord's "tenant mix", reduction in rental value or increased fire hazard. FRIEDMAN supra, at 7.304c (1983). Factors that a landlord may not reasonably consider include race, doctrinal QBMKE\

9 2233 i. Creditworthiness. ii. iii. iv. Use. Competition. Business character of proposed transferee. v. Status of Transferee as existing tenant in building or project. vi. vii. viii. Tenant mix in building. Prospective tenant. Ability to Define "Reasonableness" by Agreement. ix. Notice. Hendrickson v. Freericks, 620 P.2d 205 (Alaska 1980) (court described Restatement as only applicable where tenant asks for consent first); Healthco, Inc. v. E & S Realty Assocs., 400 Mass. 700, 511 N.E.2d 579 (1987) (court refused to consider reasonableness of landlord's refusal to consent where tenant failed to seek consent first); Reston Recreation Ctr. Assocs. v. Reston Prop. Investors Ltd. P ship, 238 Va. 419, 384 S.E.2d 607 (1989); see also RESTATEMENT (SECOND) OF PROPERTY 15.2, comment g (1977 & Supp. 2003). 5. Potential Remedies for Landlord Unreasonably Withholding Consent. A Tenant might seek damages, an injunction, specific performance, or termination of the lease, depending on the Tenant s jurisdiction and the applicable provisions of the lease. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.304c (4th ed & Supp. 2002); E. Fed. Corp. v. State Office Supply Co., 646 So.2d 737 (Fla. Dist. Ct. App. 1995) (holding that injunction was proper remedy when Landlord was found to have a pattern and practice of unreasonably withholding consent to prospective subtenants); Gladliz, Inc. v Castiron Court Corp., 177 Misc.2d 392, 677 N.Y.S.2d 662 (1998) (holding that lease provision limiting Tenant s remedies to seeking either a declaratory judgment or specific performance was enforceable); Manhattan Embassy Co. v. Burns, 185 Misc.2d 692, 713 N.Y.S.2d 799 (2000) (holding that Tenant was entitled to damages resulting from Landlord unreasonably withholding consent when lease predated statute limiting such remedies). anathema, and personal objection to the proposed business where not otherwise excluded by the lease. QBMKE\

10 2234 D. Transferees That Implicate Non-assignment Provisions. 1. Co-tenants. 2. Partnerships. Heflin v. Stiles, 663 S.W.2d 131 (Tex. Ct. App. 1983); Borgen v. Wiglesworth, 190 Kan. 367, 375 P.2d 601 (1962); Miller v. Pond, 214 Mich. 186, 183 N.W. 24 (1921), Annotation, 17 A.L.R. 179 (1921); Madison 52nd Corp. v. Luxenberg, 8 N.Y.2d 955, 168 N.E.2d 851, 204 N.Y.S.2d 185 (1960), noted in 7 N.Y.L.F. 118 (1961); Morris Glick v. Grubman, 56 N.Y.S.2d 324 (Sup. Ct. 1945); 51C C.J.S. Landlord and Tenant 33(6) (1968 & Supp. 2002); Fidelity Trust Co. v. BVD Assocs., 196 Conn. 270, 492 A.2d 180 (1985) (transfer of interest in limited partnership not in violation of mortgage due on sale provision). i. Transfer of partnership interest. ii. iii. Entry of new partner(s) or exit of existing partner(s). Deceased partner(s). 3. Corporations. See generally Alabama Vermiculite Corp. v. Patterson, 124 F. Supp. 441, 445 (W.D.S.C. 1954); Richardson v. La Rancherita La Jolla, Inc., 98 Cal. App. 3d 73, 159 Cal. Rptr. 285 (1979); Ser-Bye Corp. v. C. P. & G. Markets, Inc., 78 Cal. App. 2d 915, 179 P.2d 342 (1947); Branmar Theatre Co. v. Pranmar, Inc., 264 A.2d 526 (Del. Ch. 1970); Burrows Motor Co. v. Davis, 76 A.2d 163 (D.C. Mun. Ct. App. 1950); Posner v. Air Brakes & Equip. Corp., 2 N.J. Super. 187, 62 A.2d 711 (1948); Rubinstein Bros. v. Ole of 34th St., Inc., 101 Misc. 2d 563, 421 N.Y.S.2d 534 (Civ. Ct. 1979); Comment, Amalgamation Transactions of Corporate Lessees as Breaches of Nonassignment Covenants: Another Plea for Substance Over Form, 69 YALE L.J (1960); see attached Case Update II (D)(3); In re Ames Dep t Stores, Inc., 127 B.R. 744 (D. N.Y. 1991); Kelly v. Alstores Realty Corp., 250 N.J. Super. 11, 593 A.2d 347 (Ct. App. 1991). i. Transfer of Stock. In the opinion of some, a transfer of stock may circumvent ordinary non-assignment clauses prohibiting the transfer of the Tenant s interest in the leasehold. The best way to address this possibility, is to specifically make the unauthorized transfer of the control of the stock of the Tenant an impermissible assignment. 3 See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 3 Friedman notes that even a clause to this effect may not be completely effective, because like other restraints on alienation, this provision will be construed strictly against the restriction. Therefore, a clause applicable literally to any stock transfer may not bar the creation of enough new stock, and its issuance to a third party, to change stock control with the same effect as if QBMKE\

