lease assignment privity of contract

Commercial Lease Assignment and Sublet Provisions

A balancing act for landlords and tenants, july 2020 by adam f. aldrich.

This article identifies common problems involved in commercial lease transfers through assignments and subleases. It offers both landlords and tenants tips for solving these problems when negotiating assignment and sublease provisions in leases.

The modern commercial lease is a complex, integrated document that attempts to balance the competing interests of the landlord and tenant. As a result, commercial leases are the subject of much negotiation and are never “one size fits all.” In fact, commercial leases are one of the least standardized documents in real estate practice.

When any commercial lease is to be transferred in part through a sublet or in its entirety through an assignment, the issues multiply. The transfer provisions, which once seemed moot, become operative to determine whether the lease can be transferred and, if so, under what conditions. If, during lease negotiations, the parties overlooked the lease transfer provisions or gave them cursory consideration, they may be unpleasantly surprised by the result. While landlords and tenants have divergent economic interests with respect to transferring the lease, their legitimate concerns can be appropriately addressed through thoughtfully crafted transfer provisions.

This article explores common problems, issues, and solutions encountered in commercial lease transfers through assignments and subleases. It is intended to be useful both to the lawyer who infrequently encounters lease transfer problems and the seasoned practitioner who deals with lease transfer issues every day.

Distinguishing Between an Assignment and Sublease

Assignments and subleases have fundamental differences that are frequently misunderstood. A lease is both a conveyance of an interest in property and a contract. 1 After executing the lease, the landlord and tenant are bound to one another by privity of contract and by privity of estate. As a result, they may each enforce the provisions of the written lease through privity of contract and the promises that arise from privity of estate. 2 Privity of contract allows enforcement of the lease provisions, while privity of estate allows enforcement of only those promises that run with the land. 3

Whether the landlord, tenant/assignor, and subtenant/assignee call their arrangement an assignment or a sublease, courts typically look at the substance of the transaction. In an assignment, a tenant transfers its entire interest in the lease. 4 After assigning its interest in the lease, the assignee has privity of estate with the landlord, but the assignee and the landlord are not in privity of contract unless the assignee assumes the tenant’s obligations under the lease. 5 Assignment of the lease ends the original tenant’s rights to possession, but absent an express release under the lease terms, its liability under the lease continues. 6 This means the original tenant remains secondarily liable for the assignee’s obligations under the lease. Thus, the tenant/assignor may find itself liable at a future date if the assignee fails to perform its obligations under the lease.

In a sublease, however, the tenant transfers less than the remaining term or less than the tenant’s entire interest in the lease, leaving the original tenant with a reversionary interest in the lease. 7 The relationship between the original landlord and the original tenant, including both privity of contract and privity of estate, remains intact, thereby creating the relationship of landlord and tenant between the original tenant (sublandlord) and the new tenant (subtenant). The original landlord and the subtenant have no privity of estate or privity of contract with one another, so the original tenant remains liable for the actions and omissions of the subtenant. 8 However, the subtenant’s rights will terminate with the original lease or when the landlord declares a forfeiture of the tenant’s lease term. 9

A third, less common type of transfer is a partial assignment of a lease. Such assignments are called assignments “pro tanto,” not subleases, because they grant possession of a portion of the leased premises to the new tenant for the balance of the lease term. 10 The landlord now has two tenants and, in effect, two leases. There is little guiding case law on this hybrid lease transfer, so it is not entirely clear whether the assignee has a contractual relationship with the landlord. 11 Due to the vagaries and uncertainties that can result when a transfer of possession encompasses less than all of the space, partial assignments should be avoided. To avoid assignments pro tanto, landlords should consider prohibiting assignments of less than the original tenant’s entire interest in the lease. If a landlord proceeds with a partial assignment, it should clearly document the arrangement, including the rights and remedies of the landlord, original tenant, and new tenant, and acknowledge the transaction as a partial assignment and not a sublease. 12

The accompanying table illustrates the many differences between an assignment, sublease, and partial assignment. 13

Restrictions on Assignments and Subleases

Colorado law favors the free transferability of rights. 14 As a result, landlords frequently attempt to limit the tenant’s right to transfer the lease by including lease provisions specifically restricting the tenant’s right to assign or sublet. Under Colorado law, outright prohibitions against assignments are permissible and are not considered invalid restraints on alienation. 15 Even if outright prohibitions on assignments or subletting are enforced, such provisions “are construed against the restriction.” 16 This means a court generally will construe such stipulations “against the party invoking them.” 17 A breach of the restriction against transfer does not terminate the lease, 18 but may give rise to a claim for default. 19 Generally, tenants in commercial leases negotiate exceptions to strict prohibitions against assignments or subletting because transfer provisions may be their only viable exit strategy if they find they can no longer afford the space or no longer need it.

Consent to Assignments and Subleases

Recognizing that absolute prohibitions are neither favored by the courts nor acceptable to most tenants, some landlords include modified prohibitions in their leases that limit the tenant’s rights to transfer the lease and, if a transfer is permitted, allow the landlord to enforce the lease against both the original tenant and the new tenant to the maximum extent possible. Such provisions may reserve to the landlord, either in its sole discretion or without unreasonably withholding its consent, the right to approve a proposed lease transfer. Although the reservation of the landlord’s right to approve a proposed assignment or sublease is for the landlord’s benefit, 20 the landlord is bound to the standards set out in the lease for consents to an assignment or sublease. 21 Accordingly, once the landlord has established the standards for its consent in the lease, it cannot object to a proposed assignment or sublease if the tenant has met the appropriate requirements.

It is well established in Colorado law that “without a freely negotiated provision in the lease giving the landlord an absolute right to withhold consent, a landlord’s decision to withhold consent must be reasonable.” 22 Thus, if a lease contains a provision against subletting or assignment, but is silent on a landlord’s right to withhold consent, Colorado law forbids the landlord from withholding its consent unreasonably if the tenant tenders a suitable subtenant or assignee to the landlord. 23

Disputes often arise as to what is a ‘‘reasonable” withholding of the landlord’s consent. This debate has led to the enunciation of specific standards of reasonableness. If a lease provision “requires that consent to an assignment will not be unreasonably or arbitrarily withheld, a landlord is held to the standard of conduct of a reasonably prudent person.” 24 Therefore, a landlord must only consider “those factors that relate to a landlord’s interest in preserving the value of the property,” 25 which do not include “[a]rbitrary considerations of personal taste, convenience, or sensibility . . . .” 26 Whether a landlord has acted reasonably is a fact-specific inquiry. 27 Most courts have held that the tenant bears the burden of proving that the landlord acted unreasonably in withholding consent, 28 but some courts have required the landlord to prove it acted reasonably. 29 Courts have been divided on a tenant’s right to terminate a lease where the landlord has been found to have unreasonably withheld consent. 30

There are several reliable rules that courts follow in determining whether a landlord acted reasonably. First, a landlord cannot refuse consent for racial or other discriminatory reasons. 31

