< DD 11/4/08 Waiving the Landlord's anti-waiver language on lease assignments.

Daily Development for Tuesday, October 28, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; ASSIGNMENT: Despite a clause providing that there can be no assignment without the landlord’s written consent and providing further that payment of rent shall not be a waiver of this prohibition, an occupant of the premises who pays rent for 18 months with the knowledge and consent of landlord’s agent may become an assignee of the lease and recover against the landlord for damages to its goods due to negligent maintenance of common areas.  In the alternative, tenant may become a month to month tenant or even a licensee of the original tenant, and in either case be able to recover. 

La Belle Epoque, LLC v. Old Europe Antique Manor, LLC., 4489273 (Md. 10/8/08)

Landlord leased the upper level of its property to LBE and the lower level to VFA.  VFA, which held a five year lease,  was owned by a French national, but his sole employee operated the business.  The French owner, however, signed the rent checks. 

VFA’s lease contained a relatively strict restriction on assignments (Maryland case law, like the majority of jurisdictions,  upholds the validity of a landlord’s right to withhold consent to assignments for any reason.)  This particular restriction stated that acceptance of rent by the landlord after an attempted assignment would not be deemed consent to the assignment.  The landlord’s approval was required to be in writing after notice to the Landlord.  The Maryland Statute of Frauds required that lease assignments also be in writing. 

About a year into the five year lease, the employee who had been managing the VFA operation made a deal with the French owner that she would take over the business.  She paid the French owner $10,000 for the privilege, and he removed his merchandise and she installed her own. She changed the name of the business to Old Europe Antique Manor (Tenant), but for some time after taking over left the VFA sign in front of the store.  According to the Employee, she notified both Landlord’s agent (the notice address in the lease) and Landlord that she was taking over the store and that the original owner didn’t want it any more.  She claimed in court that the agent told her that this would be no problem.

For the next 17 months, the Employee paid the rent, most often using checks drawn on Old Europe. The manager, however, continued to address the rental bills to the original owner/assignor.

Things were at this stage when a calamity occurred.  The upper level tenant, LBE, had been permitting a large accumulation of debris to develop in the common area outside its premises.  Tenant (lower level) complained of this to the manager, but nothing was done.  Then an unusually heavy storm hit, and the debris collected snow and directed water and snow runoff in such a way that Tenant’s lower level premises were flooded, damaging her inventory and premises to the extent of over $300,000.  Tenant was forced to close.  Thereafter, Landlord seemed to be willing to take responsibility for the repairs, but ultimately concluded that it would not reimburse Tenant for her injuries because she was not a lawful assignee.

A trial court agreed, indicating that it saw no evidence that Tenant was anything but a trespasser.  The duty of cared owed to trespassers, it concluded, was not breached.  Summary judgment for Landlord.

On appeal: Held: Reversed.

Agreeing with the lower appeals court, the Maryland Court of Appeals court here concluded that Tenant should recover, and took a rather comprehensive approach to analyzing Tenant’s status. 

The court first held that there was a triable issue of fact as to whether Tenant was indeed a valid assignee.  Although the lease stated that acceptance of rent was not waiver to the right to object to an assignment, the court noted that the 17 months of acceptance coupled with notice of Tenant’s status of assignee of the original tenant (as Tenant alleged) could constitute waiver of its right to require express notice and written consent.  As to the Statute of Frauds, the court noted that Maryland law states that a contract that arises out of “operation of law” does not have to comply with the Statute of Frauds, and that the many months of Tenant’s occupancy of the premises and payment of rent with VFA’s knowledge and approval made this assignment one by operation of law. 

In a somewhat puzzling characterization of the situation, the court talked of the Landlord’s implicitly “surrendering” the original lease.  (Of course, normally no surrender - no novation - is necessary for an assignment to occur.  The Landlord can look to both assignor and assignee for performance of the lease covenants.)

“Intent is a key inquiry in this case.  The trier of fact must determine whether [Landlord and VFA] intended to surrender the Lease and/or whether [Landlord] intended to accept Ole Europe as an assignee under the lease, and whether [Landlord], by its actions, waived the requirements of the Lease and Statute of Frauds.” 

The court went on to conclude that even if Tenant was not a valid assignee, then most likely it acquired a “common law tenancy” (month to month) in the premises.  This is what the lower appeals court had concluded.  In a footnote, the court noted that even if there were no common law tenancy, tenant could be regarded as a licensee of the original tenant, VFA, and still entitled to the standard of care owed to a tenant. 

Once Tenant’s status was to be resolved, the court had no difficulty concluding that the alleged facts demonstrated a breach on the part of the Landlord of a duty owed to a tenant, as the Landlord allegedly had actual notice of a hazardous accumulation of debris in the common area.

Comment 1: The editor agrees with the outcome, but is puzzled with the analysis on a number of levels. 

First, of course, is the suggestion that there ought to be, and might be, a surrender of the original lease.  It is hard to where the court gets this conclusion.   The first tenant never contacted the landlord to ask for a surrender and the new Tenant never requested one.  A surrender is not a necessary prerequisite for a valid assignment.

The Editor further is puzzled by the court’s discussion of the application of the Statute of Frauds.  Surely, as between the original tenant, VFA, and the current tenant, part performance had long since nullified the impact of the Statute of Frauds.  The old tenant had removed its things and the new tenant had paid $10,000 in cash and then paid rent for 17 months on the understanding that an assignment had occurred.  The court characterizes this transfer as an assignment “by operation of law.”  Well, OK.  That’s not the Editor’s understanding of this concept, but it nevertheless works. 

Comment 2: The court clearly is uncomfortable with characterizing Tenant as an assignee, since it considers two alternative formulations: Tenant as a “common law tenant” and Tenant as a “licensee” of VFA.  Both work, of course, but it is difficult for the Editor to see why either is necessary. 

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