Privity of Contract & Estate, Subleases & Assignments, Landlord Rights in Tenants, Self-Help & Tenant Default, Surrender & Abandonment

LL Consent to Transfer in Commercial Context

Leaseholds are freely transferable. Absent provision in the lease to the contrary, T has right to alienate his interest in the lease. But, some contractual restrictions are permitted to protect the LL's legitimate interest in determining who the property can be transferred to (by the T), since the LL retains a reversionary interest in it. B/c of importance of alienabiliy, restrctions are construed strictly against the LL. (Kendall v. Pestana) A consent clause may be included, but may be silent as to the grounds upon which LL can refuse.

Privity

formal transaction that links parties together -a voluntary transactional relationship between two or more people or entities

Privity of Contract

Relationship existing between both parties to a contract (mutual relationship with respect to some voluntary promise) -Since lease is a contract, LL and T are in POC w/r/t leased premises. -Relationship to the lease agreement itself. -Their obligations bind them regardless of whether they are in privity of estate

Rules

(1) Lease prohibits any transfer Policy: LL interest in safeguarding their reversionary interest, but courts don't like that it restricts alienability (2): Arbitrary Refusal: Lease allows transfer with LL consent; can refuse for any reason (traditional rule) -Sole discretion allows transfer for any reason or no reason. Doesn't need to explain. -Laws prevent doing it for discrimination reasons -Courts seem to uphold this more if freely negotiated -harsh consequences are dealt with through estoppel and waiver (3) Lease allows transfer with LL consent; requires commercially reasonable objection -Growing Minority: LL cannot deny consent for reasons that constitute unlawful discrimination or for reasons that are not commercially reasonable, like personal taste, convenience, sensibility -Requires objective, commercially reasonable basis. Factors: · Financial responsibility of proposed transferee · Nature of new use proposed (in commercial lease, could base on % of profit being source of rent) · Suitability of proposed use for premises · Legality of new use · Need for alterations · Whether use will compete with LL's business or other existing tenants ("good mix" in malls) Kendall: Raising rents isn't a reasonable reason because it doesn't relate to LL interest in preserving property or ensuring performance of lease covenant Policy: · Idea that once you've decided to put your property on the market, you have less control about what happens to it · Want to allow for reasonable alienation of commercial space · Contractual duty of good faith and fair dealing o (4) Silent Consent Clause (Requires consent without a standard) - says LL consent is required but doesn't explain what the standard is -Traditional rule: Assume sole discretion because parties could have added reasonableness if they intended · Why? Hostility against restraints on alienation; increased recognition of duty of GF&FD · Initial instance of leasing: free ability to alienate. Commercially reasonable restriction is only when approving subleases. LL has much more freedom in deciding whether to lease than once it's been put on market -Modern rule (minority still but growing): Choose reasonableness. Kendall approach: · Conveyance: LL interests in protecting can still be met with reasonableness; this is better for society given shortage of commercial space o In modern urban society, urgent need to have alienability b/c supply of properties is low, so cannot permit unreasonable restrictions. o Reasoning underlying traditional rule was that lessor needed control over who leased the property in order to protect his interests. But this reasoning no longer valid b/c relationships between LLs and Ts have become very impersonal. o Second Restatement adopts this rule (except when lease term to the contrary) o If LL suspects sublessee can't meet financial obligations, those are sufficient commercially reasonable grounds. · Contract: good faith and fair dealing compels reasonableness

Rules for distinguishing sublease v. assignment

1) by term (most common; traditional -If original T retains an interest (of even a day), the transfer from T to third party is a sublease. -If original T transfers property for the entire remaining period of the lease, the transfer is an assignment. -Operates regardless of actual intent of the parties. -Retention of right of reentry or possibility of reverter by original T creates sublease. ---->Ex: T transfers his interest "to T1 so long as T1 farms the property." Sublease b/c T has retained possibility of reverter. 2) by intent (less common, modern) -Ascertain the intention of the parties by both the language of the document and the circumstances surrounding it. -Appears that courts not really looking at intentions or whether parties knew consequences of what they were doing. Rather, inferring intention from the use of certain words. --->Ex: Court applies this rule in Ernst v. Conditt and finds that the document is an assignment. The liability language did not create a reversionary interest and the subletting language is not conclusive, since other circumstances indicated an assignment was intended (i.e. R parted w/his entire interest in the property; C went into possession for entire term). 3) other factors: If the premises is rent at a higher or lower rent than the original lessee paid for it, then it looks like a sublease, assuming that rent differential goes to the lessee. (If it goes to, i.e. a rent management company, then not determinative.)

