Privity Of Contract Assignment Consent

"Assignee" redirects here. For the racehorse, see Assignee (horse).

An assignment (Latin cessio) is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party, the assignor, to another party, the assignee.[1] It can also be a transfer of a benefit, including an equitable interest, according to established rules (at common law or in equity).[2] The rights may be vested or contingent.[3] The details of the assignment determines some additional rights and liabilities (or duties).

Typically a third party is involved in a contract with the assignor, and the contract is, in effect, transferred to the assignee. For example, a borrower borrows money from a local bank. The local bank receives a mortgage note and can thereafter transfer that note to a financial institution in exchange for a lump-sum of cash, thereby assigning the right to receive payment from the borrower to another entity. Mortgages and lending contracts are relatively amenable to assignment since the lendor's duties are relatively limited; other contracts which involve personal duties such as legal counsel may not be assignable.

The related concept of novation is not assignment. Rather than assigning only the rights to another party, novation involves the replacement of the original party with a new party or the replacement of the original contract with a new contract. Since novation creates a new contract, it requires the consent of all parties, but assignment does not require the consent of the nonassigning party, but in the case of assignment, the consent of the nonassigning party may be required by a contractual provision.[4]

Procedure[edit]

The assignment does not necessarily have to be in writing; however, the assignment agreement must show an intent to transfer rights. The effect of a valid assignment is to extinguish privity (in other words, contractual relationship, including right to sue) between the assignor and the third-party obligor and create privity between the obligor and the assignee.

Liabilities and duties[edit]

Unless the contractual agreement states otherwise, the assignee typically does not receive more rights than the assignor, and the assignor may remain liable to the original counterparty for the performance of the contract. The assignor often delegates duties in addition to rights to the assignee, but the assignor may remain ultimately responsible.

However, in the United States, there are various laws that limit the liability of the assignee, often to facilitate credit, as assignees are typically lenders.[5] Notable examples include a provision in the Truth in Lending Act[6] and provisions in the Consumer Leasing Act and the Home Ownership Equity Protection Act.[5]

In other cases, the contract may be a negotiable instrument in which the person receiving the instrument may become a holder in due course, which is similar to an assignee except that issues, such as lack of performance, by the assignor may not be a valid defense for the obligor.[7] As a response, the United States Federal Trade Commission promulgated Rule 433, formally known as the "Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses", which "effectively abolished the [holder in due course] doctrine in consumer credit transactions".[7] In 2012, the commission reaffirmed the regulation.[8]

Assignment of contract rights[edit]

Assignment of rights under a contract is the complete transfer of the rights to receive the benefits accruing to one of the parties to that contract. For example, if Party A contracts with Party B to sell Party A's car to Party B for $10, Party A can later assign the benefits of the contract - i.e., the right to be paid $10 - to Party C. In this scenario, Party A is the obligee/assignor, Party B is an obligor, and Party C is the assignee. Such an assignment may be donative (essentially given as a gift), or it may be contractually exchanged for consideration. It is important to note, however, that Party C is not a third party beneficiary, because the contract itself was not made for the purpose of benefitting Party C. When an assignment is made, the assignment always takes place after the original contract was formed. An Assignment only transfers the rights/benefits to a new owner. The obligations remain with the previous owner. Compare Novation.

When assignment will be permitted[edit]

The common law favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is thus permitted, the assignor need not consult the other party to the contract. An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. Certain kinds of performance, therefore, cannot be assigned, because they create a unique relationship between the parties to the contract. For example, the assignment of a legal malpractice claim is void since an assignee would be a stranger to the attorney-client relationship, who was owed no duty by the attorney and would imperil the sanctity of the highly confidential and fiduciary relationship existing between attorney and client.

Torts are not assignable as public policy, and various statutes may prohibit assignment in certain instances.[9] In addition, the Restatement (Second) of Contracts lists prohibitions in §317(2)(a) based upon the effect to the nonassigning party (obligor),[9] with similar prohibitions in the Uniform Commercial Code §2-210.[10] For example, UCC §2-210 states the following:[11]

Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreementotherwise [sic].

