Generally, a tenant or a landlord has the right to transfer their interest to a third party. The real question often becomes, “is the transfer an assignment or a sublease?” Which leads us to ask what are the duties of all the parties associated with each method of transfer.
Ernst v. Conditt
390 S.W.2d 703 (Tenn. Ct. App. 1964).
The Ernsts are the plaintiffs. Conditt is the defendant. He lost and appealed.
Question
Is the transfer of interest an assignment or a sublease?
Rule
Common Law:
The easy way to determine if it is an assignment or lease is to examine how much of the term was transferred. If the whole term was transferred to a third-party, then the transfer is an assignment. If the term transferred is less the the term listed in the lease, then it is a sublease with the transferor maintaining a reversionary interest.
Modern Approach:
Determine the intent of the parties.
Holding
Under either the common law or modern approach, this transfer is an assignment. Affirmed.
Facts
Ernst leased the land to Rogers for a year who paved the land and used it to operate a go-chart business. However, Rogers operated the business for only a short time. At this point, Conditt purchased the business.
In the lease, there were provisions that there would be no assignment or sublease unless there was the express permission by the landlords. Understanding this, Rogers and Conditt went to the Ernsts to extend the term of the lease (to be two total years instead of one) and to allow for the sublet of the lease. Rogers was to remain liable for the execution of the lease during the lease period. The amendment was approved by all parties.
After the lease amendment, Conditt paid rent for the first couple of months but then claimed that he was not liable for the remainder. However, he remained in possession for the rest of the lease. At the expiration, Conditt demanded the remainder of the lease not paid (over 2,000 for the first year and over 4,000 for the second year). When Rogers refused, Conditt sued.
Analysis
The resolution of the case is determined by whether the contract was a sublease or an assignment.
Here, the defendant argues that this is a sublease because Rogers personally accepted liability for the fulfilling of the contract and the language used was to “sublet.” However, the court finds these arguments unpersuasive because the language “sublet” can be used to mean either a sublease or an assignment. Additionally, the personal liability does not mean that Rogers had a reversionary interest. Instead, he intended to sell the whole lease, no longer operating the go-cart business.
As such, this is an assignment because the interest of the parties was to convey all the interest in the estate. As such, there was no longer a privity of estate between the parties and Rogers only retained a privity of contract for the purposes of liability.
Note: I want to spend a minute discussing the distinction between privity of contract and privity of estate in assignments v. subleases.
In an assignment, the tenant assigns all their interest to the assignee. Doing so breaks a privity of estate connection between the original tenant and the landlord. Instead, the privity of estate transfers to the assignee. However, the tenant still maintains a privity of contract with both the landlord and the assignee.
In a sublease, the tenant still retains some interest in the property. As such, the privity of estate between the original tenant and the landlord continues to exist. So, when the tenant subleases, the tenant retains both privity of contract and privity of estate with the landlord. Additionally, the tenant retains both privity of contract and privity of estate with the assignee.
Additional Notes
Here, we see a combination of contract law and property law. By entering into the lease, they enter into a contract which imposes duties based on the signed contract. However, there is also privity by estate which outlines the responsibilities of landlords and tenants based specifically on property law (not contracts).
Privity of Estate and Privity of Contract
Interestingly, Roger could have been liable (under privity of contract) if he there was no novation (an agreement saying that the tenant is no longer liable). Here, Roger could either not be found or is judgment proof. So, the question comes down to, “is Conditt liable?” This is the question we care about. Because his liability is dependent on whether he was an assignment or a sublease. Ernst would win if the property arrangement is an assignment. However, Conditt would win if this is a sublease.
If this is an assignment, Conditt loses because Condit would have taken all the interest in the estate. Here, he would have established a privity of estate with Ernst. If this was a sublease, Rogers would have retained an interest so the privity of estate is only created between Rogers and Conditt. See the chart below:
The basis for a privity of estate is occupation (there is no need for a contract to be present).
Here, the language of the lease is not applicable. Even though Rogers is liable, Conditt can also be liable.
The main difference between the two is “did the tenant transfer all possession for all the remaining lease term?” If so, then there is an assignment. If not, then this is is a sublease. Note from the chart above that there is no legal relationship between a landlord and a sublessee. The remedy for a defaulted sublessee is through the original tenant or by eviction of the sublessee. However, there is a legal relationship between a landlord and an assignee.
Kendall v. Ernest Pestana Inc.
709 P.2d 837 (Cal. 1985).
Although a lease can usually be freely transferred, many leases have clauses that limit the ability to transfer. There are three main types of clauses: sole discretion (landlord can deny transfer for any reason); reasonableness (must be commercially reasonable to deny transfer); silent consent (the lease does not contain information about which standard to adopt). So, when there is a silent consent, which type of consent is required. Hence this case.
Kendall is the plaintiff, wishing permission to assign which was denied by Ernest. Kendall lost and appealed.
Question
When a consent clause is silent, is the consent to be construed as requiring only reasonableness or based on the sole discretion of the landlord.
Rule
When there is a silent consent clause, it is to be construed as a commercially reasonable consent clause (the lessor cannot deny consent if the action is commercially reasonable).
Holding
When a clause is silent, it needs to be construed as requiring commercial reasonability. Reversed.
Facts
The city leased an airport hanger to one party who subleased to Ernest. Ernest subleased to another party who wants to sublease to Kendall. However, when Kendall went to get permission, Ernest denied the sublease unless Kendall was willing to pay higher rent.
Analysis
Kendall is still the minority approach today. In most other jurisdictions, a silent clause is construed as being subject to the sole discretion of the landlord. For courts that do adopt the minority approach, silence means reasonability for commercial leases but typically still allows sole discretion for residential leases. However, if the lease writes in “sole discretion” the clause will no longer be silent and may be interpreted that way.
Here, there are policy reasons for adopting the reasonable standard. The courts want to ensure the fair dealing of parties. Thus, one party may not refuse assignment or sublease if the sole reason is to demand higher rent. Instead, there must be a good reason such as: altering the premises, having poor credit or other financial standing, etc.
Additional Notes
The relationship of parties in Kendall v. Ernest:
City of San Jose leased to Perlitches who subleased to Bixler who wanted to assign their sublease to Kendall. Additionally the Perlitches assigned their interest to Ernest Pestana, Inc.
A silent consent clause is where the lease requires consent for an assignment or sublease to occur but does not have any articulated standard. As a result, jurisdictions are required to determine the standard when a silent consent clause is present.
California determined that the default should result in a “reasonableness clause” when the consent clause is silent.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
