This past spring, the Massachusetts Appeals Court, in WHTR Real Estate Limited Partnership v. Venture Distributing, 63 Mass. App. Ct. 229 (2005), revisited the issue of when a landlord is required to consent to a sublease where the lease in question provides that consent may not be unreasonably withheld. In Venture, the Appeals Court affirmed a Superior Court decision (Rouse, J.) finding that the landlord was entitled to collect rent due and that the landlord had not breached the lease, nor had it violated Mass. G.L. ch. 93A, when it failed to approve a contemplated subtenancy. In this case, WHTR as plaintiff held the right to collect amounts due from the tenant as an assignee of the landlord. For simplicity, WHTR shall be referred to as the landlord.
The Venture decision does not establish new principles governing the approval of subleases in Massachusetts. Rather, the decision closely follows established precedent, particularly the principles discussed in Worcester-Tatnuck Square CVS, Inc. v. Lewis Kaplan, 33 Mass. App. 499 (1992). Nonetheless, Venture provides an opportunity to review existing law and the steps that landlords and tenants can take to avoid costly litigation over sublease consents, both in drafting the lease and during the approval process. The first section of this article reviews the facts and holding of the Venture decision. The second section reviews recent Massachusetts sublease approval cases that preceded Venture. The third section reviews several decisions cited in Venture that illustrate conduct that landlords should avoid. Finally, the article concludes with a series of drafting and operational tips for landlords and tenants negotiating leases and working their way through the consent process.
I. The Venture Decision
The Venture case is notable because the tenant, arguing that the landlord had unreasonably withheld consent, survived summary judgment despite the fact that the tenant did not have a final agreement with the proposed subtenant. The denial of the summary judgment motion forced the landlord through a costly five-day bench trial. On appeal, the Appeals Court affirmed the Superior Court, holding that "a landlord is not in default for failure to consent unless the tenant produces a candidate who is ready, willing and able to fulfill the tenant's obligations under the sublease." Specifically, the Appeals Court affirmed the Superior Court finding that the tenant had not yet reached a final agreement on key sublease terms with its proposed subtenant. The Supreme Judicial Court's June 9, 2005, decision not to accept further appellate review in Venture followed the April 2005 Appeals Court decision and a 2002 bench trial.
In the winter of 1996, Venture, the tenant, determined that it no longer needed to utilize warehouse space that it was leasing in Woburn and began searching for a subtenant. After identifying a potential subtenant and exchanging proposals and counterproposals, but before reaching a final sublease agreement, Venture forwarded a copy of the proposed sublease to the landlord with a notation to "please examine sublease and sign consent if agreeable. . ."
The master lease at issue in Venture provided that:
Tenant "shall not assign, [or] sublet. . . this lease without lessor's prior written consent, which consent shall not be unreasonably withheld or delayed."
The master lease did not contain much detail on the exact method for requesting consent to a sublease, nor did it explain how such a request would be acted upon by the landlord. The lease did, however, provide the landlord with the opportunity to "recapture" the premises if a sublease was proposed.
The draft sublease that the tenant forwarded to the landlord was neither signed by the tenant nor by the contemplated subtenant. Over the following weeks, the tenant, subtenant and landlord exchanged additional communications. During this period, the landlord's agents contacted the proposed subtenant directly to explore the possibility of entering into a direct lease relationship. Ultimately, however, the proposed subtenant leased space elsewhere and the tenant was caught high and dry.
Consequently, the tenant argued that the landlord had interfered with its sublease negotiations and/or that the landlord had unreasonably withheld its consent to the sublease. The tenant vacated the premises and refused to pay rent for the last nine months of the lease. In response, the landlord sued for the rent due. The tenant filed counterclaims alleging that the landlord, in failing to consent to the contemplated sublease, had breached the lease. In addition, the tenant counterclaimed under Mass. G. L. ch. 93A, alleging that the landlord's direct communication with the contemplated subtenant were improper and that those communications interfered with the tenant's nearly complete sublease negotiations.
Months of discovery followed. Notwithstanding the lack of a complete agreement between the tenant and the contemplated subtenant, the landlord was unable to have the case disposed of on summary judgment. The Superior Court denied the landlord's summary judgment motion, noting that because of the landlord's direct communications with the contemplated subtenant, a factfinder might find that the landlord "waived," or might be "estopped" from, relying on the explicit terms of the sublease. As a result, the case proceeded to trial.
