Disputes over lease assignment and subletting clauses are among the most highly litigated provisions in California commercial leases. As a landlord, ensuring your leasing contracts protect your interests should a tenant want to pursue a lease assignment or sublet is one of the most essential purposes of the lease.
A lease assignment occurs when the tenant fully transfers their lease and all obligations to a new tenant. With a lease assignment, the new assignee becomes responsible for all terms of the lease, both financially and legally. Under a lease assignment, as a landlord, you must be aware of all risks and potential concerns regarding the reliability and financial abilities of the potential assignee.
Conversely, when a tenant sublets the rental property, they become a secondary leasing agent (sublessor) and rent out the property to a third party (the subtenant). The primary lease between the landlord and the initial tenant takes precedence and remains intact, and the sublessor remains responsible for all lease stipulations and requirements. Therefore, any damages or failures to comply with the terms of the lease on the part of the subtenant will fall upon the sublessor.
Lease assignment or subletting disputes most commonly arise when a tenant tries to enter into an assignment or subletting agreement without the knowledge or consent of the landlord, when they attempt to do so in violation of the clauses of the lease, or when a landlord refuses to consent to the transfer and does not provide reasonable objections to the transfer, which opens the landlord up to claims of “unreasonable withholding.”
How California Law Structures Assignment and Subletting Rights
California Civil Code § 1995.010 and subsequent code sections govern commercial lease assignment and subletting for other than residential purposes. The broad rule per Civil Code 1995.210 is that unless the lease terms specifically prohibit transfer or have restrictions on transfers of a commercial lease, the tenant has the right of unrestricted transfer of their interests in the lease.
To protect your interests as a landlord, you should include an express landlord consent clause that states whether a lease transfer is allowed and, if it is allowed, under what circumstances it can be transferred and the process to do so. This prevents ambiguity in transfer restrictions, which under California law would grant favor to the tenant in regards to transferability. Express consent clauses allow you as a landlord to stipulate restrictions on subtenants or new lease assignees and protect you against any potential unsuitability in a new tenant.
An absolute consent clause allows a landlord to “withhold consent in its sole discretion” and under California Civil Code § 1995.230, these clauses may absolutely prohibit transfer of a tenant’s interests. The lease must clearly state this to comply with the Civil Code provisions granting the tenant rights of unrestricted transfer of their interests.
If, as a landlord, you are amenable to a tenant subletting or assigning their interests to another party, including a reasonableness clause is the path to pursue. This allows you to include stipulations for your consent, such as financial approval of the new tenant or subtenant, requiring that the initial tenant remain liable for damages, stating that you are entitled to some or all of the excess rent under the lease charged by the assigner or sublessor, or restrictions on when and how a lease can be reassigned. Without a clause that stipulates the conditions in which you would find a lease assignment or sublet acceptable, your leasing contract is open for interpretation and litigation on whether you are unreasonably withholding consent.
The Reasonableness Standard: What Landlords Can and Cannot Do
Under California Civil Code § 1995.260, if a commercial lease does not explicitly state a standard for giving or withholding consent, “the restriction on transfer shall be construed to include an implied standard that the landlord’s consent may not be unreasonably withheld.” The tenant does have the burden of proof in these situations, and may satisfy this requirement by showing that the landlord did not respond in a timely manner to state reasonable objections in writing to the tenant’s written request for consent.
There are many conditions and objections a landlord might have that California courts deem reasonable grounds for withholding consent. Some of those conditions include:
- Creditworthiness of the proposed assignee – do they have any bankruptcy history, delinquent business or personal loans, or are there liens or current suits against the proposed assignee?
- Nature of proposed business use – would the new assignee need to fundamentally change the property or infringe upon the neighbors’ use of their property through sounds, smells, lights, or traffic in order to conduct business? As an example, a landlord could reasonably object to a nightclub taking over the lease on a property surrounded by quiet businesses and residences, as it would infringe upon the surrounding properties and their tenants.
