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Real Estate Law

Commercial Lease Assignment and Sublet Provisions

A Balancing Act for Landlords and Tenants

July 2020 By Adam F. Aldrich

This article identifies common problems involved in commercial lease transfers through assignments and subleases. It offers both landlords and tenants tips for solving these problems when negotiating assignment and sublease provisions in leases.

The modern commercial lease is a complex, integrated document that attempts to balance the competing interests of the landlord and tenant. As a result, commercial leases are the subject of much negotiation and are never “one size fits all.” In fact, commercial leases are one of the least standardized documents in real estate practice.

When any commercial lease is to be transferred in part through a sublet or in its entirety through an assignment, the issues multiply. The transfer provisions, which once seemed moot, become operative to determine whether the lease can be transferred and, if so, under what conditions. If, during lease negotiations, the parties overlooked the lease transfer provisions or gave them cursory consideration, they may be unpleasantly surprised by the result. While landlords and tenants have divergent economic interests with respect to transferring the lease, their legitimate concerns can be appropriately addressed through thoughtfully crafted transfer provisions.

This article explores common problems, issues, and solutions encountered in commercial lease transfers through assignments and subleases. It is intended to be useful both to the lawyer who infrequently encounters lease transfer problems and the seasoned practitioner who deals with lease transfer issues every day.

Distinguishing Between an Assignment and Sublease

Assignments and subleases have fundamental differences that are frequently misunderstood. A lease is both a conveyance of an interest in property and a contract.1 After executing the lease, the landlord and tenant are bound to one another by privity of contract and by privity of estate. As a result, they may each enforce the provisions of the written lease through privity of contract and the promises that arise from privity of estate.2 Privity of contract allows enforcement of the lease provisions, while privity of estate allows enforcement of only those promises that run with the land.3

Whether the landlord, tenant/assignor, and subtenant/assignee call their arrangement an assignment or a sublease, courts typically look at the substance of the transaction. In an assignment, a tenant transfers its entire interest in the lease.4 After assigning its interest in the lease, the assignee has privity of estate with the landlord, but the assignee and the landlord are not in privity of contract unless the assignee assumes the tenant’s obligations under the lease.5 Assignment of the lease ends the original tenant’s rights to possession, but absent an express release under the lease terms, its liability under the lease continues.6 This means the original tenant remains secondarily liable for the assignee’s obligations under the lease. Thus, the tenant/assignor may find itself liable at a future date if the assignee fails to perform its obligations under the lease.

In a sublease, however, the tenant transfers less than the remaining term or less than the tenant’s entire interest in the lease, leaving the original tenant with a reversionary interest in the lease.7 The relationship between the original landlord and the original tenant, including both privity of contract and privity of estate, remains intact, thereby creating the relationship of landlord and tenant between the original tenant (sublandlord) and the new tenant (subtenant). The original landlord and the subtenant have no privity of estate or privity of contract with one another, so the original tenant remains liable for the actions and omissions of the subtenant.8 However, the subtenant’s rights will terminate with the original lease or when the landlord declares a forfeiture of the tenant’s lease term.9

A third, less common type of transfer is a partial assignment of a lease. Such assignments are called assignments “pro tanto,” not subleases, because they grant possession of a portion of the leased premises to the new tenant for the balance of the lease term.10 The landlord now has two tenants and, in effect, two leases. There is little guiding case law on this hybrid lease transfer, so it is not entirely clear whether the assignee has a contractual relationship with the landlord.11 Due to the vagaries and uncertainties that can result when a transfer of possession encompasses less than all of the space, partial assignments should be avoided. To avoid assignments pro tanto, landlords should consider prohibiting assignments of less than the original tenant’s entire interest in the lease. If a landlord proceeds with a partial assignment, it should clearly document the arrangement, including the rights and remedies of the landlord, original tenant, and new tenant, and acknowledge the transaction as a partial assignment and not a sublease.12

The accompanying table illustrates the many differences between an assignment, sublease, and partial assignment.13

Restrictions on Assignments and Subleases

Colorado law favors the free transferability of rights.14 As a result, landlords frequently attempt to limit the tenant’s right to transfer the lease by including lease provisions specifically restricting the tenant’s right to assign or sublet. Under Colorado law, outright prohibitions against assignments are permissible and are not considered invalid restraints on alienation.15 Even if outright prohibitions on assignments or subletting are enforced, such provisions “are construed against the restriction.”16 This means a court generally will construe such stipulations “against the party invoking them.”17 A breach of the restriction against transfer does not terminate the lease,18 but may give rise to a claim for default.19 Generally, tenants in commercial leases negotiate exceptions to strict prohibitions against assignments or subletting because transfer provisions may be their only viable exit strategy if they find they can no longer afford the space or no longer need it.