Second, a landlord may not deny consent to improve its general economic position or to receive increased rent. 32 However, a landlord may deny consent to protect its interest in the value, condition, and operation of the property or the performance of lease covenants. 33 For example, in Cafeteria Operators L.P. v. AMCAP/Denver Limited Partnership , the tenant leased the premises to run a cafeteria-style restaurant. 34 After several failed attempts to operate the restaurant, the tenant marketed the space to prospective subtenants, including non-cafeteria restaurant owners. 35 When a non-cafeteria restaurant owner expressed interest in subleasing the premises, the tenant sought the landlord’s approval to the proposed sublease, but the landlord refused. The Court found that the landlord reasonably withheld consent because the proposed sublessee would have changed the “character” of the shopping center by operating “the largest restaurant of its kind, raising concerns about lighting, maintenance, traffic, and parking.” 36 Moreover, the subtenant would sell alcohol and stay open late, and its proposed occupancy raised “concerns about security, safety of patrons, and parking requirements.” 37 Similarly, the Court in List v. Dahnke found that the landlord reasonably withheld consent where the landlord determined that a Thai-American restaurant operated by the assignee would not be successful at that location, but the Court did not identify the facts that led the landlord to such conclusion. 38

Third, a court may make a finding of unreasonableness if a landlord refuses consent to a proposed transfer without obtaining relevant information to make its decision. 39 Before making the decision, the landlord should obtain sufficient information on the transferee’s financial condition; the transferee’s experience in operating its business; how the premises are to be used; projected sales, gross income, and income per square foot; and, in the case of a sublease, the size of the subleased space. 40

Fourth, courts may consider how long it takes the landlord to make the decision on the requested assignment. If the landlord instantly refuses consent or waits too long to make a decision, the court could make a finding of unreasonableness. 41 Conversely, if the tenant fails to allow the landlord a reasonable amount of time to issue a decision, the withholding of consent can be found reasonable. 42 In Parr v. Triple L&J Corp. , the Court found that the landlord unreasonably withheld consent when it deferred making a decision on the proposed assignment, thereby delaying the sale of the tenant’s business until the prospective buyer withdrew his offer. 43 The tenant sought approval from the landlord for an assignment of the lease as part of the sale of its business. The landlord requested all personal and financial information on the proposed assignee and the assignee’s business plan, and the tenant provided prompt responses that demonstrated the assignee’s experience in restaurant management and “perfect credit score.” 44 Because the landlord unreasonably withheld consent, the landlord was held liable to the tenant under a breach of contract theory, as well as for lost profits on the sale of its business. 45

Similarly, the Court in Bert Bidwell Investors Corp. v. LaSalle and Schiffer, P.C. addressed whether the landlord unreasonably withheld consent to the tenant’s request to transfer the lease where the assignee was “ready, willing, and able to assume the lease as written, and to use the premises for the same business as that of the tenants.” 46 The landlord ultimately refused consent because it “didn’t like” the proposed assignee. 47 Based on the lease, which required the landlord’s consent to assign, the landlord argued that it “had the right to relet the premises as it saw fit and to be arbitrary in doing so.” 48 Relying on List , the Court found that the landlord acted unreasonably in refusing to accept the proposed new tenant. 49 Nevertheless, parties may create their own standards and definition of reasonableness, and if they do, courts will enforce and apply such standards. 50

As these cases illustrate, if a landlord wishes to withhold consent absent a sole and unconditional contractual right to do so, it must have fact-based reasons for doing so and cannot arbitrarily withhold or delay its consent. The landlord should communicate its decision in writing to the tenant and enumerate all fact-based reasons to preserve all arguments for reasonableness. 51 Before making the request to assign or sublet the premises, the tenant should gather information about the proposed assignee’s or subtenant’s financial status, business acumen, and proposed operations, and then submit this information to the landlord, along with an assignment or sublease document signed by the tenant and assignee or subtenant. While the landlord must still consent to the transaction, 52 such documentation places the tenant in a stronger position to rebut any superficial or arbitrary reasons the landlord may proffer for denying consent. And if litigation ensues, it will be critical for the tenant’s case to show that it supplied the landlord with as much information as possible concerning the assignee’s or subtenant’s financial status and operations, to avoid having the trier of fact determine that the landlord acted reasonably in denying consent due to a lack of information from the tenant.

Recapture, Termination, and Renewal Rights

Leases may grant the landlord the right to terminate the lease and to retake the tenant’s space if the tenant wishes to assign its lease or sublet its space, or if the tenant transfers the lease without the landlord’s consent. Replacing the tenant by recapturing the premises can benefit both the landlord and the tenant, but each party will want to weigh the pros and cons of such an agreement.

Terminating the lease allows the landlord to eliminate existing lease weaknesses and to enter into a new lease with a potentially better tenant on a clean slate. Moreover, recapturing the premises and directly leasing it to the proposed assignee can save the landlord substantial dollars in tenant improvements that can be passed on to the new tenant through reduced or free rent for a portion of the lease term. But the landlord must pay close attention to market conditions before terminating the lease. Terminating the lease in a strong market when space is at a premium and rents are high allows the landlord to enter into a new lease with a new tenant at a higher rate, but the landlord may take a loss on its investment in the premises in a down market when rates are depressed and there is an oversupply of space.

The tenant, on the other hand, risks losing its investment in its business and the leased premises. Before requesting a transfer, the tenant should closely scrutinize the lease to determine the potential outcome. Under some leases, the act of notifying the landlord of an intent to assign or sublet can trigger the recapture provision. 53 Similarly, if the lease is assigned without the landlord’s consent, it may trigger the recapture right if that right is expressly provided in the lease. 54 Landlords should closely review the recapture language before terminating the lease because restraints on alienation and lease forfeitures are disfavored. 55

When a tenant violates the transfer provisions by transferring the lease without the landlord’s consent, the landlord should send a notice of default to the tenant and demand that the default be cured by nullifying the transfer, 56 unless the lease provides that transferring the lease is an automatic termination. If the tenant is unable to nullify the transfer when it receives the notice, it could be liable for default damages incurred by the landlord. 57 If the tenant does not cure the default and the landlord will not approve (and has the right not to approve) the assignee or subtenant, the landlord may terminate the lease (or the tenant’s right to possession) if the lease so permits. 58 If the landlord fails to terminate the lease 59 or accepts rent after breach of the anti-assignment clause, 60 it may be deemed to have waived the right to terminate. Once the lease is terminated as a result of the default, the landlord must consider its duty to mitigate damages. 61

If the space is recaptured and the lease terminated, the tenant’s lease obligations will be terminated with respect to all recaptured space, including the payment of rent. 62 Moreover, the tenant will no longer have privity of contract or estate with the landlord, assignee, or subtenant because the lease will be terminated as to the tenant. 63 If the landlord recaptures the premises, the tenant is spared the rent expense while it finds a transferee. But if the landlord does not recapture, the tenant can make a transfer without fear that the landlord will then exercise its recapture rights.