- Condition of the premises – if the current tenant has damaged the property or the property has been rendered uninhabitable, a landlord can deny consent due to lease violations causing the poor property condition or in order to renovate to bring the property back up to standard before accepting a new tenant.
- Ability to perform lease obligations – if the proposed assignee does not have the ability to meet lease obligations regarding rent payment, facility upkeep and maintenance, business hours of operation, or any other condition in the lease, the landlord can withhold consent for the transfer.
Unreasonable grounds for withholding consent in California commercial lease assignment and subleasing include:
- Pretextual objections – stating one reason as the grounds for withholding consent to mask the true reason. If the tenant files a claim against you for unreasonable withholding, any hidden reasons, such as secret discussions to bring in a new business or development, will be discovered and disclosed in court.
- Demands for increased rent as a condition of consent – as a landlord, you may not require an increased rent as a condition of consenting to a lease assignment. With a lease assignment or sublet, the terms of the lease cannot change, and that includes rent increases.
- Refusal without stated reasons – as discussed previously, a refusal without a stated reason is prohibited under California Civil Code, and if there is no stated reason for refusal, the tenant retains their full rights to sublet or assign their lease as they desire.
All consent decisions must be clearly documented with written objections, specifying the exact reasons for withholding consent, and this documentation must be provided to the tenant in writing. The burden of proof might be on the tenant, but clear documentation will save you time and legal fees should your tenant file a claim against you. If you are involved in litigation around withholding consent to sublet or assign one of your leases, the experienced commercial real estate litigation attorneys at Peterson Law, LLP will guide you through the process to protect your interests.
If consent is unreasonably withheld, a landlord faces several consequences. Under the California Civil Code, a tenant can have grounds to assign without consent provided they have followed the procedures outlined in § 1995.260 to document the unreasonably withheld consent. The tenant may also seek declaratory relief, pursue economic damages, or terminate the lease, as California Civil Code § 1995.310 declares this not only a breach of a lease, but a breach of a contract, and therefore the tenant can pursue all the remedies for both a lease breach and a contract breach against the landlord.
Tenant Assignment Without Consent: Liability and Remedies for Landlords
A tenant can also violate assignment or subletting clauses by proceeding with their plans to assign or sublet their lease without obtaining the required consents from the landlord. This is the more common scenario regarding lease assignment that a landlord will face.
The failure of the tenant to obtain consent from the landlord before assigning or subletting their lease also constitutes a breach of the lease and a breach of contract under California Civil Code § 1995.320. Should you face this situation as a landlord, you have remedies available to you, including terminating the lease due to the breach, pursuing unlawful detainer action (evictions) against the assignee or subtenant, terminating the transfer but not the lease, damages for the breach of lease and for breach of contract, or injunctive relief by petitioning the courts to halt the lease assignment.
In California, an unauthorized assignment does not automatically terminate the lease – as a landlord, you must elect to either terminate the lease or waive the breach. You also have the option of terminating the transfer and evicting the assignee while maintaining the lease with your tenant.
If you accept rent from the assignee or subtenant without stating a reasonable objection in writing, that can be seen by the courts as tacit approval of the lease assignment and can inadvertently waive the consent requirement. In light of that, as soon as an unauthorized transfer is discovered, respond in writing your reasons for withholding consent and the penalties you intend to pursue against your tenant. Do not accept rent from the assignee or subtenant without including reservation of rights language and without discussing your situation with your real estate litigation attorney at Peterson Law, LLP to ensure your rights are protected during lease assignment disputes.
Tenant Liability After Assignment: The Privity Problem
Unless specifically agreed to by the landlord, “an assignment of a tenant’s interest in a lease does not relieve the tenant from its liability under the lease,” per the California Department of Real Estate. In plain terms, unless a landlord agrees to release the tenant from their lease obligations, the original tenant is still liable for all conditions and responsibilities of the lease.
Unless the landlord agrees to release the original tenant and substitutes the new assignee in place of the original tenant (novation), the original tenant will remain bound by privity of contract and liable for any violations of the lease performed by the assignee.
