Daily Development for Wednesday, August 17, 1999

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

LANDLORD/TENANT; ASSIGNMENTS AND SUBLEASES; LANDLORD'S CONSENT: Colorado court affirms Restatement rule generally requiring landlord's to be reasonable in reviewing leaase assignments, but a "freely negotiated" provision giving landlord absolute discrection is enforceable.

Cafeteria Operators, L.P., v. AMCA/Denver Limited Partnership, 972 P.2d 276 (Col. App. 1998), Cert. Den'd 2/22/99) (2 dissenters)

A lease of commercial property provided that tenant could not sublet the premises without written consent of landlord. The property was originally leased for use as a cafeteriastyle restaurant. After failing to operate successfully such a restaurant, tenant marketed the premises to prospective sublessees. Upon the expression of interest by a non cafeteria restaurant owner, tenant sought consent of landlord to sublet. Landlord refused to grant its consent and tenant sought declaratory judgment. The trial court ruled that landlord had reasonably withheld consent. The Colorado Court of Appeals affirmed the trial court, holding that "under Colorado law, without a freely negotiated provision in the lease giving the landlord an absolute right to withhold consent, a landlord's decision to withhold must be reasonable."

The Colorado Court of Appeals also refused to disturb the trial court's determination, supported by the evidence, that the landlord had reasonably withheld consent to the sublease because the proposed sublessee would not have been compatible with the character of a neighborhood shopping center and would have injured its viability. Comment 1: The case is important from a theoretical standpoint because it affirms Colorado's position on the validity of "landlord consent clauses" in leases. The case cites to the 1985 decision in Basnett v. Vista Village Mobile Home Park, 699 P.2d 1343 (Colo. App. 1985) rev'd on other grounds 731 P.2d 700 (Colo. 1987), which adopted the rule of Restatement (Second) of Property Landlord/Tenant Sec. 15.2(2) (1977). The instant case discounts the fact that Basentt was reversed on other grounds and the fact that it was a mobile home park case. It concludes that the Restatement has been the rule in Colorado since 1985.

The significance of the adoption of the Restatement relates to the fact that the Restatement contains an exception to the general rule that landlords have general a duty to be reasonable in determining whether to consent to a proposed assignment or sublease under a clause giving them consent rights, even when the clause does not expressly require reasonable judgment.. The Restatement indicates that the landlord and tenant, by a "freely negotiated" provision in the lease, can confer "absolute" discretion upon the tenant. The Colorado Court of Appeals in this case clearly establishes that this exception exists in Colorado, although in the present case it concludes that there was no evidence that the parties conferred such discretion upon the landlord.

In reaching this conclusion the court appears to disregard Bert Bidwell v. LaSalle & Schiffer, 797 P.2d 811 (Colo. App. 1991), which had held that a landlord could not unreasonable withhold consent to an assignment and later collect damages for the period following such refusal, as unreasonable refusal to withhold consent to an assignment or sublet constitutes a failure to mitigate damages in a reasonable fashion, required by Colorado law. Bert Bidwell did not cite Basnett or the Restatement. Therefore, we now cannot be certain of the authority of the Bert Bidwell case when there is a "freely negotiated" absolute discretion clause. The editor must reluctantly conclude that both this case and Bidwell were poorly researched and written in that they fail to take into account important authority, leading to ambiguity and confusion in Colorado law.

Comment 2: Speaking of ambiguity and confusion, just what is a "freely negotiated" contract clause anyway? The Restatement does not really tell us, and there is scant authority following the Restatement making the meaning any clearer. See discussion of the issue in the editor's article "Coping With the New Rules On Assignability of Commercial Leases," dating from 1992, which appears on the DIRT website at <http://www.umkc.edu/dirt/files/assignar.htm>http://cctr.umkc.edu/dep t/dirt/files/assignar.htm

That article discusses the fact that although there are a number of cases following the notion that landlords have a duty to be reasonable in acting under a landlord's consent clause, they are balanced by an equal number of recent cases that reject that notion. Further, the article notes that the cases that do adopt the requirement often are not clear as to whether they are adopting the Restatement approach or some other rationale. Consequently, whether the "freely negotiated" exception to the rule is available in these jurisdictions often is in some doubt.

In preparing this report, the editor did a computer search to determine if any newer cases have shed light on the issue of what constitutes a "freely negotiated" clause conferring absolute discretion upon the landlord. And, viola! he found one (and only one).

The case nevertheless is important, as it is a thoroughly reasoned case of a state supreme court Oregon's. Pacific First Bank v. The New Morgan Park Corporation, 876 P.2d 761 (Or. 1994).

The Oregon court began by concluding that the implied duty of good faith and fair dealing, set forth in the Restatement of Contracts, required that a landlord be reasonable in exercising consent powers under a "landlord's consent" clause. But it then proceeded to state that the basis for this rule is that the parties reasonably expect that the landlord will so conduct itself, and therefore if the contract is clear that no such expectation is justified, then the duty does not exist.

The court then turned to the Restatement of Property rule. It noted that the Restatement of Property rule states that as a matter of policy the contract can provide that the landlord has the right to refuse consent to an assignment or sublease arbitrarily, and that if the contract does so provide, there will be no implied duty of good faith and fair dealing on that issue.

As to what is a "freely negotiated" provision the court noted that in this case, where the landlord reserved the right to consent to subleases on certain matters, the language of the lease stated that consent would not be unreasonably withheld. Where the lease addressed assignments, however, the language simply stated that the tenant must obtain the landlord's consent. The court concluded that the parties deliberately differentiated between circumstances in which the landlord was to be reasonable and when it had no such duty, and that this demonstrated that the provision in question was "freely negotiated."

It should be noted that the contract addressed by the Oregon court was a commercial lease between sophisticated parties, but it nevertheless is noteworthy that the court interpreted a clause that said nothing more than that the tenant had to seek landlord's consent as a contractual statement that landlord had an absolute right of discretion. The interpretation had special "bite" in the case at hand, since the landlord refused consent to an assignment in the form of an "upstream merger," which the court earlier had concluded fit within the "assignment or other transfer" language of the landlord's consent clause.

Comment 3: Huzzah's to the Oregon court for letting the market operate. Brickbats to the Colorado court for failing to read its own precedents and clarify confusion. Brickbats to the editor as well, for failing to know about the Pacific First Bank case prior to this.

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