Following a five-day trial, the Superior Court found that:
There is no evidence that the parties were even close to resolving the terms of the sublease … [n]or is there any evidence that [the contemplated subtenant] and [the tenant] had agreed on the terms of the sublease orally and simply needed to reduce them to writing … There were too many uncertainties and unresolved issues to legally bind either [the contemplated subtenant] or [the tenant]. It was incumbent on [the tenant] to secure a subtenant ready, willing and able to perform [the tenant's] obligations under the lease … There never was a legally enforceable agreement … to which the landlord could consent.
Id. at 233.
In other words, a landlord's reasonableness in refusing to consent cannot be properly evaluated unless the tenant can proffer an agreement between itself and the proposed subtenant. A subtenant cannot be considered "ready, willing and able" unless it has agreed to perform - or at least closely approximate - the tenant's obligations under the lease.
On appeal, Venture relied on two cases from other jurisdictions where courts found that landlords had acted unreasonably. The Appeals Court distinguished both of them. In Stern's Gallery of Gifts v. Corporate Property Investors, Inc, 176 Ga. App. 586 (1985), the Georgia Court of Appeals found that the tenant was entitled to a directed verdict on the issue of non-consent because of the landlord's categorical refusal to allow subleases. The Venture Appeals Court decision distinguished the facts in Stern's by noting that the landlord in Venture did not have a stated policy against subtenants.
Similarly, in Golf Management Company, Inc. v. Evening Tides Waterbeds, Inc., 213 Ill. App. 3d 355 (1991), the facts established that the landlord had stated on several occasions, when faced with prospective subtenants, that a sublease would not be permitted and that the proposed subtenant would have to enter into a new lease. In the Golf Management case, the tenant had produced a definite offer from a subtenant who was ready, willing and able to take over the space. However, the subtenant declined to do so when the landlord demanded a new lease with a higher rent and set several auxiliary requirements. The Golf Management court found that the tenant had produced ready, willing and able subtenants and that the landlord's refusal was unreasonable.
The Massachusetts Appeals Court in Venture did not reach the issue of how to define "ready, willing and able," nor did it say whether it would require a legally enforceable agreement between a tenant and a subtenant. Rather, as noted, the Appeals Court merely affirmed the Superior Court's finding that the tenant and the contemplated subtenant were not even close to an agreement. Thus, the Venture decision does not define the bounds of permissible conduct in the sublease area. However, the line of cases leading up to Venture is informative in fleshing out the landlord's reasonableness requirement in Massachusetts.
II. Sublease Approvals -
When Is a Landlord Required to Act "Reasonably," and What Is "Reasonable"
In Slavin v. Rent Control Board of Brookline, 406 Mass. 458 (1990), the Supreme Judicial Court refused to find that, in the absence of contractual language to the contrary, a residential landlord must be reasonable when determining whether to consent to a sublease. In reaching this conclusion, the SJC followed its earlier decision in 68 Beacon St., Inc. v. Sohier, 289 Mass. 354, 360-61 (1935). In 68 Beacon, the SJC ruled that it was not an unreasonable restraint on alienation for a commercial landlord to include a provision in its lease requiring its consent as to any assignment, with no limitation on its ability to refuse. The Slavin court reasoned that residential landlords were not significantly different from commercial landlords so as to impose a reasonableness requirement to which they had not agreed. The SJC characterized the issue as one of public policy and invited the legislature to intervene if it wished to change that policy.
Two years later, the SJC applied the Slavin rule in a commercial lease case, Merchant's Row Corporation v. Merchant's Row Inc., 412 Mass. 204 (1992). The court framed the issue in Merchant's Row as whether, in a commercial context, the lease requirement that a tenant obtain the landlord's consent before assigning the lease implies that the landlord must act reasonably in withholding consent. The court declined to imply this principle in the lease, reasoning that there was "no sound reason to depart from this rule and to grant greater protection … to commercial tenants than to residential tenants." Id. at 206.
Later, in Tatnuck, the Appeals Court elaborated upon the reasonableness requirement for a commercial landlord. Under Tatnuck, a landlord's reasonableness can be evaluated according to "the financial responsibility of the subtenant, the legality and suitability of the proposed use, and the nature of the occupancy." Worcester-Tatnuck Square CVS, Inc. v. Lewis Kaplan, 33 Mass. App. Ct. 499, 503 (1992). The Tatnuck court found that the landlord had exercised reasonable business judgment in not consenting to a sublease under these factors. Specifically, the Tatnuck court found that the proposed subtenant would likely fail to generate a reasonable amount of percentage rent and would only occupy part of the space. While under Tatnuck a landlord cannot refuse a subtenant "solely to extract an economic concession or to improve its economic position," it can reasonably insist upon a subtenant who would conform closely to the tenant's obligations under the prime lease.