Consent to Assignments and Subleases

Recognizing that absolute prohibitions are neither favored by the courts nor acceptable to most tenants, some landlords include modified prohibitions in their leases that limit the tenant’s rights to transfer the lease and, if a transfer is permitted, allow the landlord to enforce the lease against both the original tenant and the new tenant to the maximum extent possible. Such provisions may reserve to the landlord, either in its sole discretion or without unreasonably withholding its consent, the right to approve a proposed lease transfer. Although the reservation of the landlord’s right to approve a proposed assignment or sublease is for the landlord’s benefit,20 the landlord is bound to the standards set out in the lease for consents to an assignment or sublease.21 Accordingly, once the landlord has established the standards for its consent in the lease, it cannot object to a proposed assignment or sublease if the tenant has met the appropriate requirements.

It is well established in Colorado law that “without a freely negotiated provision in the lease giving the landlord an absolute right to withhold consent, a landlord’s decision to withhold consent must be reasonable.”22 Thus, if a lease contains a provision against subletting or assignment, but is silent on a landlord’s right to withhold consent, Colorado law forbids the landlord from withholding its consent unreasonably if the tenant tenders a suitable subtenant or assignee to the landlord.23

Disputes often arise as to what is a ‘‘reasonable” withholding of the landlord’s consent. This debate has led to the enunciation of specific standards of reasonableness. If a lease provision “requires that consent to an assignment will not be unreasonably or arbitrarily withheld, a landlord is held to the standard of conduct of a reasonably prudent person.”24 Therefore, a landlord must only consider “those factors that relate to a landlord’s interest in preserving the value of the property,”25 which do not include “[a]rbitrary considerations of personal taste, convenience, or sensibility . . . .”26 Whether a landlord has acted reasonably is a fact-specific inquiry.27 Most courts have held that the tenant bears the burden of proving that the landlord acted unreasonably in withholding consent,28 but some courts have required the landlord to prove it acted reasonably.29 Courts have been divided on a tenant’s right to terminate a lease where the landlord has been found to have unreasonably withheld consent.30

There are several reliable rules that courts follow in determining whether a landlord acted reasonably. First, a landlord cannot refuse consent for racial or other discriminatory reasons.31

Second, a landlord may not deny consent to improve its general economic position or to receive increased rent.32 However, a landlord may deny consent to protect its interest in the value, condition, and operation of the property or the performance of lease covenants.33 For example, in Cafeteria Operators L.P. v. AMCAP/Denver Limited Partnership, the tenant leased the premises to run a cafeteria-style restaurant.34 After several failed attempts to operate the restaurant, the tenant marketed the space to prospective subtenants, including non-cafeteria restaurant owners.35 When a non-cafeteria restaurant owner expressed interest in subleasing the premises, the tenant sought the landlord’s approval to the proposed sublease, but the landlord refused. The Court found that the landlord reasonably withheld consent because the proposed sublessee would have changed the “character” of the shopping center by operating “the largest restaurant of its kind, raising concerns about lighting, maintenance, traffic, and parking.”36 Moreover, the subtenant would sell alcohol and stay open late, and its proposed occupancy raised “concerns about security, safety of patrons, and parking requirements.”37 Similarly, the Court in List v. Dahnke found that the landlord reasonably withheld consent where the landlord determined that a Thai-American restaurant operated by the assignee would not be successful at that location, but the Court did not identify the facts that led the landlord to such conclusion.38

Third, a court may make a finding of unreasonableness if a landlord refuses consent to a proposed transfer without obtaining relevant information to make its decision.39 Before making the decision, the landlord should obtain sufficient information on the transferee’s financial condition; the transferee’s experience in operating its business; how the premises are to be used; projected sales, gross income, and income per square foot; and, in the case of a sublease, the size of the subleased space.40

Fourth, courts may consider how long it takes the landlord to make the decision on the requested assignment. If the landlord instantly refuses consent or waits too long to make a decision, the court could make a finding of unreasonableness.41 Conversely, if the tenant fails to allow the landlord a reasonable amount of time to issue a decision, the withholding of consent can be found reasonable.42 In Parr v. Triple L&J Corp., the Court found that the landlord unreasonably withheld consent when it deferred making a decision on the proposed assignment, thereby delaying the sale of the tenant’s business until the prospective buyer withdrew his offer.43 The tenant sought approval from the landlord for an assignment of the lease as part of the sale of its business. The landlord requested all personal and financial information on the proposed assignee and the assignee’s business plan, and the tenant provided prompt responses that demonstrated the assignee’s experience in restaurant management and “perfect credit score.”44 Because the landlord unreasonably withheld consent, the landlord was held liable to the tenant under a breach of contract theory, as well as for lost profits on the sale of its business.45