Requirements for an effective assignment[edit]

For assignment to be effective, it must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect. Although this prevents a party from assigning the benefits of a contract that has not yet been made, a court of equity may enforce such an assignment where an established economic relationship between the assignor and the assignee raised an expectation that the assignee would indeed form the appropriate contract in the future.

A contract may contain a non-assignment clause, which prohibits the assignment of specific rights and some various rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignment. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made. However, an assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that "all assignments are void".

Two other techniques to prevent the assignment of contracts are rescission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances.

Requirement of a writing[edit]

There are certain situations in which the assignment must be in writing.

  1. Assignment of wages; additionally, statutes may prohibit this assignment[9]
  2. Assignment of any interest in real property
  3. Assignment of choses in action worth over $5,000

Delegation[edit]

A parallel concept to assignment is delegation, which occurs when one party transfers his duties or liabilities under a contract to another. A delegation and an assignment can be accomplished at the same time, although a non-assignment clause may also bar delegation.

Remedies[edit]

Legal remedies may be available if the nonassigning party's rights are affected by the assignment.

Revocability[edit]

Assignments made for consideration are irrevocable, meaning that the assignor permanently gives up the legal right to take back the assignment once it has been made. Donative assignments, on the other hand, are generally revocable, either by the assignor giving notice to the assignee, taking performance directly from the obligor, or making a subsequent assignment of the same right to another. There are some exceptions to the revocability of a donative assignment:

  1. The assignment can not be revoked if the obligor has already performed
  2. The assignment can not be revoked if the assignee has received a token chose (chose being derived from the French word for "thing", as in a chose of action) - a physical object that signifies a right to collect, such as a stock certificate or the passbook to a savings account.
  3. The assignment can not be revoked if the assignor has set forth in writing the assignment of a simple chose - a contract right embodied in any form of token.
  4. Estoppel can prevent the revocation of a donative assignment if the assignee changed their position in reliance on the assignment.

Finally, the death or declaration of bankruptcy by the assignor will automatically revoke the assignment by operation of law.

Breach and defenses[edit]

A cause of action for breach on the part of the obligor lies with the assignee, who will hold the exclusive right to commence a cause of action for any failure to perform or defective performance. At this stage, because the assignee "stands in the shoes" of the assignor, the obligor can raise any defense to the contract that the obligor could have raised against the assignor. Furthermore, the obligor can raise against the assignee counterclaims and setoffs that the obligor had against the assignor. For example, suppose that A makes a contract to paint B's house in exchange for $500. A then assigns the right to receive the $500 to C, to pay off a debt owed to C. However, A does such a careless job painting the house that B has to pay another painter $400 to correct A's work. If C sues B to collect the debt, B can raise his counterclaim for the expenses caused by the poor paint job, and can reduce the amount owed to C by that $400, leaving only $100 to be collected.

When the assignor makes the assignment, he makes with it an implied warranty that the right to assign was not subject to defenses. If the contract had a provision that made the assignment ineffective, the assignee could sue the assignor for breach of this implied warranty. Similarly, the assignee could also sue under this theory if the assignor wrongfully revoked the assignment.

Successive assignments[edit]

Occasionally, an unscrupulous assignor will assign exactly the same rights to multiple parties (usually for some consideration). In that case, the rights of the assignee depend on the revocability of the assignment, and on the timing of the assignments relative to certain other actions.

In a quirk left over from the common law, if the assignment was donative, the last assignee is the true owner of the rights. However, if the assignment was for consideration, the first assignee to actually collect against the assigned contract is the true owner of the rights. Under the modern American rule, now followed in most U.S. jurisdictions, the first assignor with equity (i.e. the first to have paid for the assignment) will have the strongest claim, while remaining assignees may have other remedies. In some countries, the rights of the respective assignees are determined by the old common law rule in Dearle v Hall.