Lease is both contract (POC) and conveyance (POE)

Conveyance: older, governed by property law -Creates responsibilities for tenant: to repair, maintain, pay rent even if destroyed or LL breached obligations - instead had to sue and continue, no LL duty to mitigate if T abandoned Contract: Contract law better addresses needs and expectations of each party and better accommodates needs of a low-income urban tenant -E.g., LL habitability requirement, no obligation to pay rent if destruction of crucial structure, can stop rent and leave if breach of lease obligations, LL obligation to mitigate damages if tenant abandons Commercial leases have not adopted as much of contract law as residential leases

Examples of commercially reasonable grounds + hypo

Examples of commercially reasonable grounds 1) Desire to have only one "lead tenant" in order to preserve image of the building as tenant's international HQ 2) Desire for good "tenant mix" in shopping center 3) Lessor's belief that restaurant proposed by potential assignee would not succeed at that location Hypo: Assume lease in which LL can withhold on commercially reasonable grounds and participation clause. Tenant wants to assign his lease to a tattoo parlor. What commercially reasonable grounds does LL have to refuse consent to this assignment? -Point to evidence that parlor owners are generally not financially stable -Potential undesirability of the clientele (i.e. adverse effect on neighboring stores), but should we require hard evidence to back this up or allow the assumption to proceed w/o support? What if tattoo parlor was instead an LGBT bookstore? -in mall context, must take into account surrounding stores -participation clauses in commercial leases: In addition to a base rent paid by all shops on a square- footage basis in a mall, LL gets a certain percentage of receipts. -Adverse impact on surrounding stores is a reasonable consideration b/c any impact on profits also impacts profits of developer LL b/c of profit-sharing (via the participation clause). -Look at demographics of shoppers (very conservative community v. San Francisco) -What if it was a stand-alone shop in a commercial area, rather than in an enclosed mall? Would same shopping mall arguments work here? LL only owns one building, not the buildings containing the surrounding stores.

Privity of Estate

Exists when both the LL and T have a mutual, immediate, and simultaneous interest in the leased premises (the T having right to possession for term, the L having the reversion after the term). Created by physicial possession of premises -Comes anytime someone transfers interest in part or full to another (common or complete, both time-based and spatial) or spatial) - Think about bundle of straws! -Any assignee of the T is in privity of estate and is liable on the covenants in the lease. Similarly, LL is liable to the assignee on the LL's covenants. Exists any time interest in property passes from one party to another. -If you're subleasing, you're not in POE with original owner because you're in POE with the person it came from and goes to -imposes rights and duties on assignee and lessor can only have ONE privity of estate

Sommer v. Kridel

FACTS: 2 cases jointly decided - -Sommer v. Kridell: Kridell leased apartment from Sommer, but before occupied, K's plans changed. Asked to surrender; no response. 3rd party asked to rent empty apartment. Was reading/willing/able to rent. S told her that not being shown since rented by K. Did not show apartment >1 year, sued K for amount of the entire lease up to that time. -Riverview Realty Co. v. Perosio: P leased apartment from R. Lease prohibited T from subletting/assigning apartment w/o consent of LL. Half-way into the 2-year lease, P abandoned. (Reason not given) Holding - A LL has a duty to make a reasonable effort to mitigate damages. -"... antiquated real property concepts which served as the basis for the pre-existing rule, shall no longer be controlling where there is a claim for damages under a residential lease. Such claims must be governed by more modern notions of fairness and equity. A landlord has a duty to mitigate damages where he seeks to recover rents due from a defaulting tenant." Lease-Based Measures -Rent acceleration clauses (whole rent is due at once in case of default) -Security deposits -Payment characterized as a bonus (front-load the rent) -Liquidated damages (predetermined sum to be paid if a party fails to perform as promised, though not unenforceable if characterized as a penalty)

Berg v. Wiley

Facts: Wiley (W) leased to P. Berg (PB). -Lease specified that tenant would bear costs of repairs/remodeling, would make no structural changes w/o LL's authorization. W reserved right to retake possession if T failed to meet lease provisions. -PB assigned lease to K. Berg (KB) -KB opened Family Affair (FA) restaurant, incorporated, and assigned lease to FA. Continued to act as tenant. -KB began remodeling to make premises suitable for restaurant. -W objected to remodeling w/o his permission and later operating restaurant in state of disrepair w/alleged health code violations. -W gave her two weeks to finish remodeling and rectify health code violations, or he would repossess. During this period, KB continued to operate restaurant. Did not close to finish remodeling.At end of 2 weeks, fired her employees, put sign in window saying "closed for remodeling."Several days later, W entered property w/sheriff and changed locks. -W re-let the premises to a new tenant, even though still 2 years left on KB/FA lease. KB brought suit. W countered that she surrendered/abandoned. Holding: (1) sufficient evidence that tenant did not abandon or surrender premises. Trial court was current in finding that Wiley's reentry was forcible and wrong as a matter of law. Bans self-help to disposes a tenant who is in possession and has not abandoned or voluntarily surrendered premises. Must resort to judicial process