Similarly, the Court in Bert Bidwell Investors Corp. v. LaSalle and Schiffer, P.C. addressed whether the landlord unreasonably withheld consent to the tenant’s request to transfer the lease where the assignee was “ready, willing, and able to assume the lease as written, and to use the premises for the same business as that of the tenants.”46 The landlord ultimately refused consent because it “didn’t like” the proposed assignee.47 Based on the lease, which required the landlord’s consent to assign, the landlord argued that it “had the right to relet the premises as it saw fit and to be arbitrary in doing so.”48 Relying on List, the Court found that the landlord acted unreasonably in refusing to accept the proposed new tenant.49 Nevertheless, parties may create their own standards and definition of reasonableness, and if they do, courts will enforce and apply such standards.50

As these cases illustrate, if a landlord wishes to withhold consent absent a sole and unconditional contractual right to do so, it must have fact-based reasons for doing so and cannot arbitrarily withhold or delay its consent. The landlord should communicate its decision in writing to the tenant and enumerate all fact-based reasons to preserve all arguments for reasonableness.51 Before making the request to assign or sublet the premises, the tenant should gather information about the proposed assignee’s or subtenant’s financial status, business acumen, and proposed operations, and then submit this information to the landlord, along with an assignment or sublease document signed by the tenant and assignee or subtenant. While the landlord must still consent to the transaction,52 such documentation places the tenant in a stronger position to rebut any superficial or arbitrary reasons the landlord may proffer for denying consent. And if litigation ensues, it will be critical for the tenant’s case to show that it supplied the landlord with as much information as possible concerning the assignee’s or subtenant’s financial status and operations, to avoid having the trier of fact determine that the landlord acted reasonably in denying consent due to a lack of information from the tenant.

Recapture, Termination, and Renewal Rights

Leases may grant the landlord the right to terminate the lease and to retake the tenant’s space if the tenant wishes to assign its lease or sublet its space, or if the tenant transfers the lease without the landlord’s consent. Replacing the tenant by recapturing the premises can benefit both the landlord and the tenant, but each party will want to weigh the pros and cons of such an agreement.

Terminating the lease allows the landlord to eliminate existing lease weaknesses and to enter into a new lease with a potentially better tenant on a clean slate. Moreover, recapturing the premises and directly leasing it to the proposed assignee can save the landlord substantial dollars in tenant improvements that can be passed on to the new tenant through reduced or free rent for a portion of the lease term. But the landlord must pay close attention to market conditions before terminating the lease. Terminating the lease in a strong market when space is at a premium and rents are high allows the landlord to enter into a new lease with a new tenant at a higher rate, but the landlord may take a loss on its investment in the premises in a down market when rates are depressed and there is an oversupply of space.

The tenant, on the other hand, risks losing its investment in its business and the leased premises. Before requesting a transfer, the tenant should closely scrutinize the lease to determine the potential outcome. Under some leases, the act of notifying the landlord of an intent to assign or sublet can trigger the recapture provision.53 Similarly, if the lease is assigned without the landlord’s consent, it may trigger the recapture right if that right is expressly provided in the lease.54 Landlords should closely review the recapture language before terminating the lease because restraints on alienation and lease forfeitures are disfavored.55

When a tenant violates the transfer provisions by transferring the lease without the landlord’s consent, the landlord should send a notice of default to the tenant and demand that the default be cured by nullifying the transfer,56 unless the lease provides that transferring the lease is an automatic termination. If the tenant is unable to nullify the transfer when it receives the notice, it could be liable for default damages incurred by the landlord.57 If the tenant does not cure the default and the landlord will not approve (and has the right not to approve) the assignee or subtenant, the landlord may terminate the lease (or the tenant’s right to possession) if the lease so permits.58 If the landlord fails to terminate the lease59 or accepts rent after breach of the anti-assignment clause,60 it may be deemed to have waived the right to terminate. Once the lease is terminated as a result of the default, the landlord must consider its duty to mitigate damages.61

If the space is recaptured and the lease terminated, the tenant’s lease obligations will be terminated with respect to all recaptured space, including the payment of rent.62 Moreover, the tenant will no longer have privity of contract or estate with the landlord, assignee, or subtenant because the lease will be terminated as to the tenant.63 If the landlord recaptures the premises, the tenant is spared the rent expense while it finds a transferee. But if the landlord does not recapture, the tenant can make a transfer without fear that the landlord will then exercise its recapture rights.