  1. Earlier donative assignees for whom the assignment was revocable (because it had not been made irrevocable by any of the means listed above) have no cause of action whatsoever.
  2. Earlier donative assignees for whom the assignment was made irrevocable can bring an action for the tort of conversion, because the assignment was technically their property when it was given to a later assignee.
  3. Later assignees for consideration have a cause of action for breaches of the implied warranty discussed above.

See interpleader.

Special rules for assignment of certain rights[edit]

Property rights[edit]

See also: Rule in Dumpor's Case and Privity of estate

Real property rights can be assigned just as any other contractual right. However, special duties and liabilities attach to transfers of the right to possess property. With an assignment, the assignor transfers the complete remainder of the interest to the assignee. The assignor must not retain any sort of reversionary interest in the right to possess. The assignee's interest must abut the interest of the next person to have the right to possession. If any time or interest is reserved by a tenant assignor then the act is not an assignment, but is instead a sublease.

The liability of the assignee depends upon the contract formed when the assignment takes place. However, in general, the assignee has privity of estate with a lessor. With privity of estate comes the duty on the part of the assignee to perform certain obligations under covenant, e.g. pay rent. Similarly, the lessor retains the obligations to perform on covenants to maintain or repair the land.

If the assignor agrees to continue paying rent to the lessor and subsequently defaults, the lessor can sue both the assignor under the original contract signed with the lessor as well as the assignee because by taking possession of the property interest, the assignee has obliged himself to perform duties under covenant such as the payment of rent.

Unlike a Novation where consent of both the lessor and lesse is required for the third party to assume all obligations and liabilities of the original lessee, an assignment does not always need the consent of all parties. If the contract terms state specifically that the lessor's consent is not needed to assign the contract, then the lesee can assign the contract to whomever the lesee wants to.

Absent language to the contrary, a tenant may assign their rights to an assignee without the landlord's consent. In the majority of jurisdictions, when there is a clause that the landlord may withhold consent to an assignment, the general rule is that the landlord may not withhold consent unreasonably unless there is a provision that states specifically that the Landlord may withhold consent at Landlord's sole discretion.

Partnership rights[edit]

A person can also assign their rights to receive the benefits owed to a partner in a partnership. However, the assignee can not thereby gain any of the assignor's rights with respect to the operation of the partnership. The assignee may not vote on partnership matters, inspect the partnership books, or take possession of partnership property; rather, the assignee can only be given the right is to collect distributions of income, unless the remaining partners consent to the assignment of a new general partner with operational, management, and financial interests. If the partnership is dissolved, the assignee can also claim the assignor's share of any distribution accompanying the dissolution.

Intellectual property rights[edit]

See also: transfer (patent)

Ownership of intellectual property, including patents, copyrights, and trademarks, may be assigned, but special conditions attach to the assignment of patents and trademarks. In the United States, assignment of a patent is governed by statute, 35 U.S.C. § 261. Patent rights are assignable by an "instrument in writing." Title in a patent can also be transferred as a result of other financial transactions, such as a merger or a takeover, or as a result of operation of law, such as in an inheritance process, or in a bankruptcy. An assignment of a patent can be recorded with the United States Patent and Trademark Office. Although such recording is not required, if an assignment is not recorded at the USPTO within three (3) months or prior to a subsequent assignment, the assignment will be void against a subsequent assignee without notice of the earlier, unrecorded assignment.

With respect to a trademark, the owner of the mark may not transfer ownership of the mark without transferring the goodwill associated with the mark.

Companies sometimes request from employees that they assign all intellectual property they create while under the employment of the company. This is typically done within an Employment Agreement, but is sometimes done through a specific agreement called Proprietary Information and Inventions Agreement (PIIA).

Personal injury torts[edit]

The standard rule is that personal injurytort causes of action are nonassignable as a matter of public policy.[9][12] These should be distinguished from final settlements or judgments resulting from lawsuits brought on such causes of action, which may be assignable.

Legal malpractice[edit]

In the majority of jurisdictions, assignments of legal malpractice causes of action are void as against public policy.[13]

Equitable assignment[edit]

An equitable assignment is an assignment, or transfer of rights, in equity.