Should there be any breaches in the lease done by the assignee or any unpaid rent, the landlord is able to pursue both the assignee and the original tenant for damages in court.
With a sublease, the original tenant remains in full privity with the landlord and is directly responsible for all breaches or unpaid rents, as they are the party who entered into the contract with the landlord and there is no assignment of the lease to the subtenant. The subtenant’s obligations are only to the original tenant and the agreement between those two, not to the landlord. Any damages, breaches, or unpaid rents incurred by the subtenant are the responsibility of the original tenant, and the landlord may only pursue recompense from the original tenant.
When reviewing an assignment request or a business tenant sublease in California, landlords must determine whether the tenant is seeking a novation. If that is the case, consult with your commercial sublease attorney at Peterson Law, LLP, as it may not be in your best interest, and their team will help you determine your best course of action.
Common Litigation Triggers in Assignment and Subletting Disputes
There are several common scenarios you might face as a landlord in litigation surrounding assignment and subletting disputes, and proactive understanding and preparation can save you legal costs and time.
Trigger 1: Tenant claims landlord unreasonably withheld consent and seeks to proceed with the transfer or recover costs
One of the most common triggers is a tenant claiming a landlord unreasonably withheld consent for an assignment or sublet of the lease and then proceeding to try to force the transfer or recover financial costs they incurred by the transfer being denied. To protect your interests, ensure all reasoning for the withheld consent is documented in writing and presented to the tenant without delay. Be mindful of the reasons for withholding the consent that California considers reasonable to avoid further litigation.
Trigger 2: Dispute over whether a corporate restructuring (merger, acquisition, transfer to affiliate) constitutes an assignment requiring consent
In many cases, a corporate restructuring such as a merger or acquisition can be considered an assignment that would require consent. Creating a clause in the lease documents addressing whether you would require a tenant to seek your consent for an assignment under these circumstances prevents ambiguity that would cause the courts to find in favor of your tenant.
Trigger 3: Landlord discovers unauthorized subletting mid-lease, often through a site inspection or a third party
Should a landlord discover an unauthorized party subletting mid-lease, this can be a violation of the leasing terms, provided there are clear stipulations and requirements for seeking to sublet the property included in the lease. By including those provisions, the landlord is now able to pursue remedies for breach of lease and breach of contract against the original tenant and seek financial damages against said tenant for violating the terms of your agreement.
Trigger 4: Subtenant remains in possession after the master lease expires or is terminated; landlord must determine whether to recognize or evict the subtenant
Another risk in a tenant subletting the commercial property is if the subtenant remains in possession of the property past the end of the master lease. If this happens, the landlord must determine whether to allow the subtenant to remain in possession of the property under a new lease naming the subtenant as the original tenant of the new contract or if the subtenant should be evicted. A choice must be made to protect your rights and limit your risk exposure, as a subtenant maintaining possession of a property without a master lease in effect could open you up to adverse possession risk. Consulting with an attorney versed in commercial lease assignment and subleasing at Peterson Law, LLP will help you determine the best strategy.
Trigger 5: Dispute over whether consent to one assignment constitutes a waiver of consent rights for future assignments
Clear language in leasing documents regarding assignment and how it affects any future assignments will help you avoid commercial lease assignment litigation. Detailing whether consent to one assignment ends with that assignment or carries on to future assignments bypasses disputes on whether consent to one assignment waives consent rights for any future assignments. As a best practice, all assignments and subleases should require consent from the landlord to protect your liabilities and rights towards your commercial property.
Get Help for Complex Commercial Lease Conflicts
Consent clauses regarding assignment and subleases are enforceable under California Civil Code, but they require careful wording and administration to avoid pitfalls. Should the language be ambiguous, reasonableness challenges are common to face as a landlord. If you face an unauthorized assignment, quick action to address the breach is essential and must be well documented in writing. When dealing with active disputes, or trying to be proactive in drafting comprehensive lease agreements that protect your rights, contact Peterson Law, LLP and speak to one of their experienced commercial real estate litigation attorneys.