11 cl (4th ed & Supp. 2002); see also Hugh M. Boss, Selected Real Estate Aspects of Corporate Acquisitions, 38 BUS. LAW 147, 153 (1982); Rubinstein Bros. v. Ole of 34th St., Inc., 101 Misc. 2d 563, 421 N.Y.S.2d 534 (Civ. Ct. 1979) (finding that, if Landlord had truly wanted to protect itself against change in the control of Tenant s stock, it could have written into the lease a condition subsequent, but that such a condition could not be implied); Richardson v. La Rancherita La Jolla, Inc., 98 Cal. App. 3d 73, 159 Cal. Rptr. 285 (1979) (refusing to violate the corporate form by holding subsequent stock transfer violative of the nonassignment clause). ii. iii. Addition of new class(es) of stock. Merger. There is little authority analyzing the effect of a nonassignment clause on a merger or consolidation of a corporate tenant. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.303e2, 251 (4th ed & Supp. 2002); see also, Annotation, 39 A.L.R. 4th 879 (1983 & Supp. 2002); Middendorf v. Fuqua Indus., Inc., 623 F.2d 13 (6th Cir. 1980); Shakey s Inc. v. Caple, 855 F. Supp (E.D. Ark. 1994); Kelly v. Alstores Realty Corp., 130 N.J. 313, 613 A.2d 1163 (1992). (a) Bare Non-assignment Clauses. Courts have held that bare non-assignment clauses (a clause that does not reference transfers by operation of law) are intended to reach only voluntary acts of the tenant and that transfers by operation of law are involuntary by nature. See ROBERT S. SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT 8:16 n.1 (1980 & Supp. 2003); Dodier Realty & Investment Co. v. St. Louis National Baseball Club, Inc., 361 Mo. 981, 238 S.W.2d 321, 24 A.L.R. 2d 683 (1951) (holding that non-assignment clause did not prohibit transfers of the tenant s interest by operation of law such as by merger); see also United States v. Seattle-First National Bank, 321 U.S. 583, (1944) (ruling that one must look only at the immediate mechanism by which the transfer is made effective, which, if effecting an automatic transfer would be wholly by operation of law ); Segal v. Greater Valley Terminal Corp., 83 N.J. Super. 120, 199 A.2d 48 (Ct. App. 1964); Zwietusch v. Luehring, 156 Wis. 96, 144 N.W. 257 (1914). there has been a transfer of the original stock. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.303cl (4th ed & Supp. 2002). QBMKE\

