When Can Landlords Refuse Tenant Requests to Sublease?
April 1, 2005
In the still-less-than-booming economy, landlords are being asked to consent to subleases and assignments. The landlord, who is facing its own vacancy and rent pressures, is generally dubious about spending time and energy accommodating a tenant's exit strategy.
Under what circumstances does a landlord have to honor the request? The first place to look for the answer is the lease document. The lease may be silent on the issue. It may prevent assignment and subletting without the landlord's consent. Or, it might require consent but provide that the landlord's consent may not be unreasonably withheld. It might even say that the landlord's consent may not be ""unreasonably withheld, delayed or conditioned."" What do those words mean? Can a landlord act unreasonably under Illinois law if the magic words ""not to be unreasonably withheld"" are missing?
When the lease is silent
In the absence of an express restriction in a lease prohibiting an assignment, the lease may be assigned. Cole v Ignatius, 114 Ill App 3d 66, 70, 448 NE2d 538, 541 (1st D 1983). So if a lease is silent on the issue, a tenant has the right to freely sublease or assign. A lease that contains the common phrase ""this instrument shall be binding upon the parties' successor and assigns' or word of similar effect would also not restrict a tenant's ability to sublease or assign.
If the lease is silent on the subject, a tenant may even assign or sublease without notifying the landlord. Consequently, at a minimum, landlords should always include a provision in the form lease requiring tenants to notify them of an assignment or sublease so they know the identities of their new tenants.
When the lease requires consent
Frequently, leases forbid sublease or assignment without the consent of the landlord. Under Illinois law, when a lease requires consent, the landlord cannot unreasonably withhold it. Golf Management Co., Inc. v Evening Tides Waterbeds, Inc. 213 Ill App 3d 355, 360, 572 NE2d 1000,
1003 (1st D 1991).
Many landlords mistakenly believe that the absence of the phrase ""not to be unreasonably withheld"" from the assignment / sublease provision gives them the right to withhold consent in their sole discretion. Under Illinois law, that is not the case. Conversely, tenant's counsel often attempts to insert the phrase ""not to be unreasonably withheld,"" ""not to be unreasonably withheld or delayed,"" or even ""not to be unreasonably withheld, conditioned or delayed"" when Illinois law already requires the landlord to be reasonable.
So what is ""reasonable"" conduct?
Before a landlord can be held liable for failure to consent to a transfer, a tenant must prove that the tenant tendered a transferee who was ready, willing, and able to take over the lease and who, at the very least, meets commercially reasonable standards. Golf Management at 360-61, 752 NE2d at 1003. Covenants that restrict assignment or subletting of leased premises are to be strictly construed against the landlord. Jung v Zemel, 189 Ill App 3d 191, 196, 545 NE2d 242, 245 (1st D 1989). But the tenant bears the burden of proving that the landlord has acted unreasonably. Golf Management at 360-61, 572 NE2d at 1003. In Golf Management, the lease provided that the tenant, Evening Tides, could not sublease without the landlord's consent. Evening Tides presented the landlord three potential subtenants. The landlord rejected the first because the subtenant only wanted to sublease a portion of the space. It rejected the second because that subtenant wanted to operate a restaurant and bar, and the location was not zoned for liquor sales.
The landlord did not consent to a sublease with the third proposed subtenant, but instead entered into a direct lease with it. That subtenant never took possession. Ultimately, a portion of the space was leased to a bakery at lower rent than that being paid by Evening Tides. At trial, the jury found that Evening Tides tendered ready, willing, and able subtenants and that the landlord unreasonably refused to consent. The appellate court upheld the jury's finding. The tenant presented evidence at trial showing that the landlord tried to cajole the prospective subtenants to enter into new leases rather than sublease. Furthermore, the landlord was insisting upon higher rent than Evening Tides was paying.
Under Illinois law, if a tenant assigns its interest in the lease without the landlord's consent in violation of the lease, the assignment is voidable at the option of the landlord, not automatically void. American National Trust Company of Chicago v Kentucky Fried Chicken of Southern California, Inc., 308 Ill App 3d 106, 116, 719 NE2d 201, 208 (1st D 1999). In other words, a landlord may either declare the purported assignment void or waive the tenant's failure to follow the procedure required by the lease and accept the assignee, either explicitly or implicitly.
Landlords should be careful to pay attention to the identity of their tenants. In American National Trust, the court held that the landlord had implicitly consented to an assignment of the lease from Kentucky Fried Chicken of Southern California, Inc., to its assignee because the landlord (1) accepted monthly rent checks from the assignee for five years, (2) asked for, and obtained, tenant affidavits from the assignee during that five year period, (3) filed a proof of claim for rent in the assignee's bankruptcy case, (4) called the assignee ""tenant"" in that proof of claim, and (5) accepted more than $64,000 from the assignee ""in full satisfaction of its claim arising under the lease."" Id, 719 NE2d at 209.
If a landlord acts unreasonably and doesn't consent to an assignment or sublease when it should, the landlord risks a judgment for damages in favor of the tenant. In Golf Management, the jury awarded the tenant $35,000 in damages from the landlord as a result of the landlord's failure to consent to a sublease to the ready, willing and able subtenants proposed by the tenant. Without providing any insight as to what comprised the $35,000 in damages, the appellate court affirmed.
Many landlords and tenants may not be aware that Illinois law requires a landlord to not unreasonably withhold its consent to a proposed assignment or sublease when the landlord's consent is required for an assignment or sublease. Landlords should understand that this requirement exists under Illinois law and act accordingly when faced with requests for consent.For their part, tenants who wish to sublease or assign should proffer their proposed transferee to the landlord in writing and should support their request with evidence that the proposed transferee is ready, willing, and able to lease and meets commercially reasonable standards.
Copyright © 2004 LEVENFELD PEARLSTEIN, LLC. Originally printed in Illinois Bar Journal, June 2004. Reprinted with permission.