Another important issue is whether an option to renew contained in a lease assigned or subleased to a third party remains exercisable following the transfer. If the assigned lease gives the original tenant a renewal option, the assignee can extend the term unless the renewal option is reserved from the assignment.64 If a tenant/sublandlord grants its subtenant an option to renew based on the tenant’s option in the prime lease, the subtenant is dependent on the tenant/sublandlord for a lease extension because it does not have contractual privity with the landlord.65 If the tenant/sublandlord refuses to exercise its renewal option so as to enable the subtenant to take advantage of the rights that were granted to it, the tenant may be liable to the subtenant.66 To protect its option to renew, the subtenant should request or require a recognition agreement from the landlord when negotiating a sublease, whereby the landlord agrees to recognize the sublease if the prime lease terminates due to the tenant/sublandlord’s default.67

The Impact of Bankruptcy Proceedings on Assignments and Subleases

Bankruptcy laws can have a significant impact on commercial leases when the tenant files for bankruptcy protection. Generally, a trustee is appointed to administer the bankruptcy estate, except in Chapter 11 cases where the debtor-in-possession is the tenant.68 For debtors with executory contracts and/or unexpired leases, 11 USC § 365 contains a series of rules that govern those documents. Section 365 of the bankruptcy code provides the tenant/debtor with the statutory right to assume or reject executory contracts and unexpired leases to which it is a party, subject to objections by creditors and other parties-in-interest, and ultimately the court’s approval.69 The debtor may, in turn, assign the lease if the assignee provides “adequate assurance of future performance.”70 During the period between filing the bankruptcy petition and the date on which the lease is assumed or rejected, the tenant must continue to pay rent and perform the material terms of the lease.71 It should be noted that written waivers of § 362’s automatic stay have been found to be unenforceable unless they are part of a previous bankruptcy proceeding.72 Thus, landlords should not assume that a waiver in the lease is enforceable if the tenant files for bankruptcy.

From the debtor’s perspective, the right to reject the lease is “vital to the basic purpose of Chapter 11” because it can free the tenant from the obligation to pay all future rent under the lease.73 If a lease is rejected with bankruptcy court approval, the debtor has no legal interest in the lease or the leased premises, and it must vacate the leased premises. If, however, the debtor fails to vacate the premises, the landlord can file a motion to lift the automatic stay so it can file or continue an eviction action in state court. If the debtor rejects the lease, the landlord may have a claim for “rejection damages” pursuant to 11 USC § 502(b)(6), subject to the mitigation-of-damages duty.74

As a condition to assuming the lease, the debtor must cure all monetary defaults and provide adequate assurances of future performance under the lease.75 A debtor who assumes the lease may be able to assign the lease free of restrictions on transfer set forth in the lease and over the landlord’s objection,76 which may turn out to be a significant right for the debtor if it holds a below-market lease with sufficient time remaining on the lease term. However, a bankruptcy court has discretion to reject an assignment if it finds, for example, that the assignment would disrupt the tenant mix by changing the image of a shopping center or violating the use restriction in the lease.77 A landlord may favorably view the debtor’s assumption because it assures continuation of the lease and the cure of existing defaults. But if the tenant is holding a below-market lease, the landlord may favor rejection to enable it to negotiate a new lease. A landlord may object to the debtor’s attempted lease assumption if the landlord disagrees with the debtor’s plan to cure the default or believes the debtor has not provided adequate assurance that the default will be cured or the debtor will perform in the future.

Section 365(b)(3)(C) of the bankruptcy code provides specific protections for “a lease of real property in a shopping center” by providing that no assignment can occur without assurances that use clauses and other provisions vital to the operation of the shopping center will continue to be performed, “including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center.” The purpose of § 365(b)(3)(C) “is to preserve the landlord’s bargained-for protections with respect to premises use and other matters that are spelled out in the lease with the debtor-tenant.”78 Moreover, § 365(b)(3)(D) requires adequate assurance “that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.” Despite the bankruptcy code’s language protecting shopping centers, some bankruptcy courts have found lease provisions that limit the use of the shopping center premises to be per se restraints on alienation.79 To avoid an adverse ruling if a shopping center tenant files for bankruptcy, a landlord should arm itself with as much evidence and expert testimony as possible to show a disruption in tenant mix or a real potential for violating other tenants’ rights if an assignment is allowed.80

While a tenant’s bankruptcy filing places the lease in limbo, a landlord can be proactive by approaching the tenant to determine whether it intends to reject or assume the lease. Landlords and tenants should not treat the existing lease as a static document that presents the tenant with a “take it or leave it” proposition for assumption. If the tenant voices concerns about the current lease, the landlord can renegotiate the lease to entice the tenant to assume a modified lease (subject to court approval) that keeps the tenant in the premises and paying rent.

Negotiating Lease Transfer Provisions

Negotiating lease transfer provisions is an important process for both the landlord and the tenant because, at some time in the future, the landlord or the tenant may be forced to accept a previously unknown or undesirable counterparty to the lease. It is critical that attorneys impress upon their respective clients the short-term and long-term ramifications that could result from their negotiations of the lease transfer provisions. Landlords and tenants should consider the following issues when negotiating assignment and subletting provisions.

