Don’t Withhold Consent to Get Higher Rent

A tenant that has been renting space from you for many years might be paying less in rent than you think the space would be worth to a new tenant. If the tenant approaches you about exercising some type of option or right under its lease, don’t be tempted to try to use your consent as leverage to raise its rent. A recent Alabama case dealt with this issue and the owner ended up losing its argument. In ruling in favor of the tenant, the Supreme Court of Alabama said that it agreed with several other jurisdictions that concluded that it’s unreasonable for an owner to withhold consent to an assignment in order for the owner to charge a higher rent or otherwise to improve the owner’s economic position.

In that case, the owner of a gas station leased the building used as a convenience store and the underlying lot to a tenant for a five-year term. The lease gave the owner the option of renewing the lease every five years, with a total of five additional five-year terms. There would be an increase in base rent each time the lease was renewed. The lease also contained an assignment clause providing the tenant with a right to transfer or assign the lease with the written consent of the owner “which shall not be unreasonably withheld.”

The tenant later decided to assign the lease for the convenience store and land. The tenant made several attempts to speak with the owner and the owner’s son about the proposed assignment. The tenant then sent the owner a letter, identifying the proposed assignee. Neither the owner nor her son responded to those attempts to discuss the situation. The tenant assigned the lease without the owner’s consent. The owner sued the tenant and the assignee, a national convenience store operator.

During the proceedings, the owner died and her two adult daughters were substituted as plaintiffs. Both daughters and the owner’s son testified to the trial court that their mother didn’t want to consent to the assignment because she thought that the tenant was already paying significantly lower rent than other convenience store operators were paying for their leases and she considered the assignment to be a chance to renegotiate the lease with the assignee or find a new tenant at a higher rental rate. All three children testified that their mother’s desire to get higher rent for the space than the tenant, or its assignee under the same lease terms, had been paying was a major factor in her decision to withhold her consent.

A trial court ruled in favor of the owner. The tenant and assignee each appealed. The Supreme Court of Alabama reversed the decision.

The appeals court determined that the tenant hadn’t breached the lease. It had the right under the lease to assign the lease to the assignee—despite the owner’s failure to consent. And the assignee had the right to occupy and use the premises. That was because it was unreasonable for the owner to withhold consent to an assignment of a lease in order to extract higher rent than had been contracted for in the lease, explained the appeals court. 

An owner doesn’t unreasonably withhold consent to an assignment unless the owner is presented with—and rejects—a prospective assignee that is ready to assume the lease and that meets commercially reasonable standards. “Thus, before the [owner] may be held liable for failure to consent to a transfer of the lease, the [tenant] has the burden of proving that it had tendered a person who was ready, willing, and able to take over the lease and who, at the very least, meets the reasonable commercial standard,” it stated. Here, the tenant found an assignee—that was also an experienced gas station convenience store operator—to take its place and that was willing to pay the same rent and follow the same terms of the original lease. And the tenant had made several attempts to discuss a possible assignment with the owner and provided the name of and details about the specific assignee in a written letter.

The purpose of a consent provision is to protect the owner’s interest in preserving the property and in the performance of the lease covenants, not to protect the owner’s general economic position, concluded the appeals court [Pantry, Inc. v. Mosley, May 2013].

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