12 2236 (b) Non-assignment Clause Prohibiting Transfers By Operation of Law. Courts are split as to whether the unauthorized merger of a Tenant violates a non-assignment clause prohibiting transfers by operation of law. (i) (ii) Merger is a Violation. It would seem to follow from the reasoning in Dodier, supra, that, if a lease explicitly forbids assignment by operation of law, the Tenant s unauthorized merger should constitute a breach, and some courts have so held. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.303e2 (4th ed & Supp. 2002); Citizens Bank & Trust Co. v. Barlow Corp., 295 Md. 472, 456 A.2d 1283 (1983) (holding that a lease containing a prohibition of assignments by operation of law was violated by tenant s merger) 4 ; Pacific First Bank v. New Morgan Park Corp., 122 Or. App. 401, 857 P.2d 895 (1993) (holding that Tenant s unauthorized merger was a violation of the nonassignment clause in the lease prohibiting transfers by operation of law ) 5 ; see also Parks v. CAI Wireless Sys., Inc., 85 F. Supp. 549 (D. Md. 2000). Merger Not Necessarily a Violation. Other courts have held that an unauthorized merger of a Tenant did not violate a non-assignment provision prohibiting assignments by operation of law. See Standard Operations, Inc. v. Montague, 758 S.W.2d 442 (Mo. 1988) 6 ; see also TXO Prod. Co. v. Mark, 999 S.W.2d 137 (Tex. Ct. App. 1999). 4 The Barlow court reasoned that "assignment by operation of law" clauses are considered by most to be "of the strict type." If the Tenant wanted a more liberal clause, it should have bargained for it. The court stated that carving merger out of the "operation of law" language would raise doubts as to whether the language had any meaning at all. 5 Pacific First Bank was affirmed by the Oregon Supreme Court in Pacific First Bank v. New Morgan Park Corp., 319 Or. 342, 876 P.2d 761 (1994), on the grounds that the lease was explicit in prohibiting any transfer of the Tenant s interest without the Landlord s consent. Transfer was interpreted as including all forms of passing of rights and obligations. Id. at 248, 876 P.2d at The Montague Court discussed its earlier decision in Dodier and correctly differentiated the lease provisions in the two cases (the Dodier clause only prohibited voluntary assignments, whereas the Montague clause attempted to prohibit both voluntary and involuntary assignments). See Standard Operations, Inc. v. Montague, 758 S.W.2d 442, 433 (Mo. 1988). However, the Court held that this distinction would not merit a finding that the non-assignment provision forbade the merger, noting that forfeitures are viewed with disfavor and that instruments should QBMKE\

13 2237 iv. Dissolution. (a) Not Considered Breach of Non-assignment Clause. Most cases considering whether dissolution of a corporation violates a non-assignment clause deal with bare non-assignment clauses. The courts in these cases have followed a Dodier-type of reasoning, construing the antiassignment language narrowly, in favor of the Tenant. These courts often cite state laws that allow a dissolved corporation to reinstate itself within a certain number of years and to retain assets for purposes of "winding up" its affairs. The test for these courts then becomes whether the lease was abandoned or treated as a valuable asset of the corporation that the liquidating trustees retain for the benefit of the shareholders. If the former is true, the lease remains a primary obligation of the corporation, and, therefore, no assignment is made. If the latter is true, the lease passes to the shareholders, who succeed to the rights and obligations of the corporation in the leasehold estate. See Haddad v. Francis, 40 Conn. Supp. 567, 537 A.2d 174 (1986), aff d 13 Conn. App. 324, 536 A.2d 597 (1988); Middendorf v. Fuqua Indus., Inc., 623 F.2d 13, 17 (6th Cir. 1980); Rauch v. Circle Theatre Co., 176 Ind. App. 130, 374 N.E.2d 546 (1978); Hampton v. Hampton Beach Improvement Co., 107 N.H. 89, 218 A.2d 442 (1966); Shakey s Inc. v. Caple, 855 F. Supp (E.D. Ark. 1994); Kelly v. Alstores, 130 N.J. 313, 613 A.2d 1163 (1992); 21 Merchants Row Corp. v. Merchants Row, Inc., 412 Mass. 204, 587 N.E.2d 788 (1992); Ernst Home Ctr., Inc. v. Sato, 910 P.2d 486 (Wash. Ct. App. 1996); Lamont s Apparel, Inc. v. Si-Lloyd Assocs., 157 Ore. App. 342, 967 P.2d 905 (1998); Carma Developers, Inc. v. Marathon Dev. California, Inc., 2 Cal. 4th 342, 826 P.2d 710, 6 Cal. Rptr. 2d 467 (1992); Trinity Prof l Plaza Assocs. v. Metrocrest Hosp. Auth., 987 S.W.2d 621 (Tex. Ct. App. 1999); Julian v. Christopher, 320 Md. 1, 575 A.2d 735 (1990); see also Airport Plaza, Inc. v. Blanchard, 188 Cal. App. 3d 1594, 234 Cal. Rptr. 198 (1987). be construed to "avoid the divestment or impairment of valuable rights unless the language is compelling." Id. at 444. The Court reasoned that the "by operation of law" language in the lease was intended to forbid only involuntary assignments, whereas the merger in Montague was both voluntary and inappropriately described as an assignment. According to the Montague Court, a Tenant who fears merger may obtain the desired protection by insisting on express "anti-merger language." Id. at 444. QBMKE\