General principles[edit]

There are numerous requirements that exist for an equitable assignment of property, outside the 'standard' clear and unconditional intention to assign.[14] These requirements are fundamental characteristics of a statutory assignment: Absolute assignment (an unconditional transfer: conditions precedent or part of a debt are not absolute) and the assignment must be made in writing and signed by the assignor, and in particular, this applies to real property.[15]

Assigning future property in equity cannot be gratuitous. The assignor must receive consideration for the agreement, otherwise the assignment will be ineffective.[3] However, an absolute assignment does not require consideration to be given. Secondly, between the period of agreement between assignor and assignee and acquisition by the assignor, the assignees rights are not contractual, but rather a proprietary right to the property.[16] This means the assignee has an interest in this future property, in the same manner any owner has over property.

In equity, these principles operate to protect both the assignor and the assignee. In Norman v Federal Commissioner of Taxation,[3] a taxpayer attempted to assign by deed, to his wife certain moneys which he was eventually going to receive. This included dividends and interest due on loans. The court held the interest and the dividends were expectancies or possibilities which could not be assigned without consideration. The court's worry was that assignments without consideration might be used as instruments of fraud, to avoid creditors and tax collection.

Mere expectancies[edit]

Courts will not enforce a contract to assign an expectancy unless there is a valuable consideration. For example, under a settlement of property the respondent "the son" would have been entitled to an equal portion of properties along with his other siblings which was gained in a settlement by his mother. This portion was only his when allocated to him at his mothers discretion. Prior to this allocation being made, the respondent allotted his benefit to trustees for a voluntary settlement. He was assigning or purporting to assign something which he might become entitled to in the future, not a contingent interest. The judgment held it ineffective and elaborated on previous points to state the respondent cannot be compelled to allow the trustees to retain the appointed sum.[17]

References[edit]

  1. ^For the assignment of claim see Trans-Lex.org
  2. ^Australian Law Dictionary (second ed.). oxford university press. 
  3. ^ abcNorman v Federal Commissioner of Taxation[1963] HCA 21, (1963) 109 CLR 9, High Court (Australia).
  4. ^Tips and traps in contracting: novation versus assignmentArchived January 26, 2013, at the Wayback Machine.. Association for General Counsel. (Australia).
  5. ^ abAssignee Liability: Through the Minefield. Arnstein & Lehr LLP.
  6. ^See 15 U.S.C. 1641(a).
  7. ^ abCommercial Paper: Holder in Due Course & DefensesArchived 2012-11-28 at the Wayback Machine..
  8. ^FTC Opinion Letter Affirms Consumers' Rights under the Holder Rule. FTC.
  9. ^ abcdStark T. (2003). Negotiating and Drafting Contract Boilerplate, Ch. 3: Assignment and Delegation. ALM Publishing.
  10. ^Chapter 18: Assignment and Delegation. LexisNexis study outline.
  11. ^Uniform Commercial Code § 2-210. Delegation of Performance; Assignment of Rights.
  12. ^Pony v. County of Los Angeles, 433 F.3d 1138 (9th Cir. 2006).
  13. ^Cowan Liebowitz & Latman, PC v. Kaplan, 902 So. 2d 755, 759-760 (Fla. 2005).
  14. ^Westbourne Grammar School v Sanget Pty[2007] VSCA 39, Court of Appeal (Vic, Australia).
  15. ^Conveyancing Act 1919 (NSW) s 23C.
  16. ^Federal Commissioner of Taxation v Everett[1978] FCA 39, (1978) 21 ALR 625 at p. 643, Federal Court (Full Court) (Australia).
  17. ^Northumberland (Duke) v Inland Revenue Comrs

I.            INTRODUCTION.

Assignments and subleases are commonplace.  The difference between the two is a product of common law.  Without a thorough understanding of the differing rights among landlords, tenants and transferees resulting from assignments and subleases, parties may find themselves unpleasantly surprised.  This article will outline the fundamental differences between assignments and subleases, how the common law arranges the on-going rights among the parties, and the advisability of certain express agreements that change the common law results.