The Landlord’s Perspective

  • The landlord’s primary objective in negotiating assignment and subleasing provisions is control, including control over the mix of tenants and control over the use of the leased premises. Thus, the landlord will use the transfer provisions to protect its interests in the premises.
  • A landlord’s foremost concern is almost always the tenant’s ability to pay rent, in full, on a timely basis. A landlord should negotiate requirements that a prospective assignee or subtenant must meet, such as minimum net worth and minimum gross sales.
  • The landlord can protect itself by including a right to recapture the premises if a tenant seeks to assign its lease or to sublet its premises. However, landlords should carefully consider whether to include language that terminates the lease automatically upon receipt of an assignment request because it could constitute a restraint on alienation, which is disfavored, and the landlord may prefer the leasehold to continue.81
  • The landlord should keep the original tenant on the hook. Landlords should oppose any transfer provision that relieves the original tenant of its obligations under the lease upon an assignment. Having a tenant with a vested interest in the assignee’s ability to perform the lease is helpful to ensure that a lease is transferred to a worthy transferee. Additionally, in the event the assignee does default, if the original tenant’s liability has been preserved, the landlord’s chances of recovery are improved.
  • The landlord should limit the use rights of a subsequent assignee or subtenant. A landlord should seek to protect its right to control the mix of tenants, particularly in retail settings, so as not to violate exclusive use provisions.82 Moreover, exclusives and use restrictions held by other tenants at a shopping center must be considered in conjunction with a potential change in use that may occur upon assignment or subletting.
  • The landlord should seek to share in excess rent.83 For example, where a tenant assigns its lease or subleases its premises, it may be paid more than the amount the tenant is obligated to pay the landlord under the lease. If the assignment or sublease had not been entered into, those same financial accommodations would theoretically have been available to the landlord if it had leased directly to the assignee or subtenant. Accordingly, a landlord should seek the right to share in this excess financial consideration along with the tenant, or if it has the leverage, to obtain 100% of such excess.

The Tenant’s Perspective

  • The tenant’s goal is maintaining flexibility. The tenant’s ability to maintain flexibility through the lease largely depends on its leverage to negotiate favorable lease terms. A new business seeking space in a desirable retail shopping center may have little or no leverage to negotiate the transfer provisions, but a large corporation leasing significant space may have considerable negotiating strength. Thus, it is imperative that the tenant’s leasing broker and attorney understand the market forces at play in any lease negotiation.
  • The tenant should seek flexibility to share the leased premises or certain portions of it (i.e., floor space, utilities, and parking) with its related entities and affiliates with which it has a business relationship, without having to seek the landlord’s consent in each instance. This issue is particularly important for large companies with divisions that operate under different business names.
  • The tenant should also seek flexibility to restructure its organization without the landlord and the lease acting as an impediment to such alteration, by negotiating into the lease specific language permitting such changes. The tenant’s ability to reorganize its business, either through a merger, consolidation, or sale, could be delayed or impeded by the landlord under the transfer provisions if these provisions are not properly negotiated at the letter of intent stage or before the lease is executed.
  • The tenant should maintain an exit strategy if the premises no longer satisfy its business needs because it has outgrown the space or needs less space. This is particularly important in the era of COVID-19. For example, start-up companies can quickly outgrow their leased premises, but if the landlord does not have more space available, the company must seek out new or additional space, frequently at a higher rate. Conversely, a change in economic forces can cause the tenant’s business to quickly retract. Thus, prospective tenants should be mindful to negotiate termination and rights of first refusal options for newly available space in the same building, with the end goal of ensuring that the size of their leased space does not impair their business objectives.84
  • The tenant should insist that the landlord’s right to approve a lease transfer not be unreasonably withheld, if the landlord insists on reserving such right. The lease should detail the specific standards the tenant must meet to obtain approval, such as the transferee’s minimum net worth and minimum business experience.
  • Counsel for the tenant should attempt to include a provision for automatically releasing the tenant and any guarantor from further liability at the time of the lease transfer or after the transfer occurs if the assignee or sublessee can meet or exceed certain financial marks, such as net worth, sales, or revenue.
  • The tenant should negotiate (1) the right to revoke a transfer request during a defined period after the landlord issues a notice to terminate and recapture the premises, and (2) a reasonable period to vacate the premises before the tenant will be subject to eviction proceedings if the tenant does not revoke the transfer request. Where the landlord insists on a termination and recapture provision, this rescission right provides a tenant the flexibility to stop the recapture process according to the tenant’s particular circumstances and commercial exigencies.

Conclusion

The relationships established between the parties to a lease, sublease, or assignment can be complicated. While the ability to transfer the lease can be a valuable tool for the tenant, the landlord’s interest in protecting its investment by choosing its occupants is equally compelling. However, a balance can be struck that provides the tenant the flexibility it needs while preserving the landlord’s control and minimizing its risk. During lease negotiations, both parties should recognize that changing circumstances during the lease term could trigger the need to assign the lease or sublet the premises. If thoughtful attention is given to negotiating the transfer provisions, the parties can assure themselves that, if the need arises to transfer the lease, their respective interests will be reasonably protected.

Adam F. Aldrich is the founder of Aldrich Legal, LLC, a Denver-based law firm focused on real estate and business transactions and litigation—(303) 325-5683. Coordinating Editor: Christopher D. Bryan.