Common law rule of self-help

Self-help allowed if the landlord was legally entitled to possession and repossessed it peaceably. Tenant can sue if eviction is wrongful. (1) LL must have a right to repossess - Ex: if the T breaches a lease covenant and does not remedy covenant w/in a reasonable time after notice; hold-over tenant (2) Self-help is peaceable, only reasonable force used -Courts have been rather strict in what they consider to be "reasonable force," making self-help more of a theoretical, not practical, remedy. -Policy: Want to avoid violence. If wrongful, tenant can sue for damages

Alternative Remedies for Default

Suit in ejectment: time-consuming, can take months or years before final judgment reached -To cover losses suffered while legal proceedings take place, LLs will try to raise rents on other Ts Summary proceedings (action for "forcible entry and detainer" or "unlawful detainer") -Developed as better alternative to self-help and ejectment -Quick and efficient means by which to recover possession after termination of tenancy. -Requires only a few days' notice to the tenant Focus of litigation is on possession -Tenant can raise defenses to self-help actions, like rent withholding, at these proceedings (i.e., breach of implied warranty of habitability) Downsides: in reality, summary eviction can be time-consuming and expensive, even if uncontested. LLs try to recover costs through higher rents. Perhaps abolition of self-help not actually good for tenants. Also leaves record for tenants

Surrender

T offers to end a tenancy, and if LL accepts, terminates the lease Extinguishes T's liability for future rent - T does not have to compensate for anything Can be executed explicitly or impliedly, though implied leads to complicated abandonment What acts of the LL can be regarded as acceptance of the implied offer? Depends on LL's intent in retaking possession -Intent test: whether LL's actions are inconsistent w/ or repugnant to continuation of the original lease. (i.e., length of new tenancy, whether alterations have been made, new rent) Must be in writing (SOF), but where facts indicate LL intends to treat lease as surrendered, courts will find surrender by operation by law, even if no writing. (Ex: LL acts so inconsistently w/notion that T has continuing obligations under the lease)

Abandonment

T vacates leased property without justification or intention of returning and then defaults on rent May or may not have notified LL (may have offered to surrender, but LL refused to accept) T remains liable for rent until specific unit re-let, losses LL incurs from lower rent, expenses in searching for T

Ernst v. Conditt

TN 1964 o FACTS: Ernsts leased land to Rogers. Rogers built some improvements and then negotiated with Conditt to sell business. Conditt wanted 2-year (longer) lease, so Rogers & Conditt negotiated with Ernsts. Negotiated by amending lease between E & R, holding Rogers liable for lease. R & C sign for an assignment referencing the E & R contract. -Conditt stopped paying rent and claimed Rogers was liable because it was a sublease HOLDING: Under both modern and common law rules, this was an assignment, so there was privity of estate. If it were a sublease, no privity of estate. They say they will use modern rule but then rely on common law. -Here, Conditt was also a third-party beneficiary, so has p/e -Court applies this rule in Ernst v. Conditt and finds that the document is an assignment. The liability language did not create a reversionary interest and the subletting language is not conclusive, since other circumstances indicated an assignment was intended (i.e. R parted w/his entire interest in the property; C went into possession for entire term) liability hook (PoE in order to sue conditt)

LL Options when T Abandons:

Used to be up to LL, now expectation is usually mandatory mitigation (applied in Sommer v. Kridel) (1) Leave premises vacant and sue for accrued rent -Common law view: Can sue tenant for rent as it became due (often would sue all at end), continuing lease in full force and honoring tenants right to possession for full term. Reflects lease as conveyance. · No duty to mitigate. Based on lease as conveyance, Lease as transferring a property interest in the owner's estate. Lease conveys to T an interest in the property that forecloses any control by LL. Thus, would be anomalous to require LL to concern himself w/ T's abandonment of his own property. (2) Mitigate damages by reletting premises to new T and suing original T for unpaid balance -Common law: continue lease and relet on tenant's behalf to lessen or mitigate tenant's liability for rent -Modern view (increasing majority): Mandatory mitigation - reasonable effort to mitigate damages and to recover rent due (lease as contract). Duty ends when lease is re-let · LL can recover damages if he takes reasonable efforts. Reduces rent recovery by amount he could have obtained by trying to mitigate. Policy reasons: o Avoid waste of housing resources o LL is better suited to relet the units o Protect "less sophisticated" group, fairness, equity o Implied duties of a LL is consistent with contract law Policy criticisms: o Unfair for T to impose duty on LL by his wrongdoing o Forcing LL into relationship with new T and to do additional work Complicated based on comparison to vacant stock (how similar are the units?): say LL has apt A and B. P wants to see it. Must show A & B. if T abandoned A, and P chooses A, LL gets no damages. But if P chooses B, he gets damages from A. Factors to demonstrate reasonable effort to mitigate - treat abandoned property as "vacant stock" (but need not take extraordinary steps) o Extent to which LL advertised unit o Extent to which LL offered or showed unit to prospective tenants o Remaining length of original lease term o Cost of preparing property for new tenant o Market rent for comparable units o How far the terms of any replacement lease terminate from original lease QUESTION: Should he accept lower rent for the new lease? (yes, and T is responsible for the loss) Burden of action and proof is on non-breaching party (landlord) because they are better positioned to (1) mitigate and (2) prove that they mitigated (3) Terminate lease (more in common law, that abandonment is implied surrender) -T is liable only for (1) rent accrued and (2) damages caused by abandonment