Since 1992, several decisions have applied the rules laid out in Tatnuck and Merchant's Row. These cases illustrate the range of sublease consent disputes that landlords and tenants frequently face. For example, in National Union Fire Insurance Company v. Daniel Rose, 53 Mass. App. Ct. 910 (2002), the Appeals Court faced the issue of whether a landlord can withhold consent by demanding that a tenant sublease only at market rents. The Superior Court had granted summary judgment for the tenant, stating that "[w]ithholding of consent is unreasonable on the facts of this case. [The] clear language of [a] profit sharing sublease provision does not obligate tenant to sublease at market rents in a rising market. Profit sharing is operative only if [the] sublease rent exceeds [the] tenant's rent, which it does not." Id. at 911. The Superior Court judge then cited Tatnuck, supra, noting that the landlord's withholding consent was "solely to extract an economic concession or to improve its economic position, which is improper." Id.
The Superior Court in Town of Lynnfield v. John Hancock Mutual Life Insurance Company, 1995 Mass. Super. LEXIS 445 (1995), stated that, absent a showing of bad faith or other misconduct, it would not infer a reasonableness requirement on the part of the tenant. The lease in question stated that if the landlord refused to consent to a sublease, the tenant had the option of terminating the lease or having the landlord buy out its interest. When the landlord withheld consent, the tenant invoked its right to terminate the lease. The landlord refused to recognize the termination. The landlord argued that, under Merchant's Row, the court should infer a reasonableness requirement on the part of the tenant where the lease allows a tenant to terminate should the landlord withhold consent. The danger, reasoned the landlord, is that a tenant could purposely proffer a subtenant, knowing the landlord would not consent to that subtenant, and then terminate the lease. The court rejected this argument and the tenant was allowed to terminate.
The Superior Court also analyzed reasonableness factors for a commercial landlord in Polar Corporation v. USS Industrial Park Associates, LLC, 1998 Mass. Super. LEXIS 701 (1998). The tenant attempted to sublease part of its premises to a lawn care company. The landlord withheld consent, citing concerns that the odor from the lawn care products would affect the building's co-tenant and could "permanently permeate" the building. Notwithstanding, the tenant subleased the premises to the lawn care company. The landlord served a notice to quit and sent security guards to block the entry of the proposed subtenant. Citing Tatnuck, supra, the Superior Court stated that "a commercial landlord may withhold consent to a sublease if it determines that the sublease will damage (1) its interest in preserving its property or (2) its interest in having the terms of its prime lease performed." The court granted a preliminary injunction, stating that neither interest was in danger and that "the landlord cannot simply use self help to keep the subtenant from using the premises." Id.
The issue of whether a landlord, having consented to one sublessee, need consent to each successive sublessee was addressed in Eugene Snow v. Adel Fitian, 1998 Mass. App. Div. 227. Relying upon the SJC decision Healthco, Inc. v. E&S Realty Assoc., 400 Mass. 700 (1987), the Appellate Division found that "when a lease contains a covenant requiring the lessor's prior written consent to an assignment and when that consent is obtained, the lessee is not required to procure the lessor's consent to subsequent assignments." Id.
In Cambridge Chamber of Commerce v. Central Square Insurance Agency, Inc., 1999 Mass. App. Div. 27 (1999), the Appellate Division noted that because the landlord's consent was "expressly and unequivocally conditional" the subtenant must comply with all conditions to receive consent. The landlord's consent to a subtenant was conditioned upon the subtenant's signing all agreements both personally and in his capacity as president of his corporation. Although the subtenant signed the documents in his corporate capacity, he never signed them personally. The court affirmed judgment for the landlord on all counts.
Finally, in Express, LLC v. Club Monaco U.S., Inc., 2002 Mass. Super. LEXIS 534 (2002), the Superior Court ruled that the implied covenant of good faith and fair dealing did not require a tenant to materially alter the terms of its sublease to accommodate prospective subtenants. The court strictly construed the terms of the sublease, stating that the subtenant "cannot shift the financial loss … onto [the tenant] by blaming it for refusing to revise the sublease to accommodate the needs of prospective new subtenants." Id. Based on this reasoning, the court granted summary judgment for the tenant.