14 2238 (b) (c) Found to be a Breach of a Non-assignment Clause. At least one case holds that mere dissolution breaches a "nonassignment by operation of law" clause regardless of the treatment of the lease on dissolution. See Messall v. Merlands Club, Inc., 244 Md. 18, 222 A.2d 627 (1966) (holding that forfeiture of corporate charter violated lease provision prohibiting devolution of the lease by operation of law). Post Dissolution Defaults. Even if the dissolution does not violate a non-assignment clause, the clause may be violated by subsequent reincorporation or transfer of the lease following dissolution. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.303c2 (4th ed & Supp. 2002). v. Liquidation. 4. Fiduciaries. 5. Retransfer to Original Tenant. 49 AM. JUR. 2d Landlord and Tenant 1092 (1995 & Supp. 2002). 6. Application to Modern Entity Vehicles Such as LLCs & LLPs. i. Uniform Acts: (a) The draft Uniform Limited Liability Partnership Act (1996) states that when a partnership converts to a limited liability partnership (and vice versa), the converted entity is the same entity that existed before the conversion for all purposes. See Unif. Ltd. Liability P ship Act draft 904 (1996). (b) The Uniform Limited Liability Company Act also states that a partnership or limited partnership that has been converted into a limited liability company is for all purposes the same entity that existed before the conversion. All property owned by the converting entity vests in the limited liability company. See Unif. Ltd. Liablity Co. Act 903 (1996). The comment to section 903 states that a conversion is not a conveyance or transfer and that title to all property vests in the LLC as a matter of law without reversion or impairment. See id. cmt. ii. Cases and Commentary. There have been very few cases or articles dealing with the effect of a conversion of a partnership to a LLC and a LLP. See generally Elizabeth S. Miller, The Advent of QBMKE\

15 2239 LLCs and LLPs in the Case Law: A Survey of Cases Dealing with Registered Limited Liability Partnerships and Limited Liability Companies, VPC0312 ALI-ABA 11 (2002). Some have opined that it would be logical for consents not to be required since the debts and liabilities of the converted entity remain the same. See James E. Abbott and Raymond R. Ferrell, Mergers, Consolidations and Conversions under the New York Limited Liability Company Law, in Karon S. Walker, NEW YORK LIMITED LIABILITY PARTNERSHIPS: A GUIDE TO LAW AND PRACTICE ch. 11 (New York Practice Series 2002). Some courts have interpreted their state equivalent of the U.L.L.C.A. conversion provision as mandating that a conversion would transfer the pre-converted entity s interests to the converted entity by operation of law. See C&J Builders and Remodelers, LLC v. Geisenheimer, 249 Conn. 415, 733 A.2d 193 (1999) (holding that a conversion of a sole proprietorship to a limited liability company transferred all of its interest by operation of law); see also Mandell v. Comm r of Revenue Servs., 2001 WL (unpublished opinion) (holding that the conversion of an individual owner of commercial property to a single-member limited liability company would not require a transfer fee); but see Wolter v. Wis. Dep t of Revenue, 231 Wis.2d 651, 605 N.W.2d 283 (1999) (holding that recording of notice of conversion of partnership to LLC, as required under the statutes, was subject to transfer tax). E. Volitional Actions or Events that Implicate Assignment or Subletting Provisions. 1. Pledge. 2. Mortgage. See 49 AM. JUR. 2d Landlord and Tenant 1095 (1995 & Supp. 2002); Hasty Inc. v. Inwood Buckhorn Joint Venture, 908 S.W.2d 494 (Tex. Ct. App. 1995) (holding that non-assignment clause not breached by Tenant assigning lease to lender as security and bank releasing same after Landlord claimed default). 3. License. 4. Partial Transfer. 5. Appointment of a Receiver. 49 AM. JUR. 2d Landlord and Tenant 1099 (1995 & Supp. 2002). 6. Consolidation. F. Non-Volitional Actions Implicating Assignment or Subleasing Prohibitions. 49 AM. JUR. 2d Landlord and Tenant 1096 (1995 & Supp. 2002). QBMKE\