Another important issue is whether an option to renew contained in a lease assigned or subleased to a third party remains exercisable following the transfer. If the assigned lease gives the original tenant a renewal option, the assignee can extend the term unless the renewal option is reserved from the assignment. 64 If a tenant/sublandlord grants its subtenant an option to renew based on the tenant’s option in the prime lease, the subtenant is dependent on the tenant/sublandlord for a lease extension because it does not have contractual privity with the landlord. 65 If the tenant/sublandlord refuses to exercise its renewal option so as to enable the subtenant to take advantage of the rights that were granted to it, the tenant may be liable to the subtenant. 66 To protect its option to renew, the subtenant should request or require a recognition agreement from the landlord when negotiating a sublease, whereby the landlord agrees to recognize the sublease if the prime lease terminates due to the tenant/sublandlord’s default. 67

The Impact of Bankruptcy Proceedings on Assignments and Subleases

Bankruptcy laws can have a significant impact on commercial leases when the tenant files for bankruptcy protection. Generally, a trustee is appointed to administer the bankruptcy estate, except in Chapter 11 cases where the debtor-in-possession is the tenant. 68 For debtors with executory contracts and/or unexpired leases, 11 USC § 365 contains a series of rules that govern those documents. Section 365 of the bankruptcy code provides the tenant/debtor with the statutory right to assume or reject executory contracts and unexpired leases to which it is a party, subject to objections by creditors and other parties-in-interest, and ultimately the court’s approval. 69 The debtor may, in turn, assign the lease if the assignee provides “adequate assurance of future performance.” 70 During the period between filing the bankruptcy petition and the date on which the lease is assumed or rejected, the tenant must continue to pay rent and perform the material terms of the lease. 71 It should be noted that written waivers of § 362’s automatic stay have been found to be unenforceable unless they are part of a previous bankruptcy proceeding. 72 Thus, landlords should not assume that a waiver in the lease is enforceable if the tenant files for bankruptcy.

From the debtor’s perspective, the right to reject the lease is “vital to the basic purpose of Chapter 11” because it can free the tenant from the obligation to pay all future rent under the lease. 73 If a lease is rejected with bankruptcy court approval, the debtor has no legal interest in the lease or the leased premises, and it must vacate the leased premises. If, however, the debtor fails to vacate the premises, the landlord can file a motion to lift the automatic stay so it can file or continue an eviction action in state court. If the debtor rejects the lease, the landlord may have a claim for “rejection damages” pursuant to 11 USC § 502(b)(6), subject to the mitigation-of-damages duty. 74

As a condition to assuming the lease, the debtor must cure all monetary defaults and provide adequate assurances of future performance under the lease. 75 A debtor who assumes the lease may be able to assign the lease free of restrictions on transfer set forth in the lease and over the landlord’s objection, 76 which may turn out to be a significant right for the debtor if it holds a below-market lease with sufficient time remaining on the lease term. However, a bankruptcy court has discretion to reject an assignment if it finds, for example, that the assignment would disrupt the tenant mix by changing the image of a shopping center or violating the use restriction in the lease. 77 A landlord may favorably view the debtor’s assumption because it assures continuation of the lease and the cure of existing defaults. But if the tenant is holding a below-market lease, the landlord may favor rejection to enable it to negotiate a new lease. A landlord may object to the debtor’s attempted lease assumption if the landlord disagrees with the debtor’s plan to cure the default or believes the debtor has not provided adequate assurance that the default will be cured or the debtor will perform in the future.

Section 365(b)(3)(C) of the bankruptcy code provides specific protections for “a lease of real property in a shopping center” by providing that no assignment can occur without assurances that use clauses and other provisions vital to the operation of the shopping center will continue to be performed, “including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center.” The purpose of § 365(b)(3)(C) “is to preserve the landlord’s bargained-for protections with respect to premises use and other matters that are spelled out in the lease with the debtor-tenant.” 78 Moreover, § 365(b)(3)(D) requires adequate assurance “that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.” Despite the bankruptcy code’s language protecting shopping centers, some bankruptcy courts have found lease provisions that limit the use of the shopping center premises to be per se restraints on alienation. 79 To avoid an adverse ruling if a shopping center tenant files for bankruptcy, a landlord should arm itself with as much evidence and expert testimony as possible to show a disruption in tenant mix or a real potential for violating other tenants’ rights if an assignment is allowed. 80

While a tenant’s bankruptcy filing places the lease in limbo, a landlord can be proactive by approaching the tenant to determine whether it intends to reject or assume the lease. Landlords and tenants should not treat the existing lease as a static document that presents the tenant with a “take it or leave it” proposition for assumption. If the tenant voices concerns about the current lease, the landlord can renegotiate the lease to entice the tenant to assume a modified lease (subject to court approval) that keeps the tenant in the premises and paying rent.

Negotiating Lease Transfer Provisions

Negotiating lease transfer provisions is an important process for both the landlord and the tenant because, at some time in the future, the landlord or the tenant may be forced to accept a previously unknown or undesirable counterparty to the lease. It is critical that attorneys impress upon their respective clients the short-term and long-term ramifications that could result from their negotiations of the lease transfer provisions. Landlords and tenants should consider the following issues when negotiating assignment and subletting provisions.

The Landlord’s Perspective

• The landlord’s primary objective in negotiating assignment and subleasing provisions is control , including control over the mix of tenants and control over the use of the leased premises. Thus, the landlord will use the transfer provisions to protect its interests in the premises.
• A landlord’s foremost concern is almost always the tenant’s ability to pay rent, in full, on a timely basis. A landlord should negotiate requirements that a prospective assignee or subtenant must meet, such as minimum net worth and minimum gross sales.
• The landlord can protect itself by including a right to recapture the premises if a tenant seeks to assign its lease or to sublet its premises. However, landlords should carefully consider whether to include language that terminates the lease automatically upon receipt of an assignment request because it could constitute a restraint on alienation, which is disfavored, and the landlord may prefer the leasehold to continue. 81
• The landlord should keep the original tenant on the hook. Landlords should oppose any transfer provision that relieves the original tenant of its obligations under the lease upon an assignment. Having a tenant with a vested interest in the assignee’s ability to perform the lease is helpful to ensure that a lease is transferred to a worthy transferee. Additionally, in the event the assignee does default, if the original tenant’s liability has been preserved, the landlord’s chances of recovery are improved.
• The landlord should limit the use rights of a subsequent assignee or subtenant. A landlord should seek to protect its right to control the mix of tenants, particularly in retail settings, so as not to violate exclusive use provisions. 82 Moreover, exclusives and use restrictions held by other tenants at a shopping center must be considered in conjunction with a potential change in use that may occur upon assignment or subletting.
• The landlord should seek to share in excess rent. 83 For example, where a tenant assigns its lease or subleases its premises, it may be paid more than the amount the tenant is obligated to pay the landlord under the lease. If the assignment or sublease had not been entered into, those same financial accommodations would theoretically have been available to the landlord if it had leased directly to the assignee or subtenant. Accordingly, a landlord should seek the right to share in this excess financial consideration along with the tenant, or if it has the leverage, to obtain 100% of such excess.

