Daily Development for Wednesday, November 1, 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 dirt@umkc.edu

LANDLORD AND TENANT; ASSIGNMENTS AND SUBLETS; LANDLORD’S CONSENT:  Landlord is not in breach of a lease for unreasonable failure to consent to a sublease where the tenant has not produced a ready, willing, and able subtenant; and attorney’s fees in such an action do not have to be assessed using the lodestar method.  

WHTR Real Estate Limited Partnership v. Venture Distributing, Inc., 825 N.E.2d 105 (Mass. App. Ct. 2005).  

Lessee wished to relocate and determined to sublease the property.  Lessee’s broker contacted USCO with an ‘as-is’ offer of sublease, and USCO responded with a counteroffer containing additional conditions.  Lessee did not respond directly to the conditions contained in the counteroffer, but instead prepared a sublease and forwarded it to USCO’s in-house counsel, who took no further action. 

Lessee also forwarded the proposed sublease to Landlord with a request for consent.  Landlord requested financial information from USCO’s CEO, who did not respond.  At the same time, USCO was negotiating for a different space with another party.  USCO did conduct a walk through of Lessee’s space, and prepared a list of seventeen items needing “repair/testing prior to signing a lease.”  Two weeks later, USCO signed a lease for the other space. 

Landlord filed suit against Lessee for breach of the lease, requesting rent, attorney’s fees, and costs.  Lessee counterclaimed alleging Landlord had breached the lease by poisoning negotiations between Lessee and USCO and by unreasonably withholding consent to the proposed sublease.  The Superior Court found Lessee in breach and awarded rent, attorney’s fees, and costs to Landlord.  Lessee appealed the ruling on the breach, and Landlord appealed the amount of costs and attorney’s fees awarded.

The trial judge found that throughout the process, Lessee’s responses to Landlord’s requests for information and documents were slow, if they occurred at all.  Lessee also never fully addressed USCO’s counterproposal or the separate list of issues with the property.  A signed sublease was never presented to Landlord for approval.

The Appeals Court held that the trial court had properly found that breach for failure to consent ought not to be found  where the tenant has not produced a ready, willing, and able candidate to take on the tenant’s full obligations under the lease.  The court also noted that claims regarding interference with negotiations were too speculative given the uncertain state of the negotiations and a lack of evidence that USCO was ever ready to merely step into Lessee’s place under the lease. 

Likewise, Landlord’s appeal for larger attorney’s fees was dismissed based on a finding that the trial court had not abused its discretion in finding Landlord’s submitted amounts unreasonable.  The court held that even uncontroverted submissions must be found reasonable, and the trial court was not required to use the lodestar approach (hours reasonably spent multiplied by a reasonable hourly rate) to test reasonableness.  The Appeals Court clarified that Fontaine v. Ebtec Corp., 613 N.E.2d 881 (Mass. 1993) does not require use of the lodestar method, but merely notes that such an approach can prove to be advantageous.  The Appeals court found that Superior Court had considered appropriate factors and had not abused its discretion or committed clear error.

Comment 1:  First, the court said that it was upholding the trial court’s ruling that a completed sublease (or at least a verbal commitment to one) must be presented to the landlord in order for the landlord to be liable for unreasonably refusing consent:

“Among [the judge’s rulings] was the a ruling that a landlord is not in default for failure to consent unless the tenant produces a candidate ready, willing and able to fulfill the tenant’s obligations under the sublease.  The tenant has not persuaded us that the judge ruled in error.” [Citing Friedman on Leases for this verbatim rule.]

The tenant maintained that this ruling is too narrow, as it does not take into account the circumstance where the landlord indicates its refusal to consent or unreasonably makes demands of the proposed subtenant so as to block further negotiations.  The court’s response to this argument indicates that it might entertain such a position in the appropriate case, but that this case did not support such an analysis:

“We need not determine whether the judge’s ruling was too narrow.  Any benefit to the tenant from an expanded rule is obviated by the judge’s conclusions, amply supported by her findings, that ‘there is no evidence that the parties were even close to resolving the terms of the sublease. . . There were too many uncertainties and unresolved issues to legally bind either USCO or [the tenant]. . . .”

This sounds like a broader test, but the balance of the trial judge’s quoted ruling reiterates the requirement for a completed lease.

Comment 2: The Friedman excerpt the court relied upon now appears in Section 7:3.4[D]3 in the Randolph edition.  It is based upon a 1991 Illinois case, Golf Mgmnt. Co. v. Evening Tides Waterbeds, Inc., 572 N.E. 2d 1000, which indeed makes the statement, and cites other Illinois authority for the point.

Comment 3: On first blush, the editor agreed with the tenant’s basic position (but still agreed with the court’s failure to apply it here.)  But, upon sleeping on the issue, the editor concludes that there likely is no case in which a tenant, without having made contractual arrangements in advance, should expect a landlord to indicate approval to a subtenant prior to the tenant’s reaching agreement with that subtenant.  The landlord is entitled to know the terms of the sublease.  If the landlord wanted to be cooperative, of course, it could “vet” the proposed subtenant’s credit and respond to various questions concerning it’s views on various elements of the sublease prior to the completion of negotiations with the subtenant.  This would certainly make subleasing easier.  But that is not the landlord’s job.  If the tenant desires that the landlord be required to make an advance approval of a proposed subtenant, it should bargain for that (the landlord should still get a “second bite” based upon any changed circumstances when the sublease is completed).

This is not to say that the landlord has the right at any time to be obstructionist - to make unreasonable threats or to take unacceptable and unreasonable positions.  If the landlord should do that, even before the proposed sublease is completed, the landlord would be in breach of any duty the landlord had to be reasonable.  But silence in this case is not unreasonable.

Comment 4: It is worth noting that there is neither a “majority rule” nor a “developing trend” supporting an implied duty of reasonableness in this area.  There are some cases - some overruled by statute.  But there is an equal number of modern cases that have rejected the proposition after being confronted with the rulings of their sister states.  Friedman details all the cases   Mr. Friedman was a fan of the implied duty of reasonableness in this area.  The current editor of Friedman (your DIRT editor) isn’t.  Hey - it’s hardball.  If you want to have judicial review of the reasonableness of a landlord’s decision in this area, put it in the lease. 

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