Daily Development for Friday, January 21, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

Your editor was first provoked by a report of the following case, and teed it up for a DD.  Now it appears that the case is so sketchy that there may be no “there” there (sort of like Oakland in the mind of Virginia Woolf. ) But, going on the road at 6 AM tomorrow and faced with a class in half an hour, the editor decided to post his ruminations anyway, in the hope that they’d provoke some of the usual disagreement and hectoring, and we’d get a good discussion out of it.  Some of these issues recently popped up in a discussion thread.

LANDLORD/TENANT; RENT; TRANSFER OF REVERSION: Where owner of leased property transfers property to a third party, owner lacks standing thereafter to sue tenant for the rent.

Smith v. 6595 Corp.,605 SE2d 58 (Ga. App. 2004)

The owner of commercial property subject to a lease transferred that property to another party.  Six months later, the old owner brought suit against tenant for unpaid rent.  Remarkably, in this very short Georgia appellate report, the court does not disclose whether the rent was claimed to be due for periods before or after the transfer of the lease.  The court simply holds that a prior landlord has no standing to sue for the rent after it has transferred the premises.

Comment 1: This little case is basically inconsequential, except that it provoked the editor to search Friedman on Leases to find authority on the question of whether a transfer of real property does or does not implicitly transfer the right to collect back rent.  The answer, set forth on page 16-77 of the new (fifth) edition, revised by the editor, is that there is no such implied transfer.  Consequently, the old landlord should still have the right to collect the unpaid rental obligation for the periods prior to transfer.  Parties who seek a different result should set forth their intent specifically in their documentation of the sale.

Of course, the right to future rent implicitly passes to the transferee of the reversion, and if the old landlord intends to have any right to rents arising after the transfer, it should make that intent clear.  Where a portion of the rent is computed at some later time - such as percentage rent or “additional rent” for expenses - clearly the parties should provide expressly for how this money is to be divided.  Absent any clear statement, implicitly, still,  the editor believes that the old owner has a pro rata claim for such rent attributable to the old landlord's period of ownership.   Most likely, however, this claim should be against the successor landlord, who undoubtedly will collect these amounts as the express or implied agent of the old landlord.

Further, if the landlord expects to continue to enforce the lease, and is only selling rights arising after the termination of the lease (essentially a springing future executory interest) this unusual intent also should be made plain in the documents.

Comment 2: What about the right to terminate the lease for nonpayment of the pre-transfer rent?  That seems to disappear, unless there is an express assignment.  The old landlord does not have the reversion, and thus no right to control possession.  The new landlord does not have a right to remedies for breaches that occurred prior to the transfer.  Could the right to terminate a tenant for past due rent, as well as the right to collect that rent, be separately assigned to the transferee of the reversion?  Of course.

Comment 3: Sometimes, most often in connection with a financing that the landlord has undertaken, the landlord will assign leases and rents to a mortgagee.  Clearly the mortgagee/assignee, to the extent it exercises the assignment of the leases and takes possession as mortgagee in possession, can enforce the landlord’s right of reentry.  And, since this right in fact is the landlord’s right (exercised for the landlord by the mortgagee/assignee), the assignee should have the right to terminate for unpaid rents arising even prior to the assignment.  It should also have the right to collect those rents and apply them to the debt.  But at least one old case cited by Friedman  held that these rents themselves properly belong to the original landlord, and not the assignee. Id at 16-78, note 297.    This seems intuitively wrong in the ordinary case where the assignee by the terms of the assignment becomes entitled to accrued but unpaid rents.  If the assignee did not have the right!

  to co
llect those rents, it likely would not have the right to terminate for their nonpayment.

Comment 4: What if the tenant buys the landlord’s interest, and there are claims for damages or rent existing at the time of the purchase?  These generally are claims that the landlord should retain.  For instance, if the tenant failed to repair the premises, and reduced the value, the sale to the tenant has cemented that lost value into place, and the landlord should have the right to sue.  But if the covenant in fact was to restore the premises at the end of the lease (as many repair covenants are read), then the sale of the premises to the tenant would appear to eliminate such a claim.  Tenant damages related to breach of other covenants, such as, for instance, a breach of a radius restraint on the tenant’s competing with landlord or landlord’s other tenants, if actionable in damages, should remain.  One would assume that such a radius restriction would no longer be enforceable in favor of landlord  after the transfer, but landlords may in fact want to continue the protec!

and thus to provide that such a covenant personally benefits the landlord and its assignees is not released when the reversion in the lease is transferred to tenant.

Finally, if the tenant did not pay the rent prior to transfer, one would assume that the ordinary rule that the original landlord can collect prior unpaid rent following transfer would still apply when the property is transferred to tenant.  The parties may intend that the transfer subsumes that rent claim, but there is no reason to presume that this is so.  It is up to the tenant to bargain for relief from such a claim.

Is the rental obligation still “rent,” or is it now “damages” for breach of the rental covenant?  As the distinction rarely, if ever matters (except possibly in bankruptcy) as to unpaid rent, the cases commonly characterize the claim both ways.  But it is probably a debt, collectible as damages for breach of the obligation to pay.  Obligations to pay rent for future periods are not “debts” and clearly are simply “rent.”  See generally Id. at 5.1.1.

To the extent that the Smith case in fact denied standing to the old landlord in that case to collect back rent claims that preceded the landlord’s transfer of the premises to a new owner, the case appears to be incorrect.  But we don’t know for sure what rent was at issue.

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