Succeeding in Your Business: When can landlords ‘unreasonably withhold’ consent?

“I am a small landlord who owns several commercial buildings.

“One of my tenants — who runs a small retail store — is looking to sell his business and retire. There are several years left to go on his lease, and because he’s such a good tenant, the rent is somewhat below market for this area.

“The buyer is a young man just out of military service. His credit history is good, and he comes from a decent family. The problem is that he has never worked in retail or run a business of his own before. He also doesn’t own a home. I like this young man personally, but I’m afraid he's going to get ‘in over his head’ and fall behind on his rent.

“The lease contains a clause requiring me to consent to any assignment or sublease of the rented space, as long as my consent is not 'unreasonably withheld.'

“I spoke to my attorney who told me I should ask this young man for several months’ rent as an additional security deposit because it will take at least six months to evict him should he be unable to pay his rent. When I offered this to the young man, he became angry and told me he couldn’t afford it. He said he felt I was discriminating against him because of his youth and his ethnic background, and that it was crazy to put that much money in an escrow account not earning interest for several years.

“I want to be helpful in this situation, but I can’t afford to have tenants who don’t pay their rent on time. I also cannot afford to be sued by the current tenant because I was unreasonable in withholding my approval of the lease transfer.

“Is there any way to get out of this jam?”

Once upon a time, landlords could evict their tenants the minute a rent payment became overdue. Not anymore.

Most commercial leases contain a clause requiring the landlord to approve any transfer of the lease to a new tenant, as long as the approval is “not unreasonably withheld.” Most landlords will want to meet the new tenant and review his credit history before they will grant their approval to the transfer and release the old tenant from his liability under the lease.

If a new tenant is not financially able to make his lease payments on time or has background issues that would cause a reasonable person to question his integrity (for example, jail time or a bankruptcy), most landlords would “reasonably” refuse their consent to the transfer, and the law would back them up.

The law isn’t as clear when a landlord wants to withhold consent for personal or nonfinancial reasons.

If the landlord’s decision to reject a transfer is based on prejudice or discrimination, he is being unreasonable. If a landlord withholds approval because he “just doesn’t like” the person, and the person is a member of a protected class under federal or state anti-discrimination laws, the landlord is almost certain to be sued by his existing tenant for breach of contract.

If you do decide to disapprove the lease transfer, your attorney should prepare a letter to the current tenant detailing precisely what motivated your decision. This should be based as much as possible on the economic and financial circumstances of the buyer.

If that is not feasible, there are several ways you can approve the transfer while getting additional protection in case the new tenant has trouble paying rent (I would agree with this buyer that asking for more than three months’ rent as a security deposit is probably unreasonable). For example:

• You can refuse to release the current tenant from his lease obligations for a period of one year after the transfer; this will make him a personal guarantor of the new tenant’s obligations under the lease and will encourage him to assist the new tenant in making sure rent gets paid on time.

• You can ask the new tenant if there are any family members (preferably with deeper pockets or greater business experience) who can co-sign the lease along with him.

• You can provide for rent increases each time the tenant makes a late payment (called a “time is of the essence” clause).

If all else fails, you may be able to put a clause in the lease enabling you to terminate the lease during the next two years, even if the new tenant is paying rent on time, if for any reason you “deem yourself insecure.” Banks put this provision in their loan agreements all the time. Note, however, that because the new tenant is losing his lease without having done anything wrong, the law may require you to reimburse the new tenant for the money he paid for the business, his relocation expenses, plus the cost of any tenant improvements he makes after taking occupancy.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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