16 Assignment By Operation of Law. 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.303d (4th ed & Supp. 2002). 2. Eminent Domain. 3. Execution Sale. 4. Bankruptcy. 5. Death. 49 AM. JUR. 2d Landlord and Tenant 1102 (1995 & Supp. 2002). III. RIGHTS AND LIABILITIES BY OR AMONG PARTIES TO ASSIGNMENT OR SUBLEASE. See ROBERT S. SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT 8:1-8:2 and 8:12 (1980 & Supp. 2003). A. Rights of Parties on Assignment. See 49 AM. JUR. 2d Landlord and Tenant 1112 (1995 & Supp. 2002). 1. Lessor v. Lessee. i. Implied covenants; e.g., rent vs. express covenant may be released. See 49 AM. JUR. 2d Landlord and Tenant (1995 & Supp. 2002). ii. iii. Extensions or renewals. Contractual assumption. (a) (b) Must assumption be expressed. Lease provision that covenants and binds "heirs, executors, successors and assigns" does not normally create contractual liability. See 49 AM. JUR. 2d Landlord and Tenant 1135 (1995 & Supp. 2002). 2. Lessor v. Assignee. 3. Lessee v. Lessor. 4. Lessee v. Assignee. 5. Assignee v. Lessor. 6. Assignee v. Lessee. i. Lack of covenants. ii. Misrepresentation. QBMKE\

17 2241 B. Liabilities of Parties on Assignment. See 49 AM. JUR. 2d Landlord and Tenant 1112 (1995 & Supp. 2002). 1. Lessor v. Lessee. 2. Lessor v. Assignee. 3. Lessee v. Lessor ("surety status"). 4. Lessee v. Assignee. 5. Assignee v. Lessor. 6. Assignee v. Lessee. C. Sublease Rights. See 49 AM. JUR. 2d Landlord and Tenant (1995 & Supp. 2002). 1. Lessor v. Lessee. 2. Lessor v. Sublessee. 3. Lessee v. Lessor (including breach by sublessee). 4. Lessee v. Sublessee. 5. Sublessee v. Lessor. 6. Sublessee v. Lessee. D. Sublease Liabilities. See 49 AM. JUR. 2d Landlord and Tenant (1995 & Supp. 2002). 1. Lessor v. Lessee. 2. Lessor v. Sublessee. 3. Lessee v. Lessor. 4. Lessee v. Sublessee. 5. Sublessee v. Lessor. 6. Sublessee v. Lessee. E. Modification by Assumption. 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.501c2 (4th ed & Supp. 2002); First Am. Nat'l Bank v. Chicken Sys. of Am., Inc., 616 S.W.2d 156 (Tenn. Ct. App. 1980). QBMKE\

18 Modification by Agreement. i. Generally. ii. Prospective. 2. Modification by Conduct. 3. Anti-merger. F. Modification of Terms as Releasing Non-party to Modification. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES (4th ed & Supp. 2002); Raskel v. Hollander, 68 F.2d 265 (1st Cir. 1933) (renewal at increased rent); T.A.D. Jones Co. v. Winchester Repeating Arms Co., 55 F.2d 944 (D. Conn. 1932), aff'd, 61 F.2d 774 (2d Cir. 1932), cert. denied Southeastern Inv. Co. v. Tobler, 288 U.S. 609 (1933). IV. ENFORCEMENT OF ASSIGNMENT OR SUBLETTING PROVISIONS. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.304a et seq. (4th ed & Supp. 2002). A. Damages. B. Specific Performance. C. Termination. D. Relationship of Mitigation Obligation. E. English Rule. A qualification of the non-assignment clause stating that the Landlord s consent shall not unreasonably be withheld has been interpreted as not being an obligation of the Landlord, the breach of which could lead to its liability for damages. V. ADDITIONAL CONSIDERATIONS FREQUENTLY RAISED BY LESSOR. A. Waiver. See 49 AM. JUR. 2d Landlord and Tenant 1104 (1995 & Supp.); In re Duplan Corp., 473 F. Supp (S.D.N.Y. 1979); Hendrickson v. Freericks, 620 P.2d 205 (Alaska 1980); Karbelnig v. Brothwell, 244 Cal. App. 2d 333, 53 Cal. Rptr. 335 (1966); Blanchard v. Shrimp Boats of Louisiana, Inc., 305 So. 2d 748 (La. Ct. App. 1974); West 70th, Inc. v. Koch, 298 Minn. 121, 213 N.W.2d 332 (1973); Finkbeiner v. Lutz, 44 Ohio App. 2d 223, 337 N.E.2d 655 (1975); Smith v. Hegg, 88 S.D. 29, 214 N.W.2d 789 (1974); Jensen v. O.K. Inv. Corp., 29 Utah 2d 231, 507 P.2d 713 (1973); Kem Cleaners, Inc. v. Shaker Pine, Inc., 217 A.D.2d 787, 629 N.Y.S.2d 492 (1995); Martinez v. Selenko, 625 So. 2d 524 (La. Ct. App. 1993); Western World, Inc. v. Fletcher, 603 So. 2d 597 (Fla. Dist. Ct. App. 1992); Wandler v. Lewis, 1997 S.D. 98, 567 N.W.2d 377 (1997); Lynaum Funeral Home, Inc. v. Hodge, 576 So. 2d 169 (Ala. 1991); 49 AM. JUR. 2d Landlord and Tenant 330, 332, 336 (1995 & Supp. 2002); 51C C.J.S. Landlord and Tenant 117 QBMKE\