II.            DISTINGUISHING BETWEEN AN ASSIGNMENT AND A SUBLEASE.

The quantity of interest transferred distinguishes an assignment from a sublease.  This distinction can be summarized as follows:

Assignment.   When a tenant transfers its entire interest in a leasehold estate, the transfer is an assignment.  To qualify as such, the transfer must include the tenant's entire estate for the duration of the lease.

Sublease.   When a tenant transfers less than the remaining term or less than the tenant's entire estate, thus leaving the original tenant with a reversionary interest in the lease, the transfer is a sublease.

For these purposes "estate" is tantamount to term.  Determination of whether a tenant has retained a portion of the estate does not depend on the whether the tenant receives less rent than it owes under the lease, or even on whether the tenant transferred the entire premises.  An assignment can occur regardless.  But, retention by the tenant of even the smallest right with respect to the term constitutes a "reversionary interest" and creates a sublease.  For instance, courts have construed a transfer as a sublease where the original tenant retained an option to terminate, extend or renew the prime lease.  In fact, the reversionary interest need not even be under the control of the original tenant to qualify the transaction as a sublease.  At least one court has held that a tenant may have retained a reversionary interest where a third party to whom premises are conveyed has the option to terminate the conveyance.[1]

Surprisingly, one factor that does not distinguish an assignment from a sublease is the portion of premises involved.  As long as the tenant relinquishes its interest in the portion of the premises transferred for the entire term of the lease, an "assignment pro tanto" occurs.  Such a transfer carries all the legal implications of any other assignment, except that the assignee has liability for only a portion of the rent proportionate to the interest it receives in the premises.  Most people would think that a sublease has occurred, because less than the entire premises has been conveyed.  However, such a transfer creates a form of assignment.  This means that the assignee will have privity of estate with the landlord, and may have privity of contract as well.

Landlords and tenants may not find pro tanto assignments desirable.  A landlord will be concerned about dealing with two separate tenant interests under one lease document.  For instance, what if the original tenant defaults under the lease with respect to its space, but the assignee continues to meet its obligations under the lease for its portion of the premises?  Would the landlord be forced to terminate the lease for only a portion of the premises?  The landlord certainly did not intend this result when it entered into the lease.  Although the landlord might be able to control this risk if the lease requires its consent for a transfer, what if the lease is silent?  From the assignee's or tenant's perspective, what if it wants to terminate the lease? Can it do so without the consent of the other party?  What if either the tenant or assignee bankrupts?  If the trustee rejects the lease, does this terminate the assignment?  No easy answers exist for these issues.  Comprehensive transfer provisions in leases and assignment documents provide the only real solution.

III.            WHAT'S AT STAKE: THE LEGAL IMPLICATIONS OF IDENTIFYING A TRANSFER.  

A.             Privity of Estate v. Privity of Contract.   The classification of a leasehold transfer as an assignment or sublease carries differing legal implications regarding future liability arising under the prime lease.  A party's liability under the terms of the prime lease ultimately depends upon the somewhat archaic term of "privity."  The common law recognizes two general types of privity: (a) privity of estate and (b) privity of contract.

Privity of Estate.   Privity of estate rests upon a landlord-tenant relationship.  Acquisition of a leasehold interest by the new tenant, regardless of whether it is an assignment or sublease, establishes privity of estate.

Privity of Contract.   Privity of contract rests upon the existence of an agreement, regardless of whether a landlord-tenant relationship exists.  Privity of contract does not run with the land, unlike privity of estate.  Accordingly, the original lease will not bind a new tenant under privity of contract unless the new tenant assumes the lease.

The original landlord and tenant under a lease have both privity of estate and privity of contract.  When the original tenant transfers its interest in the lease to a third party, these relationships inevitably change.  The manner and extent of the transfer determine what forms of privity will thereafter exist.