The Tenant’s Perspective

• The tenant’s goal is maintaining flexibility. The tenant’s ability to maintain flexibility through the lease largely depends on its leverage to negotiate favorable lease terms. A new business seeking space in a desirable retail shopping center may have little or no leverage to negotiate the transfer provisions, but a large corporation leasing significant space may have considerable negotiating strength. Thus, it is imperative that the tenant’s leasing broker and attorney understand the market forces at play in any lease negotiation.
• The tenant should seek flexibility to share the leased premises or certain portions of it (i.e., floor space, utilities, and parking) with its related entities and affiliates with which it has a business relationship, without having to seek the landlord’s consent in each instance. This issue is particularly important for large companies with divisions that operate under different business names.
• The tenant should also seek flexibility to restructure its organization without the landlord and the lease acting as an impediment to such alteration, by negotiating into the lease specific language permitting such changes. The tenant’s ability to reorganize its business, either through a merger, consolidation, or sale, could be delayed or impeded by the landlord under the transfer provisions if these provisions are not properly negotiated at the letter of intent stage or before the lease is executed.
• The tenant should maintain an exit strategy if the premises no longer satisfy its business needs because it has outgrown the space or needs less space. This is particularly important in the era of COVID-19. For example, start-up companies can quickly outgrow their leased premises, but if the landlord does not have more space available, the company must seek out new or additional space, frequently at a higher rate. Conversely, a change in economic forces can cause the tenant’s business to quickly retract. Thus, prospective tenants should be mindful to negotiate termination and rights of first refusal options for newly available space in the same building, with the end goal of ensuring that the size of their leased space does not impair their business objectives. 84
• The tenant should insist that the landlord’s right to approve a lease transfer not be unreasonably withheld, if the landlord insists on reserving such right. The lease should detail the specific standards the tenant must meet to obtain approval, such as the transferee’s minimum net worth and minimum business experience.
• Counsel for the tenant should attempt to include a provision for automatically releasing the tenant and any guarantor from further liability at the time of the lease transfer or after the transfer occurs if the assignee or sublessee can meet or exceed certain financial marks, such as net worth, sales, or revenue.
• The tenant should negotiate (1) the right to revoke a transfer request during a defined period after the landlord issues a notice to terminate and recapture the premises, and (2) a reasonable period to vacate the premises before the tenant will be subject to eviction proceedings if the tenant does not revoke the transfer request. Where the landlord insists on a termination and recapture provision, this rescission right provides a tenant the flexibility to stop the recapture process according to the tenant’s particular circumstances and commercial exigencies.

The relationships established between the parties to a lease, sublease, or assignment can be complicated. While the ability to transfer the lease can be a valuable tool for the tenant, the landlord’s interest in protecting its investment by choosing its occupants is equally compelling. However, a balance can be struck that provides the tenant the flexibility it needs while preserving the landlord’s control and minimizing its risk. During lease negotiations, both parties should recognize that changing circumstances during the lease term could trigger the need to assign the lease or sublet the premises. If thoughtful attention is given to negotiating the transfer provisions, the parties can assure themselves that, if the need arises to transfer the lease, their respective interests will be reasonably protected.

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Adam F. Aldrich is the founder of Aldrich Legal, LLC, a Denver-based law firm focused on real estate and business transactions and litigation—(303) 325-5683. Coordinating Editor: Christopher D. Bryan .

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1 . Schneiker v. Gordon , 732 P.2d 603, 606 (Colo. 1987) (recognizing the “dual nature of a lease” as both a contract and a conveyance of an interest in land).

2 . Id. at 606–07.

3 . Shaffer v. George , 171 P. 881, 882 (Colo. 1917).

4 . Gordon Inv. Co. v. Jones , 227 P.2d 336, 340 (Colo. 1951).

5 . Shaffer , 171 P. at 882.

6 . Roget v. Grand Pontiac, Inc. , 5 P.3d 341, 345 (Colo.App. 1999) (“after the assignment, the assignee becomes primarily liable for the obligations under the contract, while the assignor remains secondarily liable”).

7 . Gordon Inv. Co. , 227 P.2d at 340.

8 . J.E. Martin, Inc. v. Interstate 8th St. , 585 P.2d 299, 301 (Colo.App. 1978) (“the delegation of duties under a lease and their assumption by a third person do not absolve the original lessee, absent the lessor’s knowledge and consent, simply by virtue of the conduct of the lessee and third party”). See also 1 Friedman and Randolph Jr., Friedman on Leases § 7:7.2 (Practising Law Institute 5th ed. 2013).

9 . V.O.B. Co. v. Hang It Up, Inc. , 691 P.2d 1157, 1159 (Colo.App. 1984).

10 . Friedman and Randolph Jr. , supra note 8 at § 7:4.2.

11 . Barbuti, “Assignments Pro Tanto And Why To Avoid Them,” 22 The Practical Real Estate Lawyer 24, 24–25 (Sept. 2006).

12 . Id. at 24.

13 . Id. at 23 (reprinted in part).

14 . Parrish Chiropractic Ctrs., P.C. v. Progressive Cas. Ins. Co. , 874 P.2d 1049, 1052 (Colo. 1994) (“Contract rights generally are assignable, except where assignment is prohibited by contract or by operation of law or where the contract involves a matter of personal trust or confidence”).

15 . Union Oil Co. of Cal. v. Lindauer , 280 P.2d 444, 447 (Colo. 1955). See also Malouff v. Midland Fed. Sav. and Loan Ass’n , 509 P.2d 1240, 1243 (Colo. 1973) (recognizing that “[t]he common law doctrine of restraints on alienation is a part of the law in Colorado”).

16 . Friedman and Randolph Jr., supra note 8 at § 7:3.3. See also Malouff , 509 P.2d at 1243 (holding “that the question of the invalidity of a restraint depends upon its reasonableness in view of the justifiable interests of the parties”).

17 . Beck v. Giordano , 356 P.2d 264, 265 (Colo. 1960).

18 . Lindauer , 280 P.2d at 447.

19 . Fink v. Montgomery Elevator Co. of Colo. , 421 P.2d 735, 738 (Colo. 1966).

20 . Routt Cty. Mining Co. v Stutheit , 72 P.2d 692, 693 (Colo. 1937).

21 . Parr v. Triple L & J Corp. , 107 P.3d 1104 (Colo.App. 2004).

22 . Cafeteria Operators L.P. v. AMCAP/Denver Ltd. P’ship , 972 P.2d 276, 278 (Colo.App. 1998).

23 . Id. See also Basnett v. Vista Vill. Mobile Home Park , 699 P.2d 1343, 1346 (Colo.App. 1984) (holding that a landlord may not unreasonably refuse consent under a silent consent clause because that result “incorporates the principles of fair-dealing and reasonableness and also preserves freedom of contract”), rev’d on other grounds , 731 P.2d 700 (Colo. 1987).