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Notes

1. Schneiker v. Gordon, 732 P.2d 603, 606 (Colo. 1987) (recognizing the “dual nature of a lease” as both a contract and a conveyance of an interest in land).

2. Id. at 606–07.

3. Shaffer v. George, 171 P. 881, 882 (Colo. 1917).

4. Gordon Inv. Co. v. Jones, 227 P.2d 336, 340 (Colo. 1951).

5. Shaffer, 171 P. at 882.

6. Roget v. Grand Pontiac, Inc., 5 P.3d 341, 345 (Colo.App. 1999) (“after the assignment, the assignee becomes primarily liable for the obligations under the contract, while the assignor remains secondarily liable”).

7. Gordon Inv. Co., 227 P.2d at 340.

8. J.E. Martin, Inc. v. Interstate 8th St., 585 P.2d 299, 301 (Colo.App. 1978) (“the delegation of duties under a lease and their assumption by a third person do not absolve the original lessee, absent the lessor’s knowledge and consent, simply by virtue of the conduct of the lessee and third party”). See also 1 Friedman and Randolph Jr., Friedman on Leases § 7:7.2 (Practising Law Institute 5th ed. 2013).

9. V.O.B. Co. v. Hang It Up, Inc., 691 P.2d 1157, 1159 (Colo.App. 1984).

10. Friedman and Randolph Jr., supra note 8 at § 7:4.2.

11. Barbuti, “Assignments Pro Tanto And Why To Avoid Them,” 22 The Practical Real Estate Lawyer 24, 24–25 (Sept. 2006).

12. Id. at 24.

13. Id. at 23 (reprinted in part).

14. Parrish Chiropractic Ctrs., P.C. v. Progressive Cas. Ins. Co., 874 P.2d 1049, 1052 (Colo. 1994) (“Contract rights generally are assignable, except where assignment is prohibited by contract or by operation of law or where the contract involves a matter of personal trust or confidence”).

15. Union Oil Co. of Cal. v. Lindauer, 280 P.2d 444, 447 (Colo. 1955). See also Malouff v. Midland Fed. Sav. and Loan Ass’n, 509 P.2d 1240, 1243 (Colo. 1973) (recognizing that “[t]he common law doctrine of restraints on alienation is a part of the law in Colorado”).

16. Friedman and Randolph Jr., supra note 8 at § 7:3.3. See also Malouff, 509 P.2d at 1243 (holding “that the question of the invalidity of a restraint depends upon its reasonableness in view of the justifiable interests of the parties”).

17. Beck v. Giordano, 356 P.2d 264, 265 (Colo. 1960).

18. Lindauer, 280 P.2d at 447.

19. Fink v. Montgomery Elevator Co. of Colo., 421 P.2d 735, 738 (Colo. 1966).

20. Routt Cty. Mining Co. v Stutheit, 72 P.2d 692, 693 (Colo. 1937).

21. Parr v. Triple L & J Corp., 107 P.3d 1104 (Colo.App. 2004).

22. Cafeteria Operators L.P. v. AMCAP/Denver Ltd. P’ship, 972 P.2d 276, 278 (Colo.App. 1998).

23. Id. See also Basnett v. Vista Vill. Mobile Home Park, 699 P.2d 1343, 1346 (Colo.App. 1984) (holding that a landlord may not unreasonably refuse consent under a silent consent clause because that result “incorporates the principles of fair-dealing and reasonableness and also preserves freedom of contract”), rev’d on other grounds, 731 P.2d 700 (Colo. 1987).

24. List v. Dahnke, 638 P.2d 824, 825 (Colo.App. 1981).

25. Cafeteria Operators L.P., 972 P.2d at 279.

26. List, 638 P.2d at 825.

27. Id.

28. Ring v. Mpath Interactive, Inc., 302 F.Supp.2d 301, 305 (S.D.N.Y. 2004); Toys “R” Us, Inc., No. 88 C 10349, 1995 U.S. Dist. LEXIS 14878 at *111 (N.D.Ill. Sept. 29, 1995); Restatement (Second) of Prop.—Landlord and Tenant § 15.2 cmt. g (American Law Inst. 1976).

29. E.g., Campbell v. Westdahl, 715 P.2d 288, 293 (Ariz.Ct.App. 1985).

30. Friedman and Randolph Jr., supra note 8 at § 7:3.4 (citing cases).

31. Cent. Bus. Coll. v. Rutherford, 107 P. 279, 280 (Colo. 1910); List, 638 P.2d at 825 (dictum).

32. Kendall v. Ernest Pestana, Inc., 709 P.2d 837, 845 (Cal. 1985).

33. Id. at 845. See also Econ. Rentals, Inc. v. Garcia, 819 P.2d 1306, 1317 (N.M. 1991).

34. Cafeteria Operators L.P., 972 P.2d at 277.

35. Id.

36. Id. at 279.

37. Id.

38. List, 638 P.2d at 825.

39. Toys “R” Us, Inc., U.S. Dist. LEXIS 14878 at *124 (landlord’s refusal before it has relevant information that should be obtained in making the consent decision may be unreasonable).

