By: Santiago J. Padilla, Esq.
In these hectic economic times, the issue of obtaining landlord approval for the assignment of a commercial lease arises frequently. Normally, what happens is that the tenant wants to sell his or her business for various reasons and in the process assign the lease to the purchaser of the business. This is fairly classic in the acquisition of businesses. Most leases provide that a tenant may not assign the lease without the approval of the landlord. This is where I suggest that the parties focus on negotiating the lease prior to signing it to ensure that the landlord must act reasonably when deciding to approve an assignment of the lease.
For example, I have seen cases where the landlord seeks a percentage of the purchase price of the business being sold in order to approve the assignment. In other cases, the landlord seeks to extract other economic benefits in order to approve the assignment. Recent case law in Florida holds that such conduct by the landlord may constitute a breach of contract.
Specifically, in the case of Siewart v. Casey, 80 So.3d 1114 (Fla. 4th DCA 2013), the Court of Appeals affirmed the lower court's decision that the landlord acted unreasonably in failing to approve a partial assignment of the lease. In that case, the landlord sued the tenant for damages resulting from the tenant's early termination of a lease. Following a non-jury trial, the trial court found that the landlord arbitrarily refused to allow a partial assignment of the property, despite a clause in the lease permitting a sublease with prior approval by the landlord. The trial court further found that because the landlord arbitrarily withheld consent, the tenant was no longer obligated to perform under the lease. The landlord appealed the trial court's judgment stating that the lease was clear in that landlord approval had to be obtained in order for the lease to be assigned. Specifically, the lease provided in pertinent part as follows:
"ASSIGNMENT. Tenant . . . may not assign the lease or sublease all or any part of the Premises without first obtaining the Landlord's written approval and consent to the assignment or sublease."
However, the Fourth District Court of Appeals disagreed with the landlord and held that the landlord had acted unreasonably because the landlord could not simply not approve the assignment arbitrarily. The Court stated that
When a lease contains a boilerplate clause requiring the landlord's consent for any proposed sublease-without specific standards governing the landlord's approval-the landlord may not then arbitrarily withhold approval of a sublease. This stems from the implied covenant of good faith which "exists in virtually all contractual relationships." Speedway SuperAmerica, LLC v. Tropic Enters., Inc., 966 So. 2d 1, 3 (Fla. 2d DCA 2007). "The implied obligation of good faith performance has been applied in the context of lease provisions requiring a landlord's consent to a tenant's assignment of a lease." Id. at 4; see also Fernandez v. Vazquez, 397 So. 2d 1171 (Fla. 3d DCA 1981).
In the instant case, the sublease provision in the lease provided no standards which the landlord was to utilize in determining whether to approve or reject a sublease. Therefore, the implied obligation of good faith performance is applicable to the sublease provision at issue in this case.
A landlord's blanket refusal to consent to any sublease, when the lease provides that the landlord must give approval before a sublease can be created, is by definition unreasonable and therefore a violation of the covenant of good faith.
Siewart v. Casey, 80 So. 3d at 1116. As such, the rule of law in Florida is that a landlord must act reasonably and with good faith when deciding whether to approve an assignment of the lease unless there are specific provisions in the lease that give the landlord a right to request certain documentation or evidence regarding the financial capacity of the assignee. Even then, however, courts will impute an obligation of good faith on the landlord.
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If you have any questions regarding commercial leases or other real estate matters, please contact Santiago J. Padilla at 1-800-483-7197.