III. The Venture Decision
Confirming Prior Law
As is evident from the foregoing cases, Venture did not so much make new law as stand on precedent. The Venture Superior Court decision, affirmed by the Appeals Court, rested on the rule that "a landlord is not in default for failure to consent unless the tenant produces a candidate ready, willing, and able to fulfill the tenant's obligations under the sublease." Id. at 233. The Appeals Court approvingly noted the Superior Court's reliance on Worcester-Tatnuck Square CVS, Inc. v. Kaplan, 33 Mass. App. Ct., 499 (1992) and Freedman, Leases
ß 7.304B (4th Ed. 1997) (a "landlord is not in default for failure to consent to an assignment or sublease unless tenant produces a candidate ready, willing and able to fulfill obligations").
Although the findings of the Appeals Court in Venture do not break new ground on sublease consents, the path of the litigation provides many lessons - for lease drafters seeking clarity, for landlords seeking to avoid litigation, and for tenants seeking a fair review of sublease proposals where the landlord may or may not have ulterior motives.
While the Venture Appeals Court deferred to the Superior Court's factual findings that the tenant had not produced a "ready, willing and able" subtenant, it did not define what constitutes a ready, willing and able subtenant. More specifically, how can a tenant establish and document that their contemplated subtenant is ready, willing and able? Equally important, how does a landlord avoid years of litigation?
IV. Drafting and Consent
A. When Does the Consent Process Begin?
In Venture, the landlord argued that it did not have to consider a proposed sublease - and therefore could not be in default for failing to consent - until it was presented with a written agreement signed by both the tenant and the proposed subtenant. While numerous documents were exchanged between the tenant and the proposed subtenant, those documents fell into the "proposal and counterproposal" category and would commonly be described as non-binding. Clearly, for a period, the tenant and the proposed subtenant were engaged in negotiations and were moving toward a deal. Ultimately, however, no agreement was reached. The landlord would probably have prevailed at summary judgment, and could have avoided its litigation agony altogether, had the lease specified that the landlord's duty to begin the consent process would not be triggered until a fully completed sublease, signed by tenant and subtenant and effective only upon the landlord's review, had been produced. Accordingly, landlords are well advised to carefully define what will "trigger" the consent process.
B. The Landlord's Management of the Consent Process
How does a landlord respond to a proposal? If the landlord's representatives in Venture had methodically documented their concerns, significant litigation costs could have been avoided. Instead, in an attempt to accommodate a tenant facing a tight time constraint, much was done orally. Proving that oral dealings were reasonable many years after the events in question, when many employees had moved on, was extraordinarily difficult for the landlord in Venture.
In addition, because the landlord did not have a policy and procedure in place for responding to sublease consents, and dealt with them on a rather ad hoc basis, the tenant was able to seize upon one of the most incredibly tenant-friendly cases: Stern's Gallery of Gifts, supra. In that case, the tenant proved that it had tendered a subtenant who was ready, willing and able to take over the lease and who, at the very least, met commercially reasonable standards. The Stern's court heard evidence of the landlord's longstanding policy of refusing to permit subletting. No landlord should ever leave itself open to a policy of refusing to permit subleases. Rather, landlords should have specific policies as to how sublease requests are handled, and they should attempt to adhere to those policies wherever a tenant appears to be requesting approval of a sublease. For example, the first step every cautious landlord should take is to send their tenant a letter requesting detailed financial and proposed use information on the proposed subtenant and informing the tenant that the approval process will begin after the information is received.
C. The Need for Caution in Exercising Recapture Rights
Many leases provide that a landlord can "recapture" the premises should a tenant seek to sublease. As a practical matter, deciding whether or not to exercise the right will often require direct landlord communication with the proposed subtenant. In Venture, these communications provided a basis for the tenant to argue that the landlord had interfered with its sublease negotiations and ultimately led to the denial of the landlord's summary judgment motion. Although the landlord had communicated with the proposed subtenant with the goal of finding a mutually beneficial solution for all parties, the communications left the landlord vulnerable to the fact-intensive allegation that it had interfered. If the Venture sublease had spelled out that the landlord could communicate directly with any proposed subtenant, much litigation would have been avoided.
The Venture decision ultimately confirmed that a landlord cannot be in default for failure to consent to a sublease unless a tenant produces a "ready, willing and able" subtenant to take over the prime lease. However, the litigation that the landlord and tenant endured illustrates the importance of careful lease drafting and the need for careful management of the sublease approval process. By defining the "trigger" for the start of the consent in the lease, setting and following policies and procedures for the management of the consent process, and providing guidelines for exercising recapture rights, a landlord can avoid costly litigation.