Can I Assign My Commercial Lease? (Part 2- Assignments By Operation Of Law)
Earlier this year, I wrote a blog post about assigning commercial leases generally. Sometimes, contractual rights or obligations get transferred without an express assignment. This can happen, for example, where a party to the contract gets acquired by someone else, or where the party’s ownership or control changes hands. An entity tenant under a commercial lease might be a corporation which gets bought up by another corporation, or an LLC tenant might have a change in its underlying membership. Such a transfer of rights under a contract occurs “by operation of law” rather than through an express assignment; under such circumstances, the law ordinarily presumes that someone who buys the tenant or acquires control of the tenant naturally acquires and assumes the tenant’s rights and obligations under the lease. We therefore refer to this succession as an assignment “by operation of law.”
But the landlord may not be happy with the new situation for a number of reasons. Perhaps the successor entity does not have the same financial strength as the original tenant; perhaps the new tenant has a different reputation or operates a business which would create an unpleasant or off-putting atmosphere for neighboring commercial tenants; perhaps the landlord has a specific objection to people or personalities who now control the tenant entity.
Sometimes, tenants intentionally structure transactions to avoid triggering the need to obtain the landlord’s consent for the transfer of tenant rights under the commercial lease. The landlord may see this as a de facto assignment which violates the spirit of an anti-assignment provision, while the tenant or successors with new control of the tenant view themselves as absolutely entitled to continue the lease over the landlord’s objection.
Under Washington law, even though they may be valid, lease provisions prohibiting or restricting rights to assignment are strictly construed as they are not favored in the law. Therefore, where the lease is silent regarding assignments by operation of law, and where there is otherwise no breach of the lease agreement, the landlord probably has no right to object to the de facto transfer of rights and may not unilaterally terminate the lease. In other jurisdictions, the majority view is that, “The fact that the members of the entity change, such as when the stockholders at the time the lease is made later transfer their stock, or a partner in the partnership drops out and a new partner replaces him, or the beneficiaries of the trust change, does not constitute an alienation by the landlord or the tenant that is in violation of a restraint on alienation, absent specific language in the restraint provision that covers such change in the nature of the entity involved.” There does not appear to be any Washington case expressly adopting or rejecting this view, but Washington case law on this subject generally appears consistent with this majority view.
All of this is to say that it is critical for parties to a commercial lease to specify when a lease can or cannot be assigned. If the landlord’s willingness to lease is based upon the personal reputation or relationship with key persons associated with an entity tenant, the landlord should carefully take the time to contemplate and negotiate an assignment provision to cover acceptable and unacceptable transfer scenarios.
Whether you are a commercial tenant looking to assign your lease, or you are a landlord being asked to consent to an assignment, the lawyers at Beresford Booth can help. We have extensive experience advising clients on real estate matters.