Daily Development for Thursday, September 29, 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/TENANT; ASSIGNMENT AND SUBLET; LANDLORD’S CONSENT: Landlord is unreasonable in withholding consent to assignee based upon the fact that assignee will compete with landlord’s business, especially when landlord has acquired the leased premises following the lease to tenant by another landlord.

Tenet v. Jefferson Parish Medical Center, 2005 U.S. App. LEXIS 20283 (5th Cir. 9/21/05)

Tenant entered into a lease in a shopping center for an outpatient surgical center.  The lease provided that Tenant could use the property for “out patient surgical procedures and general medical and physicians offices, including related uses and for other purposes reasonably acceptable to Landlord.”  The lease provided that Tenant had to obtain Landlord’s consent to any assignment or sublet, but that consent would not be unreasonably upheld. 

Later, the landlord transferred the shopping center fo Jefferson, which operated a hospital in the area and acquired the space for “strategic purposes” for future expansion. 

Tenant then sought to sublease the space to Pelican, which operated an occupational medical clinic - which provided a range of medical services to employees of  identified corporate clients, rather than to the general public.  Jefferson objected on the grounds that Pelican’s proposed business was not within the permitted activities under the lease and that Pelican would compete with activities that Jefferson was conducting on nearby premises.

Tenant brought suit based on the allegation that Jefferson’s refusal to consent to the sublet was unreasonable.  The federal district court  granted summary judgment to Jefferson, ruling that whether Jefferson was reasonable ought to be determined with reference to Jefferson’s individual situation. 

On appeal: Held, Reversed.

The Court of Appeals had no problem finding that the occupational medial clinic fit within the description of “medical and physician’s offices.”  Interestingly, it cited a case in which an orthodontist’s office was held not to be within the description of “general dentistry.”  But that case, based upon specialized dentistry terms,  had no impact here.

As to whether Jefferson was reasonable in refusing to consent to a competitor, the court made two alternative findings.

First, the court held that a landlord is unreasonable when it refuses to consent to a sublet to a party that will compete with business that the landlord is conducting nearby.  It cited a thoughtful New Mexico decision that acknowledged that a landlord can take it’s own economic interest into account, but that this interest must relate to the premises in question (apparently expanded to include the shopping center of which the premises are a part) and the landlord cannot withhold consent to improve its “general economic interest.”  Although the opinion could be more clear, the court apparently was of the view that the withholding of consent was done to decrease competition to the hospital’s business located outside the shopping center of which the lease was a part.

Second, the court held that, in any event, the perspective from which the landlord’s decision will be judged is an objective one based upon the nature of the landlord *at the time of the letting.* Thus, tenant is enabled to make judgments as to what is or is not likely to be viewed as reasonable taking that landlord into account, rather than being subject to differing standards as the reversion changes hands.  Under this standard, of course, the Jefferson’s position would have been unreasonable whether or not it was protecting its medical business within or outside the center, since the original landlord had not been in the medical services business.

Comment 1: Based upon what the court says its research revealed and upon the available discussion in Freidman on Leases (Randolph Edition), at Section 7:3.4, this is perhaps a “perfect storm” consent issue of virtually first impression.  Friedman cites very few cases on the subject of whether a landlord can withhold consent for anticompetitive purposes, and only two cases involving shifting landlords.  Thus this case is a very significant precedent.

Comment 2: On the question of withholding consent for anticompetitive purposes, Friedman does cite one California case, discussing the issue in dicta, and another case upholding a shopping center landlord’s refusal to consent to an assignment that would lead to competition with other landlord’s other  businesses conducted within the shopping center where the proposed assignment would occur.  Further, in Medinvest Co. v. Methodist Hosp., 359 N.W. 2d 714 (Minn. App. 1984), a hospital landlord was permitted to withhold consent to an assignee who would compete with landlord in an adjacent and “skyway connected” building.  The court emphasized that the landlord’s primary business venture in both buildings was the provision of medical services, rather than earning rentals from leasing space.

Edelman v. F.W. Woolworth Co., 252 Ill. App. 142; 1929 Ill. App. LEXIS 665 (Ill. App. 1929) is a seminal case, cited by Friedman and all of the above courts, including the instant court, for the proposition that the landlord ordinarily is unreasonable in trying to protect itself from competition at other locations through its decision to deny consent to an assignment or sublease.

Comment 3: Perhaps the more intriguing question before the court was whether the tenant could rely on the identity of the landlord at the time of letting, so that the landlord’s reasonableness in determining whether to consent should be judged by objective standards assuming a landlord with business interests similar to that original landlord.  Friedman cites only one clear case on this point, a 1969 New York decision in which a religious institution acquired a building subject to an existing lease and later refused to consent to the assignment of the lease to a family planning clinic on the grounds that the activity was inconsistent with its principles.  This decision was held to be unreasonable, as the original landlord had no objective basis to object on those grounds. 

Comment 4:   The editor is of the view that all the bells haven’t rung on the issue of shifting landlords.  Maybe we can “carve out” the religious institutions and hospitals, but in fact, in any long term lease, a tenant ought to expect that the landlord’s future business interests will evolve, and if a new landlord is within a foreseeable range of development that the old landlord might have experienced as well, then the tenant should not be able to claim that the new landlord’s actions are unreasonable just because the old landlord, as that landlord existed at the time of letting, might not have had a basis to object.  This cannot be what the parties reasonable expected, and analysis of reasonable expectations should be the primary tool in resolving these issues.   

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