B.             Assignment.  If the original tenant assigns its interest in the lease, its privity of estate terminates, but its privity of contract remains intact.  In other words, assignment of the lease ends its right to possession, but, absent an express release under the terms of the lease, its liability under the lease continues.  When the assignee takes possession of the premises, the assignee obtains privity of estate.  Privity of estate binds the landlord and assignee to the terms of any covenants running with the land, but only so long as the privity of estate continues.  As a result, the assignee becomes liable to the landlord for the payment of rent and the breach of any other lease covenants running with the land.  Likewise, the landlord becomes liable to the assignee for the covenant of quiet enjoyment.  However, the assignee does not come into privity of contract with the landlord unless the assignee expressly assumes the tenant’s obligations under the lease.  Without an assumption, the assignee would not be liable for contractual agreements that do not run with the land, such as an original tenant/assignor's undertaking to pay a note made in favor of the Landlord.[2]   Further, absent the assignee's assumption of the lease, a subsequent assignment will end the assignee's privity of estate, and with it, all of that party's obligations to the landlord.  Thus, the absence of privity of contract between the landlord and assignee prevents the assignee from being liable for any breach committed by the original tenant or any prior or subsequent assignee.

As previously alluded, the tenant cannot relieve itself from liability under the lease merely by assigning the lease to a third party.  Despite an assignment, the tenant remains secondarily liable for the obligations of the assignee under the lease.  This means that if the landlord cannot recover from the assignee, it can thereafter pursue the tenant.  From the landlord's perspective, it would prefer to pursue either or both of the tenant and assignee, at its election and without exhausting remedies against one or the other. To achieve this end, the lease must expressly provide that the original tenant remains primarily liable notwithstanding a transfer of its interest.

If the assignee assumes the obligations of the tenant under the lease through agreement with the assignor, both the tenant and the assignee have privity of contract, while only the assignee has privity of estate.  The landlord can enforce the lease against the assignee as a third party beneficiary, regardless of whether the landlord was a party to the assignment/assumption agreement.  However, some jurisdictions have held that in limited circumstances, when a landlord has accepted the assignee in place of the assigning tenant, either expressly or by implication, then the assigning tenant is released from liability arising under the terms of the lease.[3]

Notwithstanding its initial liability under the lease following an assignment, the original tenant may later be released from liability, if the terms of the lease are amended by agreement between the landlord and the assignee.  Thus, from the landlord's perspective, it is important for the lease to provide that the tenant remains liable, at least for the initial lease obligations, regardless of any later amendment of the lease terms.

C.             Sublease.       A sublease, unlike an assignment, does not establish privity of estate or privity of contract between the landlord and the subtenant.  Instead, when a sublease occurs, the original tenant retains both privity of estate and privity of contract with the landlord.  No legal relationship exists between landlord and subtenant.  A sublease therefore does not transfer any of the original tenant's rights or obligations under the lease to the subtenant.  Accordingly, the landlord cannot hold the subtenant liable for a breach of the lease, even if caused by the subtenant, nor can the subtenant enforce the terms of the lease against the landlord.

Despite the lack of privity between the landlord and subtenant, a sublease does establish a new leasehold estate between the tenant and subtenant, creating both privity of estate and privity of contract.  Thus, the sublease document will control whether and to what extent the subtenant can hold the tenant liable for breaches of the lease by the landlord, and what happens if the subtenant's failure to perform under the sublease creates liability for the tenant under the lease.  These agreements do not, however, disturb the privity of contract and estate existing between the landlord and tenant, despite the subtenant's possession of the premises.  Thus, for either the landlord to have rights against the subtenant or vice versa, the landlord and subtenant must execute a separate document establishing them.

IV.             CONSENT, WAIVER AND BREACH:

The law favors free transferability of rights.  As such, a party may prohibit assignment or subletting only through the use of express prohibitions in the lease.  Absent such prohibitions, tenants may sublease or assign their leasehold interests freely.  However, simple restrictions on transfer in the lease may not be sufficient.  Many courts perceive restrictions against assignment or sublease as restraints on alienation.  As a result, courts often interpret restrictive language against the landlord.  For instance, a prohibition only against assignments does not preclude subleases, and vice versa.[4]   Furthermore, under the majority rule, a simple covenant against subletting would not bar subletting only a portion of the premises.[5]