24 . List v. Dahnke , 638 P.2d 824, 825 (Colo.App. 1981).

25 . Cafeteria Operators L.P. , 972 P.2d at 279.

26 . List , 638 P.2d at 825.

28 . Ring v. Mpath Interactive, Inc. , 302 F.Supp.2d 301, 305 (S.D.N.Y. 2004); Toys “R” Us, Inc., No. 88 C 10349, 1995 U.S. Dist. LEXIS 14878 at *111 (N.D.Ill. Sept. 29, 1995); Restatement (Second) of Prop.—Landlord and Tenant § 15.2 cmt. g (American Law Inst. 1976).

29 . E.g., Campbell v. Westdahl , 715 P.2d 288, 293 (Ariz.Ct.App. 1985).

30 . Friedman and Randolph Jr., supra note 8 at § 7:3.4 (citing cases).

31 . Cent. Bus. Coll. v. Rutherford , 107 P. 279, 280 (Colo. 1910); List , 638 P.2d at 825 (dictum).

32 . Kendall v. Ernest Pestana, Inc. , 709 P.2d 837, 845 (Cal. 1985).

33 . Id. at 845. See also Econ. Rentals, Inc. v. Garcia , 819 P.2d 1306, 1317 (N.M. 1991).

34 . Cafeteria Operators L.P. , 972 P.2d at 277.

36 . Id. at 279.

38 . List , 638 P.2d at 825.

39 . Toys “R” Us, Inc. , U.S. Dist. LEXIS 14878 at *124 (landlord’s refusal before it has relevant information that should be obtained in making the consent decision may be unreasonable).

40 . Shaffer, The Sublease and Assignment Deskbook at 80–81 (American Bar Ass’n 2d ed. 2016).

41 . Compare Parr , 107 P.3d at 1107 (affirming trial court’s ruling that the landlord unreasonably withheld consent where the landlord delayed consent, which caused the proposed assignees to withdraw their offer to purchase the business) with Toys “R” Us, Inc. , 1995 U.S. Dist. LEXIS 14878 at *124 (landlord’s refusal before it has relevant information that should be obtained in making the consent decision may be unreasonable).

42 . Fahrenwald v. LaBonte , 653 P.2d 806, 811 (Idaho Ct.App. 1982).

43 . Parr , 107 P.3d at 1106.

45 . Id. at 1107.

46 . Bert Bidwell Inv. Corp. v. LaSalle and Schiffer , P.C., 797 P.2d 811 (Colo.App. 1990).

47 . Id. at 811.

48 . Id. at 812.

50 . Toys “R” Us, Inc. , 1995 U.S. Dist. LEXIS 14878 at *115 (citations omitted) (“where a lease contains provisions giving further meaning to a reasonableness clause, the standard of reasonableness varies”); Shaffer, supra note 40 at 80–81.

51 . Golden Eye, LTC v. Fame Co. , No. 0603166/2007, 2008 N.Y. Misc 8571 at *16 (N.Y. Gen Term Jan. 16, 2008) (“the Court may not determine reasonableness if withholding consent is based on grounds that were not included in the letter refusing consent”).

52 . Shaffer, supra note 40 at 74–75.

53 . Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc. , 826 P.2d 710 (Cal. 1992).

54 . Lindauer , 280 P.2d at 447.

55 . Murphy v. Traynor , 135 P.2d 230, 231 (Colo. 1943).

56 . Shoemaker v. Shaug , 490 P.2d 439, 441 (Wash.Ct.App. 1971) (finding that the tenant was not in default of the anti-assignment provision because it could reassign the lease back to itself).

57 . La Casa Nino, Inc. v. Plaza Esteban , 762 P.2d 669, 672 (Colo. 1988) (citing Schneiker v. Gordon , 732 P.2d 603 (Colo. 1987)).

58 . Gordon Inv. Co. , 227 P.2d at 260–61 (tenant’s subletting was held a breach that permitted landlord to terminate the lease).

59 . Shakey’s Inc. v. Caple , 855 F.Supp. 1035, 1043–44 (E.D.Ark. 1994) (holding that the landlord was estopped from terminating a lease on account of an unapproved sublease because the landlord did not act promptly).

60 . Merkowitz v. Mahoney , 121 Colo. 38, 42 (Colo. 1949) (“It is the general rule that any act done by a landlord, with knowledge of an existing right of forfeiture, which recognizes the existence of the lease is a waiver of the right to enforce the forfeiture”); Werner v. Baker , 693 P.2d 385, 387 (Colo.App. 1984) (“the lessor’s acceptance of rent accruing after the breach of an anti-assignment clause, with knowledge of the breach, constitutes a waiver of the right to terminate the lease for breach of that clause”). Cf. Nouri v. Wester & Co. , 833 P.2d 848, 851 (Colo.App. 1992) (holding that waiver of conditions against assignment by accepting rent did not carry over to other provisions in the lease).

61 . La Casa Nino, Inc. , 762 P.2d at 672.

62 . Carma Developers (Cal.), Inc. , 826 P.2d 710.

63 . Schneiker , 732 P.2d at 611.

64 . Friedman and Randolph Jr., supra note 8 at §§ 7:5.1 and 7:7.1.

65 . Tiger Crane Martial Arts Inc. v. Franchise Stores Realty Corp. , 235 A.D.2d 994, 995 (N.Y.App.Div. 1997) (“It is well settled that where, as here, a sublease is expressly made subject to the terms of a master lease, the subtenant has no legal right to compel the tenant to exercise an option for renewal of the entire demised premises in order to permit the subtenant to exercise an option for renewal of its subleased premises, absent proof of an agreement on the part of the tenant to exercise its option to renew for the benefit of the subtenant or evidence of special circumstances entitling the subtenant to such relief”).

66 . Burgess Pic-Pac, Inc. v. Fleming Cos. , 190 W. Va. 169, 175 (W.Va. 1993) (discussing liability of sublandlord to subtenant for failure to exercise renewal option after request from subtenant).

67 . Senn, Commercial Real Estate Leases: Preparation, Negotiation, and Forms , § 13.14 (Wolters Kluwer 6th ed. 2019).

68 . 11 USC § 1107.

69 . 11 USC § 365(a).

70 . 11 USC § 365(f)(2)(B).

71 . 11 USC § 365(d)(3).

72 . In re DB Capital Holdings, LLC , 454 B.R. 804, 816 (Bankr. D.Colo. 2011) (“waivers, unless they were part of a previous bankruptcy proceeding . . . should not be enforced”).

73 . NLRB v. Bildisco & Bildisco , 465 U.S. 513, 528 (1984); 11 USC § 502(b)(6).

74 . In re Shane Co. , 464 B.R. 32, 38–41 (Bankr. D.Colo. 2012) (discussing damages claim under 11 USC § 502(b)(6)).

