Commercial Transaction Newsletter – March 2016 Issue

WHAT DOES IT MEAN FOR CONSENT NOT TO BE UNREASONABLY WITHHELD OR DELAYED FOR AN ASSIGNMENT OF A LEASE?

 

Many leases have a provision that prohibit assignment of the lease by the Tenant without the consent of the Landlord, but that the Landlord’s consent would “not be unreasonably withheld or delayed.”  What constitutes unreasonably withholding or delaying of consent by a Landlord?

In the recent case of 1963 Jackson, Inc. vs. Lloyd De Vos, Et Al, the Court of Appeals set forth guidelines that Tennessee Courts should use to determine whether a Landlord unreasonably withholds consent to the assignment.  In the De Vos case, the Trial Court and the Court of Appeals held that the Landlord unreasonably withheld consent.  The De Vos case, as does almost every other case, turned upon its particular facts and circumstances as to the reasonableness of the Landlord’s consenting or not consenting to the assignment.  However, the important factor in the De Vos case is that the Court of Appeals set forth the standards by which Tennessee Courts should consider as to whether a Landlord acts reasonably or unreasonably in consenting or not consenting to an assignment of the lease.

The standards set out by the Court of Appeals in determining whether a Landlord’s lack of consent is reasonable or unreasonable are as follows:

1.   Was a reasonable commercial standard applied?

2.   A reasonable commercial standard is understood to include the elements of good faith and fair dealing.

3.   The Landlord cannot withhold consent solely to extract economic concessions or improve its economic condition.

4.   The primary factor in determining whether the Landlord acted in good faith and in a commercially reasonable manner is the financial responsibility of the proposed Tenant.

5.   The court will consider the reasonableness of the Landlord’s perception that the assignee presents financial or other risks.

MY RECOMMENDATION:   The guidelines set forth by the Court of Appeals in the De Vos case provide a good “checklist” to Landlords for evaluating whether lack of consent to an assignment is reasonable or not.  Of course, the lease itself could set forth certain criteria that the Landlord wants for granting its consent to an assignment.  Examples of such criteria are:  a certain level of financial strength and liquidity of a proposed assignee, the assignee’s proposed use of the leased property, and the experience and background of the assignee in that area of operations.

Yours very truly, RAINEY, KIZER, REVIERE & BELL, P.L.C. William C. Bell, Jr., Attorney at Law