Some states have enacted statutory limitations upon a tenant's right to transfer its leasehold interest.   For instance, a Texas statute prohibits tenants from subleasing or assigning a leasehold interest without the consent of the landlord.[6]   Other states have adopted similar restrictions, but only as to short term leases.[7]

Given the common law, and absent satisfactory statutory provisions that change the common law result, most leases contain language requiring landlord consent for transfers of the tenant's leasehold estate.  Where a requirement for landlord consent exists, in most jurisdictions the tenant's failure to obtain such consent will enable the landlord to recover damages.  However, in certain circumstances or where a statute or the language of a landlord consent requirement expressly provides, a landlord may be able to declare the assignment or sublease void, sue the tenant for breach of covenant or obtain an injunction.[8]   It is important to note, however, that the breach of covenant prohibiting assignment or sublease does not, in and of itself, terminate the lease.[9]   While an assignment in breach of the restriction may provide the basis for forfeiture, the assignee will still receive good title to the lease as a result of the assignment.  As such, the landlord is still entitled to recover rent from the assignee despite the breach.[10]

To ensure that the landlord can terminate the lease or void an unauthorized transfer regardless of jurisdiction, the lease should expressly provide such rights, at its election.  A landlord may, however, waive the breach of a transfer restriction against or otherwise prevent itself from objecting.  As such, although a lease may prohibit assignment or sublease without consent, the landlord may expressly, or by implication, be deemed to have waived a transfer in violation of the lease by acting in a manner that implies that the breach of this covenant has been waived.  For instance, the landlord's knowing acceptance of rent from an assignee or subtenant may constitute such a waiver, and prevent the landlord from declaring a lease forfeiture.

Another pitfall arises after a landlord has either consented to a transfer or waived a breach of a non-assignment clause.  Unless the lease expressly provides to the contrary, the restriction on transfer will terminate for future transfers.

V.            PRACTICAL ASPECTS

An assignment can differ from a sublease in only the most nominal way – at the very limit a transfer for an hour less than the full term constitutes a sublease, while a transfer for one hour longer constitutes an assignment.  In either case, the original tenant will remain liable to the landlord for the lease obligations.  But the rights of the landlord and transferee will differ.  In case of an assignment, the assignee will at least have privity of estate and therefore certain rights against the landlord and vice versa.  In case of a sublease, the subtenant has no rights against the landlord, nor does the landlord have any rights against the subtenant.

Each party will have different goals.  The landlord will want to enforce the lease against both the tenant and transferee to the maximum extent possible.  It would therefore prefer an assignment where the tenant agrees to remain primarily liable under the lease.  The transferee will want the freedom to enforce the essential lease obligations against the landlord with minimum liability.  It would therefore prefer and assignment without assumption.  The tenant would prefer either to have total absolution or total control.  Thus, it may prefer an assignment with assumption by the assignee and release of the tenant.  If the tenant cannot absolve itself of liability under the lease, it may opt for the other end of the spectrum, and create a sublease, retaining a nominal portion of the estate, in order to prevent the transferee from having direct dealings with the landlord.

Any of the foregoing results and infinite variations can arise.  The trick comes in making the results intentional.  A tightly crafted transfer clause in the lease provides the best solution.  The following list comprises the key elements to include:

1.          No transfer of all or any portion of the premises or the tenant's leasehold estate may occur without the landlord's consent.

2.          Any transfer without the landlord's consent is voidable, at the landlord's option.

3.          Any transfer without the landlord's consent may result in a forfeiture of the lease, at the landlord's option.

4.          The acceptance of rent by the landlord from any transferee will not be deemed to be a waiver of the landlord's right to consent or declare the lease forfeited or the transfer void.

5.          The landlord's consent to one transfer will not be deemed to be a waiver of the right to consent to any future transfer.

6.          Following an assignment, the tenant will remain primarily liable under the lease.  If the assignee defaults, the landlord may proceed directly against the tenant without the necessity of exhausting remedies against the assignee.

7.          The landlord may consent to subsequent sublettings or assignments or amendments or modifications to the lease by transferees without notifying the tenant, and without obtaining the tenant's consent thereto.  No such actions will relieve the tenant from primary liability under the lease.