Modern Rule (minority but growing)

When a tenant defaults on a lease and remains in possession, the LL cannot resort to self-help and must use legal remedies) Trend but not majority rule Policy Rationale (Berg v. Wiley) -Reentry never peaceable: Notion that requirement of common law rule can never be met: No self-help reentry can ever be done in a peaceable manner b/c always the possibility of violence. -Alternatives exist: Self-help used to be important remedy b/c only alternative was cumbersome, time-consuming, common-law procedure of ejectment (see below). But now there are summary proceedings: a judicial remedy that is theoretically faster than ejectment, which undermines the need for self-help. But Unclear whether summary proceedings really are as fast they purport to be. -Unjust eviction: Would be expensive to make up for if they were wrong in evicting them. Relying on LL to make judgment about whether he is LEGALLY entitled, rather than the court. PROBLEM: Can trap low-income tenants in substandard housing (unintended consequencE)

Self-Help & Tenant Default (general)

When a tenant defaults on a lease covenant, LL may want to evict them (e.g., remodeling w/o authorization (Berg)) Generally, parties cannot waive this requirement in express contract terms because the policy concerns still exist (though laxer on the commercial leases) Berg deals w/commercial but appears equally applicable to residential; more reasons to prohibit self-help in residence: loss of residence has greater psychological impact than loss of possession of place of business, need for immediate replacement of commercial space is less vital, parties in commercial settings have more equal bargaining power

Sublease

less than full unexpired term, retains reversionary interest -Lessee transfers something less than the full remaining term of the lease, and retains a reversionary interest (the right to possession goes back to him at the end of the period designated in the transfer) Effect on Privity of Estate and Contract -No effect on original lease between lessor and lessee. -Sublessee not bound by covenant to pay rent in the original lease. -Puts lessee and sublessee in privity of contract and estate. -Creates no relationship between original lessor and sublessee. -Original T still "on the hook." Becomes surety, liable for sublessee. -If sublease, there is sometimes, but not always, a reversion or a right of entry.

Kendall v. Pestana

o Facts: Commercial hangar space at San Jose airport. SJ leased to Perlitch, who sublet to Bixler, who assigned to Pestana. Then Bixler sold business to Kendall. Lease included approval clause, so Pestana needed to consent, who refused. Bixler alleges demand for higher rent and Kendall sued o Holding: Without an express provision that consent will not be unreasonably withheld, a landlord must have commercially reasonable grounds to refuse consent to an assignment or sublease the tenant wants to make for (1) policy reasons and (2) duty of good faith and fair dealing. o Can always include a clause for arbitrary refusal in the contract to avoid o REASONING: Court applies minority rule because o Factors trier of fact could consider in determining whether commercially reasonable § Acceptable: financial responsibility of the proposed assignee, suitability of use for purpose (flexible to argue), legality of the proposed use, need for alteration of the premises, nature of the occupancy (i.e. office, factory, clinic) § Unacceptable: Personal taste, Convenience, Sensibility § Should we allow parties to negotiate these? May differ between housing and commercial - general theme § Here: reason was to charge a higher rent. Not valid. Would be if market rates are rising faster than terms would set it (had been set at start of lease term)

Assignment

whole of unexpired term -Lessee transfers the whole of the unexpired term of the lease (right to possession for the duration of the term). -Original lessee retains no interest in the estate, not even right of reentry. -Covenants that run w/the land, that touch and concern the land, are assignable. Effect on Privity of Estate -Transfers privity of estate w/LL to the assignee. T no longer in POE with LL. -Privity of estate is between assignee and original lessor b/c at the end of the assignee's lease, land reverts directly to original lessor w/o passing through intermediary lessor (i.e. assignor). (This is not true for a sublessee, who does not have privity of estate w/the original lessor.) Effect on Privity of Contract -Has no effect on privity of contract between T and LL, which can only be terminated by express agreement between the parties. Thus, under the original lease, the original lessee is still "on the hook" for the rent.