75 . 11 USC § 365(b)(1).

76 . 11 USC § 365(f); In re Bricker Systems, Inc. , 44 B.R. 952 (Bankr. E.D. Wis. 1984) (recognizing that § 365(f) invalidates restrictions on assignment of contracts or leases by a debtor or trustee and allows assignment of assumed contracts at a later date).

77 . In re Federated Dep’t Stores, Inc. , 135 B.R. 941 (Bankr. S.D. Ohio 1991); In re Martin Paint Stores , 199 B.R. 258 (Bankr. S.D.N.Y. 1996), aff’d , S. Blvd., Inc. v. Martin Paint Stores , 207 B.R. 57 (S.D.N.Y. 1997).

78 . In re Trak Auto Corp. , 367 F.3d 237, 244 (4th Cir. 2004) (internal citation omitted).

79 . In re Bradlee Stores, Inc. , No. 00-16033, 2001 U.S. Dist. LEXIS 14755 (S.D.N.Y. Sept. 20, 2001) (holding that restriction on assignment violated the anti-assignment provisions of § 365(f)); In re Rickel Home Ctrs., Inc. , 240 B.R. 826, 832 (D.Del. 1998) (striking restrictive use provision).

80 . In re Trak Auto Group , 367 F.3d at 242 (enforcing use provision concerning the sale of automobile parts and accessories in shopping center lease); In re J. Peterman Co. , 232 B.R. 366 (Bankr. E.D.Ky. 1999) (rejecting assignment of shopping center lease where proposed assignment would violate radius restriction in lease and assignee did not sell similar merchandise as the original tenant). But see In re Toys “R” Us, Inc. , 587 B.R. 304, 307 (Bankr. E.D.Va. 2018) (overruling landlord’s objection to the debtor’s assignment on the grounds that it would violate the exclusivity provision of another lease in the shopping center and would disrupt the shopping center’s tenant mix and balance).

81 . Friedman and Randolph Jr., supra note 8 at § 7:1.1.

82 . In re Ames Dept. Stores, Inc. , 127 B.R. 744, 752–54 (Bankr. S.D.N.Y. 1991) (discussing rights of landlord to protect the tenant mix at the shopping center in the context of the lease and a subsequent bankruptcy filing of the tenant).

83 . Carma Developers (Cal.), Inc. , 826 P.2d 710 (upholding the landlord’s contractual right to capture excess rent).

84 . For an interesting discussion on the assignability of rights of first refusal, see Mitchell, “Can a Right of First Refusal Be Assigned?” 985 U. Chi. L. Rev. (2001).

As these cases illustrate, if a landlord wishes to withhold consent absent a sole and unconditional contractual right to do so, it must have fact-based reasons for doing so and cannot arbitrarily withhold or delay consent.

Privity of Estate | Practical Law

Privity of Estate

Practical law glossary item 7-503-8122  (approx. 3 pages).

• The original tenant no longer has privity of estate with the landlord and it cannot occupy the premises any more.
• the landlord expressly releases the original tenant; or
• there are state or local laws that establish the tenant's privity of contract terminated when the tenant's privity of estate terminated.
• The assignee and the landlord will have privity of estate and privity of contract as of the effective date of the assignment and assumption of the lease.
• The original tenant retains its privity of estate and privity of contract with the landlord.
• The subtenant does not have privity of estate or privity of contract with the landlord.
• The subtenant has privity of estate and privity of contract with the original tenant.

Legal Dictionary

The Law Dictionary for Everyone

In the legal system, the term privity refers to a connection between parties to a contract. This includes parties who have mutual interest in, or successive rights to, the same property. Privity is an important concept in contract law , which requires that there be a direct relationship, or “privity,” for one party to enforce a contract against another party. To explore this concept, consider the following privity definition.

Definition of Privity

• The relationship between parties participating in a legal transaction or contract interest.

1175-1225       Middle English

Privity of Contract

In contract law, the rule of privity ensures that only someone directly involved in a contract or agreement can sue any other party in relation to that contract.

For example:

John enters into a purchase contract for a rental property in which Abigail is already living with a one-year lease. As part of the purchase agreement, John assumes the existing lease. The home’s air conditioning unit is not working properly at the time of the purchase, and the seller, Max, agrees in the contract to have the unit repaired or replaced. Two months later, John is collecting lease payments from Abigail, but nobody has shown up to take care of the air conditioner. When Abigail calls John, he tells her that it is Max’s responsibility .

If Abigail were to file a civil lawsuit against Max, asking the judge to order him to repair or replace the air conditioning unit as he had agreed, her case would likely be dismissed. This is because Max has no contract with Abigail, meaning there is no privity between Max and Abigail, and therefore Abigail cannot sue him for performance of his obligations under the property sale contract.

Abigail can, however, sue her landlord, John, to force him to perform his obligations under their lease contract. If John wants to enforce his contract with Max, he must sue Max himself.

Privity of Estate

Also known as privity of title , privity of estate refers to the legal relationship between parties who hold an interest in the same piece of real property or real estate. A landlord and tenant have both privity of contract and privity of estate. If the tenant finds someone else to take over his lease so that he can move out, and assigns his lease to that new tenant, the new tenant (“assignee”) becomes responsible for the tenant’s obligations under the lease.

In most cases, a tenant cannot legally assign his lease to someone else without the landlord’s express written consent, as this is a transfer of the actual lease contract to another person. An assignment of lease serves to transfer both the original tenant’s interest in the property, or right to be there, to the assignee.

For the original tenant to be released of his obligation under the lease contract, or from his privity of contract , the landlord generally must expressly release him from those obligations in writing. In some jurisdictions, however, the law ends a tenant’s privity of contract when his privity of estate is terminated. If the landlord enters into a new contract with the new tenant, however, the two have established privity of estate and privity of contract, releasing the original lessor.

Privity in a Sublease

If a tenant subleases a leased property, whether the entire property, or only a portion of it, the original tenant remains responsible for his contract with the original landlord, and so is liable for making lease payments to the landlord, and performing any other obligations of that lease contract. This is true even though he no longer has privity of estate, or right to be there. The original tenant retains privity of contract with the original landlord, which means that the individual subleasing the property has no privity with the original landlord, but must go through the original tenant with whom he has a lease agreement .

Amanda has a one-year lease on her apartment in the city. She has made arrangements to go to South America as an exchange student for six months, and wants to sublet her apartment while she is gone. With permission from her landlord, Nick, Amanda sublets her apartment to Suzanne with a written six-month agreement. Amanda remains responsible to make lease payments to her landlord, as she retains privity through her original lease agreement.

Suzanne has no privity with Nick, and must deal directly with Amanda, both in making her payments, and for any other requests that have to do with the property. In the event Suzanne leaves the apartment damaged, Amanda is responsible to Nick for the damages . If Amanda wants Suzanne to be held responsible, she must sue her directly, and Nick is not required to wait for that process.