VI.             CONCLUSION.

Under the common law and some state statutes, assignment and subletting create specific sets of rights among the landlord, tenant and transferee.   These pre-established results may be undesirable from the standpoint of the parties and the structure of a particular transaction.  Thus, drafting a comprehensive transfer clause plays an essential role in ensuring results consistent with the expectations of the parties.



[1]See Orchard Shopping Center, Inc. v. Campo, 485 N.E.2d 1248 (Ill. App. 5th Dist. 1985) (holding that where, as a term of a lease transfer, a Sublessee retains the right to terminate the sublease for any reason upon seven days notice, a reversion is retained by the transferor and, as a result, the transaction is a sublease). See also Indian Refining Co. v. Roberts, 181 N.E. 283 (Ind. App. 1932).

[2] Gateway Company v. DiNoia, 654 A.2d 342 (Conn. 1995) (fn. 8); Dolph v. White, 12 N.Y. 296 (1855).

[3]See 185 Madison Associated v. Ryan, 174 A.D.2d 461 (N.Y.A.D. 1991) (stating "[i]t is well settled that in order to relieve the original tenant-assignor from its continuing liability after assignment, it must be expressly shown that the lessor not only consented to the assignment, but accepted the assignee in place of the tenant and such release of the tenant must either be express or implied from facts other than the lessor's mere consent to the assignment and its acceptance of rent from the assignee").  But see, De Hart v. Allen, 161 P.2d 453 (Cal. 1945) (maintaining that an assignor/lessee of lease remains as primary obligor under the lease).

[4]See, e.g., Board of Commissioners v. Lions Del. County Fair, Inc., 580 N.E.2d 280 (Ind. App. 1991); Smith v. Hegg, 214 N.W.2d 789 (S.D. 1974); Gagne v. Hartmeier, 611 S.W.2d 194 (Ark. App. 1981); Rogers v. Hall, 42 S.E.2d 347 (NC 1947).  See also, M. Friedman on leases, § 7.303.

[5]See Drake v. Eggleston, 108 N.E.2d 67 (Ind. App. 1952). For minority view, see Minneapolis, St. Paul & Sault St. Marie R.R. v. Duvall, 67 N.W.2d 593 (N.D. 1954).

[6]V.T.C.A. Property Code § 91.005 (1995), discussed in 718 Associates, Ltd. v. Sunwest N.O.P., Inc., 1 S.W.3d 355 (Tex. Civ. App. 1999); Lawther v. Super X Drugs of Texas, Inc., 671 S.W.2d 591 (Tex. Civ. App. 1984).

[7]See M. Friedman on Leases, § 7.301 (citing Sooner Pipe & Iron Co. v. Bartholomew, 248 P.2d 225 (Okla. 1952)).

[8]See generally, Shropshire v. Prahalis, 419 S.E.2d 829 (S.C. App. 1992) (allowing a forfeiture remedy where the lease contained a forfeiture clause); Clasen v. Moore Bros. Realty Corp., 413 S.W.2d 592 (Mo. App. 1967); Artesia Medical Development Co. v. Regency Association, Ltd., 214 Cal App. 3d 957 (Cal 2d Dist. 1989); Twelve Oaks Tower I, Ltd. v. Premier Allergy, Inc., 938 S.W.2d 102 (Tex. Civ. App. 1997) (providing that under a Texas statute, failure by a tenant to obtain consent to assignment renders the lease voidable at option of lessor, and is not terminated unless landlord undertakes to terminate it, declare forfeiture or reenter). See also M. Friedman on Leases § 7.304.

[9]See Chessport Millworks, Inc. v. Solie, 522 P.2d 812 (N.M. 1974); Cities Serv. Oil Co. v. Taylor, 45 S.W.2d 1039 (Ky. 1932).

[10]See Klee v. United States, 53 F.2d 58 (9th Cir. 1931); Fink v. Montgomery Elevator Co., 421 P.2d 735 (Colo. 1975).

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