40. Shaffer, The Sublease and Assignment Deskbook at 80–81 (American Bar Ass’n 2d ed. 2016).

41. Compare Parr, 107 P.3d at 1107 (affirming trial court’s ruling that the landlord unreasonably withheld consent where the landlord delayed consent, which caused the proposed assignees to withdraw their offer to purchase the business) with Toys “R” Us, Inc., 1995 U.S. Dist. LEXIS 14878 at *124 (landlord’s refusal before it has relevant information that should be obtained in making the consent decision may be unreasonable).

42. Fahrenwald v. LaBonte, 653 P.2d 806, 811 (Idaho Ct.App. 1982).

43. Parr, 107 P.3d at 1106.

44. Id.

45. Id. at 1107.

46. Bert Bidwell Inv. Corp. v. LaSalle and Schiffer, P.C., 797 P.2d 811 (Colo.App. 1990).

47. Id. at 811.

48. Id. at 812.

49. Id.

50. Toys “R” Us, Inc., 1995 U.S. Dist. LEXIS 14878 at *115 (citations omitted) (“where a lease contains provisions giving further meaning to a reasonableness clause, the standard of reasonableness varies”); Shaffer, supra note 40 at 80–81.

51. Golden Eye, LTC v. Fame Co., No. 0603166/2007, 2008 N.Y. Misc 8571 at *16 (N.Y. Gen Term Jan. 16, 2008) (“the Court may not determine reasonableness if withholding consent is based on grounds that were not included in the letter refusing consent”).

52. Shaffer, supra note 40 at 74–75.

53. Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 826 P.2d 710 (Cal. 1992).

54. Lindauer, 280 P.2d at 447.

55. Murphy v. Traynor, 135 P.2d 230, 231 (Colo. 1943).

56. Shoemaker v. Shaug, 490 P.2d 439, 441 (Wash.Ct.App. 1971) (finding that the tenant was not in default of the anti-assignment provision because it could reassign the lease back to itself).

57. La Casa Nino, Inc. v. Plaza Esteban, 762 P.2d 669, 672 (Colo. 1988) (citing Schneiker v. Gordon, 732 P.2d 603 (Colo. 1987)).

58. Gordon Inv. Co., 227 P.2d at 260–61 (tenant’s subletting was held a breach that permitted landlord to terminate the lease).

59. Shakey’s Inc. v. Caple, 855 F.Supp. 1035, 1043–44 (E.D.Ark. 1994) (holding that the landlord was estopped from terminating a lease on account of an unapproved sublease because the landlord did not act promptly).

60. Merkowitz v. Mahoney, 121 Colo. 38, 42 (Colo. 1949) (“It is the general rule that any act done by a landlord, with knowledge of an existing right of forfeiture, which recognizes the existence of the lease is a waiver of the right to enforce the forfeiture”); Werner v. Baker, 693 P.2d 385, 387 (Colo.App. 1984) (“the lessor’s acceptance of rent accruing after the breach of an anti-assignment clause, with knowledge of the breach, constitutes a waiver of the right to terminate the lease for breach of that clause”). Cf. Nouri v. Wester & Co., 833 P.2d 848, 851 (Colo.App. 1992) (holding that waiver of conditions against assignment by accepting rent did not carry over to other provisions in the lease).

61. La Casa Nino, Inc., 762 P.2d at 672.

62. Carma Developers (Cal.), Inc., 826 P.2d 710.

63. Schneiker, 732 P.2d at 611.

64. Friedman and Randolph Jr., supra note 8 at §§ 7:5.1 and 7:7.1.

65. Tiger Crane Martial Arts Inc. v. Franchise Stores Realty Corp., 235 A.D.2d 994, 995 (N.Y.App.Div. 1997) (“It is well settled that where, as here, a sublease is expressly made subject to the terms of a master lease, the subtenant has no legal right to compel the tenant to exercise an option for renewal of the entire demised premises in order to permit the subtenant to exercise an option for renewal of its subleased premises, absent proof of an agreement on the part of the tenant to exercise its option to renew for the benefit of the subtenant or evidence of special circumstances entitling the subtenant to such relief”).

66. Burgess Pic-Pac, Inc. v. Fleming Cos., 190 W. Va. 169, 175 (W.Va. 1993) (discussing liability of sublandlord to subtenant for failure to exercise renewal option after request from subtenant).

67. Senn, Commercial Real Estate Leases: Preparation, Negotiation, and Forms, § 13.14 (Wolters Kluwer 6th ed. 2019).

68. 11 USC § 1107.

69. 11 USC § 365(a).

