Date: Wed, 03 May 2000 23:01:06 -0500

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

WORDS AND PHRASES; "PREDECESSOR IN INTEREST:" Lease assignor will be treated as "predecessor in interest" within meaning of release document executed between landlord and assignee providing for release of such predecessors even where landlord never consented to assignment and had no actual intent to release assignor. American National Trust Company v. Kentucky Fried Chicken, 719 N.E.2d 201 (Ill. App. 1 Dist. 1999), discussed under the heading: "Landlord/Tenant; Assignment and Sublease; Landlord's Consent Right; Waiver."

LANDLORD/TENANT; ASSIGNMENTS AND SUBLETS; LANDLORD'S CONSENT RIGHT; WAIVER: Where lessor did not initially consent to the lessee's assignment of a lease but lessor's subsequent conduct fully implied acceptance of the assignment, lessor waives objection to the assignment. American National Trust Company v. Kentucky Fried Chicken, 719 N.E.2d 201 (Ill. App. 1 Dist. 1999).

Lessor entered into a 15year lease with Naugles. Six years later, Naugles merged with KFCSC (referred to here as KFC) and KFC assumed Naugle's obligations under the lease. For the next three years, KFC made efforts to convince the lessor to consent to an assignment of the lease to Collins Properties, a subsidiary of Collins International. The relationship between Collins and KFC is not completely clear, but the court at one point refers to KFC as a subsidiary of Collins International.

On two separate occasions, plaintiff refused in writing to terminate the lease and refused also to consent to the assignment until it received complete financial information about Collins and clarity of the liability of assignor and assignee in the future. Nevertheless, in 1991, allegedly without the landlord's knowledge, KFC assigned all rights, title and interest to Collins Properties.

Prior to 1996 (the court does not say when), Sizzler, International acquired Collins International and Collins Properties. Some relationship must have existed between Sizzler and Collins properties as of 1991, because the court indicates from that time Sizzler paid rent to the landlord for the subject property here, and the landlord accepted such checks. Further, during a property tax dispute, the landlord asked Sizzler and Collins Properties to execute affidavits on its behalf and in that dispute referred to Collins and Sizzler as its tenants.

In early 1996, apparently, defaults began to occur and landlord, in May, sued KFC for the back rent. It also named both Collins companies and Sizzler as defendants, but did not serve them for another six months. In the meantime, Sizzler declared bankruptcy and rejected the lease. Landlord filed a proof of claim against Collins and Sizzler for $90,000, and eventually the parties entered into a stipulation providing for the payment of $60,000 to landlord and a release of Collins companies and Sizzler and other "releasees" identified in the release document. The release purported to release the named parties and their "agents, representatives, brokers, employees, attorneys, independent contractors, officers, directors, shareholders and partners, and their respective heirs, personal representatives, guarantors,*predecessors in interest,* successors and assigns." (Emphasis added) This stipulation became a binding contract.

Later, when landlord attempted to renew its claims against KFC, which apparently was independent of the Sizzler bankruptcy, KFC argued that it was released as a "predecessor in interest" of Collins, and thus had been released by the stipulation in bankruptcy. Landlord argued that KFC could not be released because (a) landlord had never consented to the assignment to Collins, so KFC could not be regarded as a "predecessor in interest" of Collins and (b) because the landlord had never intended to release KFC when it agreed to the release in bankruptcy.

The court held that the assignment was valid because the landlord had waived any objection to it by treating Collins and Sizzler as lessee in accepting rent, obtaining affidavits from them, and by claiming against them in bankruptcy and entering into the stipulated settlement.

The court acknowledged that the landlord might have had a claim that it was not required to consent to the assignment when it never received adequate financial data upon which to evaluate Collins as a successor. But it noted that if the landlord does not treat the leasehold as void following its knowledge of the wrogful assignment, the requirements of the lease are deemed waived. Equity does not allow a lessor to treat the lessee's assignment of the lease as valid for purposes of rent collection or financial settlements but invalid when seeking to collect payment from original lessee.

As to the application of the release to KFC, the court said that KFC, in light of the validity of the assignment, was indisputably a "predecessor in interest" to Collins within the regular meaning of the term. The fact that the landlord had no intention of granting a release to KFC was of no consequence. It should have read the fine print.

Comment 1: Let's say it again. "It should have read the fine print." This is a classic case of the kind of issue that good lawyers catch and weak lawyers don't. Remember that the next time the words start to blur together. Our clients rely upon us to be careful technicians and pay us accordingly.

Comment 2: There's really nothing new in the waiver issue. Of course a party that accepts rent for five years from the assignee and then sues the assignee for the rent and enters into a bankruptcy stipulation and release for the rent and other damages necessarily will be viewed as acquiescing in the assignment. Note that the original assignment documents that the KFC asked the landlord to sign would have released KFC from liability upon assignment. It wasn't bound by that release it never signed it. So it still had KFC on the line until it entered into that unfortunate little arrangement with Sizzler at the doors of the bankruptcy court. Let's hope it got all the salad it could eat.

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