Related Legal Terms and Issues

• Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
• Jurisdiction – The legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.
• Sublet – A leased property that is subleased to another individual.

Commercial Lease Assignment and Subleases Part 1: Differences and Negotiation Tactics

When a tenant assigns its lease, it transfers its entire leasehold interest to a third-party assignee for the remainder of the lease term. On the effective date of the assignment and assumption, the tenant transfers both its: (1) privity of contract, meaning the assignee now has a direct contractual relationship with the landlord; and (2) privity of estate, meaning the assignee has the sole right to possess and occupy the premises until the expiration or termination of the lease. An assignment of a lease is usually evidenced by an assignment and assumption agreement between the tenant and the assignee whereby the tenant assigns its rights and interest under the lease to the assignee and in return the assignee assumes all of the tenant’s obligations under the lease.

When a tenant subleases its lease, the tenant transfers less than all of the tenant’s leasehold estate to a third-party subtenant. With a sublease, the tenant subleases to the subtenant all or a part of its premises for a term that is less than the remainder of the lease term. In a sublease, the tenant keeps its privity of contract and privity of estate with the landlord, and remains responsible for all of its obligations under the lease, even if the subtenant is the party that causes the breach. With a sublease, the tenant transfers its privity of estate covering the subleased portion of the demised premises to the subtenant, however, because the tenant does not transfer to the subtenant its privity of contract, the subtenant: (1) has no direct contractual relationship with the landlord; and (2) must rely on the tenant to enforce the landlord’s obligations if the landlord breaches any of its representations, warranties or covenants under the lease.

In negotiating an assignment, a landlord will want to make sure it maintains control over the party that is using and occupying its premises, and limit any risks associated with the assignment of the lease to a third-party. For example, landlord may include language in its assignment clause the provides the following: (a) prohibits a tenant from assigning its lease; (b) places strict notice and consent requirements on the tenant for any proposed assignment; (c) requires tenant to split any profit with the landlord; (d) requires the tenant to pay a fee to the landlord for its consideration and processing of the proposed assignment; (e) requires the tenant to reimburse the landlord for all costs and expenses incurred by the landlord and its counsel for the review of the assignee’s financials and other documents, the assignment and assumption agreement, and the negotiation of the landlord consent; (f) gives the landlord the option to terminate the lease; (g) the tenant and any guarantor of tenant continue to remain liable for ongoing tenant obligations after the effective date of the assignment; (h) prohibits the assignee from enjoying certain benefits and rights that the original tenant enjoyed under the lease, such as self-cure rights, and right to set-off; and (i) prohibits the assignee from exercising certain options contain the lease, such as the option to expand, extend the term and purchase the property.

Just like in negotiating an assignment, when negotiating a sublease, a landlord will want to make sure it maintains control over the party or parties that use and occupy the premises. For example, landlords generally draft language in their subleasing clauses that: (a) prohibits a tenant from subleasing all or part of its space; (b) places strict notice and consent requirements on the tenant for any proposed subletting; (c) gives the landlord the option to take back the space that is subject to the sublease; (d) limits the number of subtenants occupying the space; (e) limits the number of times a tenant can sublease its space during the lease term; (f) requires the tenant to split any profit with the landlord; (g) requires the tenant to pay a fee to the landlord for its consideration and processing of the proposed sublease; (h) requires the tenant to reimburse the landlord for all costs and expenses incurred by the landlord and its counsel for the review of the subtenant’s financials and other documents, the sublease agreement, and the negotiation of the landlord consent (if required); (i) prohibits the subtenant from enjoying certain benefits and rights that the tenant enjoys under the lease, such as self-cure rights, right to off-set and a listing in the lobby directory or floor directory; and (j) prohibits the tenant from exercising certain lease options if the space is subject to a sublease such as an option to expand, an option to extend the term, and an option to purchase the property.

Landlords should carefully consider requests from tenants for approval of assignments and subleases. It may be prudent to retain experienced legal counsel to review proposed agreements to ensure that the landlord’s rights are adequately protected. Call our experienced Florida business lititgation attorneys at the Rosenthal Law Group at (954) 384-9200 today.

• Commercial Landlord Tenant Litigation

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Assignment of Lease

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What is an Assignment of Lease?

The assignment of lease is a title document that transfers all rights possessed by a lessee or tenant to a property to another party. The assignee takes the assignor’s place in the landlord-tenant relationship.

You can view an example of a lease assignment here .

How Lease Assignment Works

In cases where a tenant wants to or needs to get out of their lease before it expires, lease assignment provides a legal option to assign or transfer rights of the lease to someone else. For instance, if in a commercial lease a business leases a place for 12 months but the business moves or shuts down after 10 months, the person can transfer the lease to someone else through an assignment of the lease. In this case, they will not have to pay rent for the last two months as the new assigned tenant will be responsible for that.

However, before the original tenant can be released of any responsibilities associated with the lease, other requirements need to be satisfied. The landlord needs to consent to the lease transfer through a “License to Assign” document. It is crucial to complete this document before moving on to the assignment of lease as the landlord may refuse to approve the assignment.

Difference Between Assignment of Lease and Subletting

A transfer of the remaining interest in a lease, also known as assignment, is possible when implied rights to assign exist. Some leases do not allow assignment or sharing of possessions or property under a lease. An assignment ensures the complete transfer of the rights to the property from one tenant to another.

The assignor is no longer responsible for rent or utilities and other costs that they might have had under the lease. Here, the assignee becomes the tenant and takes over all responsibilities such as rent. However, unless the assignee is released of all liabilities by the landlord, they remain responsible if the new tenant defaults.

A sublease is a new lease agreement between the tenant (or the sublessor) and a third-party (or the sublessee) for a portion of the lease. The original lease agreement between the landlord and the sublessor (or original tenant) still remains in place. The original tenant still remains responsible for all duties set under the lease.

Here are some key differences between subletting and assigning a lease:

• Under a sublease, the original lease agreement still remains in place.
• The original tenant retains all responsibilities under a sublease agreement.
• A sublease can be for less than all of the property, such as for a room, general area, portion of the leased premises, etc.
• Subleasing can be for a portion of the lease term. For instance, a tenant can sublease the property for a month and then retain it after the third-party completes their month-long sublet.
• Since the sublease agreement is between the tenant and the third-party, rent is often negotiable, based on the term of the sublease and other circumstances.
• The third-party in a sublease agreement does not have a direct relationship with the landlord.
• The subtenant will need to seek consent of both the tenant and the landlord to make any repairs or changes to the property during their sublease.

Here is more on an assignment of lease here .

Darryl "D" S.

Alexandra I.

Parties involved in lease assignment.

There are three parties involved in a lease assignment – the landlord or owner of the property, the assignor and the assignee. The original lease agreement is between the landlord and the tenant, or the assignor. The lease agreement outlines the duties and responsibilities of both parties when it comes to renting the property. Now, when the tenant decides to assign the lease to a third-party, the third-party is known as the assignee. The assignee takes on the responsibilities laid under the original lease agreement between the assignor and the landlord. The landlord must consent to the assignment of the lease prior to the assignment.