19 2243 (1968 & Supp. 2002). Conflicting authority on landlord's right to accept rent and rely on a provision in the lease disclaiming waiver. USA Petroleum Corp. v. Jopat Bldg. Corp., 343 So. 2d 501 (Ala. 1977). 1. Receipt of Rents. 2. Subsequent Approvals (Dumpor's Case; (Assignment vs. Sublease, Compare Restatement 16.1)). B. Increased Rental on Transfer. The propriety of a Landlord's attempt to "exact" either a fee from the original Tenant or a higher rent from a subtenant (or assignee) as a condition to consent to a sublease or assignment depends not only upon the specific lease provisions, but also on whether a court imposes a standard of commercial reasonableness on the Landlord. Courts generally treat conditional consent as a denial of consent. The question then becomes whether the Landlord had a duty to act in good faith in withholding consent. There are essentially three types of contractual provisions that limit the Tenant's right to sublease or assign; (i) absolute prohibition; e.g., "Tenant shall not assign or sublet (a "Type I" restriction); (ii) a prohibition that the Tenant shall not assign or sublet without the consent of Landlord "which consent shall not be unreasonably withheld" (a "Type II" restriction); and (iii) tenant "shall not assign or sublet without the consent of the Landlord" (a "Type III" restriction). 1. Type I Restriction: Absolute Prohibition. An absolute prohibition against assignment and subletting authorizes a landlord to refuse permission for any or no reason. See 1 MILTON R. FRIEDMAN, FRIEDMAN ON LEASES 7.304a (4th ed & Supp. 2002); Truschinger v. Pak, 513 So. 2d 1151 (La. 1987); Healthco, Inc. v. E & S Realty Assocs., 400 Mass. 700, 511 N.E.2d 579 (1987); Leonard, Street & Deinard v. Marquette Assoc., 353 N.W.2d 198 (Minn. Ct. App. 1984); F & L Ctr. Co. v. Cunningham Drug Stores, Inc., 19 Ohio App. 3d 72, 482 N.E.2d 1296 (1984); Kendall v. Ernest Pestana, Inc., 40 Cal. 3d 488, 496, 709 P.2d 837, 841, 220 Cal. Rptr. 818, 822 (1985); 1 AMERICAN LAW OF PROPERTY 3.58, at 302 (1952); 51C C.J.S. Landlord and Tenant 423 (1970 & Supp 2002); 21 A.L.R. 4th 188 (1983 & Supp. 2002). It follows that a landlord could grant conditional permission, provided the condition is not against public policy. Renegotiating rent payments should therefore be permissible. 2. Type II Restrictions: Prohibition Unless Landlord Consents (which may not be Unreasonably Withheld). With this type of clause, there is no question that the Landlord must be reasonable in considering whether to grant or deny consent to the proposed assignment or sublease. Many courts have held that a Landlord s conditioning consent on payment of a fee or increased rent is unreasonable. See Ringwood Associates, Ltd. v. Jack s of Route 23, 153 N.J. Super. 294, 379 A.2d 508 (1977) (holding that Landlord acted unreasonably in conditioning consent on an increase in QBMKE\