70. 11 USC § 365(f)(2)(B).

71. 11 USC § 365(d)(3).

72. In re DB Capital Holdings, LLC, 454 B.R. 804, 816 (Bankr. D.Colo. 2011) (“waivers, unless they were part of a previous bankruptcy proceeding . . . should not be enforced”).

73. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984); 11 USC § 502(b)(6).

74. In re Shane Co., 464 B.R. 32, 38–41 (Bankr. D.Colo. 2012) (discussing damages claim under 11 USC § 502(b)(6)).

75. 11 USC § 365(b)(1).

76. 11 USC § 365(f); In re Bricker Systems, Inc., 44 B.R. 952 (Bankr. E.D. Wis. 1984) (recognizing that § 365(f) invalidates restrictions on assignment of contracts or leases by a debtor or trustee and allows assignment of assumed contracts at a later date).

77. In re Federated Dep’t Stores, Inc., 135 B.R. 941 (Bankr. S.D. Ohio 1991); In re Martin Paint Stores, 199 B.R. 258 (Bankr. S.D.N.Y. 1996), aff’d, S. Blvd., Inc. v. Martin Paint Stores, 207 B.R. 57 (S.D.N.Y. 1997).

78. In re Trak Auto Corp., 367 F.3d 237, 244 (4th Cir. 2004) (internal citation omitted).

79. In re Bradlee Stores, Inc., No. 00-16033, 2001 U.S. Dist. LEXIS 14755 (S.D.N.Y. Sept. 20, 2001) (holding that restriction on assignment violated the anti-assignment provisions of § 365(f)); In re Rickel Home Ctrs., Inc., 240 B.R. 826, 832 (D.Del. 1998) (striking restrictive use provision).

80. In re Trak Auto Group, 367 F.3d at 242 (enforcing use provision concerning the sale of automobile parts and accessories in shopping center lease); In re J. Peterman Co., 232 B.R. 366 (Bankr. E.D.Ky. 1999) (rejecting assignment of shopping center lease where proposed assignment would violate radius restriction in lease and assignee did not sell similar merchandise as the original tenant). But see In re Toys “R” Us, Inc., 587 B.R. 304, 307 (Bankr. E.D.Va. 2018) (overruling landlord’s objection to the debtor’s assignment on the grounds that it would violate the exclusivity provision of another lease in the shopping center and would disrupt the shopping center’s tenant mix and balance).

81. Friedman and Randolph Jr., supra note 8 at § 7:1.1.

82. In re Ames Dept. Stores, Inc., 127 B.R. 744, 752–54 (Bankr. S.D.N.Y. 1991) (discussing rights of landlord to protect the tenant mix at the shopping center in the context of the lease and a subsequent bankruptcy filing of the tenant).

83. Carma Developers (Cal.), Inc., 826 P.2d 710 (upholding the landlord’s contractual right to capture excess rent).

84. For an interesting discussion on the assignability of rights of first refusal, see Mitchell, “Can a Right of First Refusal Be Assigned?” 985 U. Chi. L. Rev. (2001).

As these cases illustrate, if a landlord wishes to withhold consent absent a sole and unconditional contractual right to do so, it must have fact-based reasons for doing so and cannot arbitrarily withhold or delay consent.

 

Item Assignment Sublease Partial Assignment
Space All the space All or less than all the space Less than all the space
Privity of estate Assignee has privity of estate as to all the space Subtenant never has privity of estate Privity of estate but only as to the space assigned
Privity of contract Depends on whether assignee has “assumed the lease” Subtenant does not “assume” the lease Depends on whether assignee has “assumed the lease”
Rent Assignee liable for all underlying rent and additional sums payable to tenant/assignor Subtenant only liable for rent specified in the sublease Assignee liable for a share of the underlying rent under the prime lease and for additional sums payable to tenant/assignor
Term Entire balance of term of prime lease At least one day less than balance of term of prime lease Entire balance of term of prime lease, but only as to the portion of the premises so assigned
Landlord’s remedies for rent May sue assignee for all rent and may sue tenant/assignor for all rent May not sue subtenant for rent; may only sue tenant/sublandlord for rent May sue assignee for its pro rata share; may sue tenant/assignor for all rent
Landlord’s remedies for possession May evict assignee for breach of lease May evict subtenant if prime lease provision is breached by tenant/sublandlord or by subtenant May evict assignee from its portion of the space for breach of lease
Tenant’s remedies for breach by transferee May sue assignee for damages, but not to recover possession or for rent May sue subtenant for rent and for recovery of possession May sue partial assignee for damages, but not to recover possession or for rent
Transferee’s liability Assignee’s liability for rent ends when it assigns the lease to another and no longer has privity of estate Subtenant’s liability to sublandlord does not end if subtenant assigns or further sublets (i.e., privity of contract) Partial assignee’s liability for rent ends when it assigns its interest to another and no longer has privity of estate