20 2244 rent) 7 ; Chanslor-Western Oil & Development Co. v. Metropolitan Sanitary District, 131 Ill. App. 2d 527, 266 N.E.2d 405 (1970) (holding that the district acted unreasonably in conditioning consent to sublease on reappraisal of rent); 1010 Potomac Assoc. v. Grocery Manufacturers, 485 A.2d 199 (D.C. App. 1984) (holding that Landlord acted unreasonably in withholding consent to a sublease of an option period solely to extract additional rent) 8 ; Economy Rentals, Inc. v. Garcia, 112 N.M. 748, 819 P.2d 1306 (1991). 3. Type III Restrictions: Prohibition Without Landlord s Consent. This type of clause omits an express requirement that the Landlord be reasonable in withholding its consent. When a lease contains this type of restriction and a Landlord has asked for a fee or increased rental as a condition to its consent to an assignment or sublease, the court must first decide whether it will impose an implied covenant of good faith or reasonableness on the Landlord. In general, courts from jurisdictions that cling to the majority rule allowing refusal of consent do not prohibit the Landlord from conditioning his consent to an assignment or sublease on an increased rental. Courts from jurisdictions imposing the reasonableness standard, however, generally hold that such conditional consent is forbidden. i. Jurisdictions following the "majority" rule. In general, courts in jurisdictions that have not adopted the implied covenant of commercial reasonableness will allow the Landlord to condition its consent on an increased rental or a fee. Courts following the majority rule generally reason that if the parties wished to incorporate a standard of reasonableness, they were free to do so when the lease was drafted. These courts generally refuse to "rewrite" the clear and unambiguous language of a lease agreement. See Illinois Central Gulf Railroad Co. v. International Harvester Co., 368 So. 2d 1009 (La. 1979) (holding that Landlord could withhold consent for purely economic reasons); B & R Oil Co. v. Ray s Mobile Homes, Inc., 422 A.2d 1267 (Vt. 1980). ii. Jurisdictions following the "minority " rule. In these jurisdictions, the court adopted the "minority" position, imposing 7 The court noted that the Landlord failed to provide an adequate reason for denial of the assignment, particularly since the original Tenant had unequivocally guaranteed performance of all tenant covenants under the lease, the Landlord did not question the solvency of the proposed Tenant, no alterations to the premises were necessary in order to convert the same for the proposed use, and the Landlord did not object to the nature of the proposed Tenant s use. 8 The Potomac court reasoned that the purpose of a consent provision in any assignment/sublease clause is to protect the landlord s ownership and operation of the particular property, not to protect the landlord s general economic condition. Relying on the rule that the legal remedy of damages is presumed to be inadequate in disputes involving real property, the court granted the lessee specific performance. QBMKE\

21 2245 C. Concurrent Liability. 1. Assignment. 2. Sublease. D. Bankruptcy of Lessee or Transferee. an implied requirement of commercial reasonableness on the landlord. Uniformly, the courts held that the landlord's request for an increased rental as a condition for consent to an assignment or sublease was unreasonable. See Campbell v. Westdahl, 148 Ariz. 432, 715 P.2d 288 (Ct. App. 1985) (holding that Landlord s refusal to consent to the assignment because the Landlord was displeased with the low rent under the current lease was unreasonable); Kendall v. Ernest Pestana, Inc., 40 Cal. 3d 488, 709 P.2d 837, 22 Cal. Rptr. 818 (1985) (holding that a non-assignment clause s purpose is to protect the property and to insure that the Landlord is in as good a position with the new Tenant as Landlord was with the original Tenant); Warner v. Konover, 210 Conn. 150, 553 A.2d 1138, 1141 (1989) (finding that, although the Landlord had substantial discretion with regard to accepting offered assignees, the Landlord s came under doubt when the acceptance of an impeccable assignee was conditioned upon an increase in rent); Fernandez v. Vazquez, 397 So. 2d 171 (Fla. Dist. Ct. App. 1981); Funk v. Funk, 102 Idaho 521, 633 P.2d 586 (1981); Economy Rentals, Inc. v. Garcia, 112 N.M. 748, 819 P.2d 1306 (1991). E. Transfer by Sublessee/Assignee (Covenant Runs With Leasehold; i.e., Tenants and Assigns or Transferees). F. Expenses to Consider Assignment. G. Statute of Frauds. H. Effect on Aggregated Excluded Transactions. I. Notice. Subtenant's assumption, required by the prime lease, establishing privity between landlord and subtenant. Cordonier v. Central Shopping Plaza Assocs., 82 Cal. App. 3d 991, 147 Cal. Rptr. 558 (1978). J. Prior Consent. K. Assumption of Liability by Assignee or Sublessee. L. Use. M. Net Worth or Financial Capacity of Assignee or Sublessee. QBMKE\

22 2246 N. Reputation of Assignee or Sublessee. O. Percentage Rent Expectancy. P. Not in Conflict with Other Agreements of Lessor. Q. Partial Interest. R. Effect of Violation or Agreement in Violation. 1. Lessee. 2. Sublessee/Others. S. Effect of Acceptance of Rents. T. Assignee (Sublessee) Automatically Assumes All Obligations in Lease ("Running With Land" or Otherwise). U. Limit Damage Claim. V. Right to Terminate vs. Consent. W. Calculations of Profits ("Net Gain or Loss"). 1. Fees and Expenses of Tenant or Landlord. 2. Computation of Time Value of Rent Differentiation. X. Scope of "Prohibited" Transactions. Y. Release, If Any, Limited to Matters Subsequent to Assignment. Z. Sublessee Attornment at Lessor's Option. AA. BB. CC. DD. EE. Prohibition on Offer or Advertise Availability. Sublessee or Assignee Not Approved Until Delivery of Acceptable Transfer Documents. Sublessee's or Transferee's Agreement That Sublease/Assignment Limitations Apply to Subsequent Transfer. No Sublease or Assignment Which Conflicts With Other Agreements of Lessor. Limitation on Sublease or Assignment to Other Tenants in Project. QBMKE\

23 2247 VI. ADDITIONAL CONSIDERATIONS FREQUENTLY RAISED BY LESSEE. A. Time of Approval. B. Data Required for Approval. C. Rejections and Reasons for Rejections. D. Agreement to Sublease or Assign No Violation. E. Reasonableness Defined. F. Relationship with Other Lease Provisions. 1. Use. 2. Waiver. 3. Alteration. 4. Percentage Rent. 5. Continuous Operating Covenant. i. Corporation. ii. iii. Partnership. Other. 6. Default (Need For Forfeiture Provision). G. Damages. H. Excluded Events. 1. Related Entity. 2. Sale of Business. 3. Merger. 4. Portion of Premises. 5. Mortgage. I. Notice of Default. J. Right to Cure. QBMKE\

24 Curable Events. 2. Non-Curable Events. K. Right to Terminate (Withdrawal on Landlord's Termination). L. Obligation to Mitigate. M. Release Mechanism. N. Holdover of Subtenant (or Assignee). O. Estoppel Certificate. P. Obligation for Term Beyond Initial Term. Q. Subsequent Assignment Prohibited (or Release of Lessee). R. Delivery of Transfer and Subletting Documents to Lessor (Drafts or Terms Only). VII. ADDITIONAL CONSIDERATIONS FREQUENTLY RAISED BY ASSIGNOR/TRANSFEREE AND TRANSFER DOCUMENTS. A. Assumption of Liability (Versus "Subject to") (See I(B)(4) Above). B. Default by Lessee. 1. Right to Cure. 2. Bankruptcy. C. Non-disturbance Agreement. D. Accrual of Obligation "From and After." E. Acceptance or Consent by Lessor (Caveat - Covenants Running With Land). F. Warranty of Title. G. Estoppel Certificate. VIII. ADDITIONAL CONSIDERATIONS FREQUENTLY RAISED BY SUBLESSOR/SUBLESSEE TRANSFER DOCUMENT. A. Cure Provisions. B. Bankruptcy of Sublessor/Sublessee. C. Accrued Obligations. QBMKE\

25 2249 D. Consent of Lessor. E. Notice of default. F. Effect of Lessee Default (on either non-leased premises or sublease premises). G. Warranty of Title. H. Surrender by Lessee. I. Non-Disturbance Agreement. J. Sublease Subordinate to Lease. K. Renovations. QBMKE\

26 2250 2