For example, Jake is renting a commercial property for his business from Paul for two years beginning January 2013 up until January 2015. In January 2014, Jake suffers a financial crisis and has to close down his business to move to a different city. Jake doesn’t want to continue paying rent on the property as he will not be using it for a year left of the lease. Jake’s friend, John would soon be turning his digital business into a brick-and-mortar store. John has been looking for a space to kick start his venture. Jake can assign his space for the rest of the lease term to John through an assignment of lease. Jake will need to seek the approval of his landlord and then begin the assignment process. Here, Jake will be the assignor who transfers all his lease related duties and responsibilities to John, who will be the assignee.

You can read more on lease agreements here .

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Assignment of Lease From Seller to Buyer

In case of a residential property, a landlord can assign his leases to the new buyer of the building. The landlord will assign the right to collect rent to the buyer. This will allow the buyer to collect any and all rent from existing tenants in that property. This assignment can also include the assignment of security deposits, if the parties agree to it. This type of assignment provides protection to the buyer so they can collect rent on the property.

The assignment of a lease from the seller to a buyer also requires that all tenants are made aware of the sale of the property. The buyer-seller should give proper notice to the tenants along with a notice of assignment of lease signed by both the buyer and the seller. Tenants should also be informed about the contact information of the new landlord and the payment methods to be used to pay rent to the new landlord.

You can read more on buyer-seller lease assignments here .

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Graduated from Washburn University School of Law with certificates in Tax Law and Business Transactions. Served as a specialized tax advisor and business consultant to clients across the nation over the last 8 years. I have practiced law since 2019, specializing in entity formations, contract drafting, contract review, contract disputes, business transactions, demand letters, legal research, and general business consulting.

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What Exactly is Privity?

One of the knocks against the legal profession is that it uses terms that are obscure or undecipherable by the rest of the population. One of those terms is “privity.” It gets thrown around in some circles with less than a full understanding of what the term means and how it may apply. Generally, the term “privity” connotes a close, direct, or successive relationship; one having a mutual interest or right. In the Landlord/Tenant context a Landlord and a Tenant have both “privity of contract” and “privity of estate.” There are significant differences between the two types of privity.

For example, privity of contract allows one party to a contract to enforce the other party’s promises. Let’s say Party A sells property to Party B. Parties A and B are in privity, and each may enforce the other’s promises as contained in the contract. However, Party B’s tenant is not in privity with Party A, and therefore has no right to enforce the terms of the contract between Party A and Party B against Party A. Thus, if Party A failed to make repairs as required in his contract with Party B, the tenant cannot sue Party A for failing to do so. There is no privity between Party A and the tenant. Party B, however, does have a right to enforce Party A’s promise to make repairs.

Privity of estate, on the other hand, allows a party to enforce promises that are considered to run with the land: that is, promises whose substance touches and concerns the land. The promise must relate directly to occupation, use or enjoyment of the premises. For example, a successor to a landlord, although not the original landlord, can enforce provisions in the lease relating to a tenant’s obligations to pay rent, taxes, and insurance and to make repairs. Tenants, on the other hand, have the right to enforce against a Landlord’s successor the right to quiet enjoyment of the property, a tenant’s option rights, exclusivity rights, and extension rights.

Privity becomes important when a tenant decides to assign his lease to a third party. Unless the assignee agrees to assume the lease, there is no privity between the landlord and the assignee. As a result, neither can enforce the lease against the other. In assignment situations, the landlord usually consents to the assignment and privity is not an issue. There are situations, however, where the landlord does not know of the assignment and the assignee does not assume the lease. Apart from the fact that this usually constitutes a default under the lease, there is no privity between landlord and the new “tenant” and neither can enforce the terms of the lease against the other.

In a sublease situation (where the tenant assigns less than the entire leased premises to a third party), there is no privity between the landlord and the sub-lessee. However, the sub-lessee, is in privity with the tenant-sublessor, who would be responsible for enforcing the lease provisions against the landlord.

Both parties in a landlord-tenant relationship should have a firm grasp of the concept of privity and how it may impact the rights and responsibilities of the parties in the event a third party is introduced into the relationship.

If you have any questions about this post or any other related matter, please contact me at [email protected] .

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Assignments and Sub-Leases

Video-course: tenant’s duties - module 4 of 5, video-course: warranties and limits on sales contracts - module 3 of 5.

Assignments and subleases are terms for situations in which a tenant in possession of property transfers his or her right to possess that property to a third party. If the lessee transfers his or her entire remaining interest in the tenancy, then the transfer is known as an assignment. If the lessee transfers only part of his or her interest, then the transfer is known as a sublease. For example:

Barney leases Rubbleacre from Fred for two years, beginning January 1, 2013 and ending on December 31, 2014 at the rental price of $1,000 per month. On January 1, 2014, with one year remaining on the lease, Barney and Kazoo agree that Kazoo will occupy the land for the remainder of the lease, and that Kazoo will pay the $1,000 per month rent to Fred. In this case, Barney has “ assigned ” his lease to Kazoo. Barney leases Rubbleacre from Fred for two years, beginning January 1, 2013 and ending on December 31, 2014 at the rental price of $1,000 per month. On January 1, 2014, with one year remaining on the lease, Barney and Kazoo agree that Kazoo will occupy the land for the next six months and pay the rent for those months. At the end of six months, Barney will move back onto the land and finish out the remainder of the lease. In this case because Barney and Kazoo have agreed that Kazoo will assume less than the full remainder of the lease, Barney has “ sublet ” part of his interest in Rubbleacre to Kazoo.

See McClain Airlines, Inc. v. Republic Airlines, Inc. , 1991 U.S. App. LEXIS 18047 (1991) .

As a general principle, both assignments and subleases are allowed, and so any tenant can assign his or her lease to a third party or sublease his or her interest in the property to a third party at any time. However, as a practical matter, many lease agreements specifically prohibit assignments or subleases. Of course, any agreement between landlord and tenant that prohibits assignments or subleases is fully binding and enforceable.

The key issue to be discussed, then, is what affect the transfer of interest has on all the involved parties. Since there are several parties involved in these transactions, we will start by defining the parties. In an assignment, there is the landlord/ lessor (the property owner), the tenant/ assignor (the person who leased it from the landlord and then assigned his or her interest to a third party) and the assignee (the person who received the assignment). In a sublease, there is the landlord/ lessor, the tenant/ sublessor (the party who leased the property from the landlord but is now subleasing the property to a third party), and the sublessee.

As a further necessary introduction, there are two forms of relationship between every landlord and tenant. There is a contractual relationship that took effect and exists by virtue of the lease agreement itself. That relationship is known as “ privity of contract ”. In addition, there is a property ownership relationship, by virtue of their sharing of the ownership of the property. That relationship is known as “ privity of estate ”. “Privity of estate” exists between two parties when those two parties have successive ownerships in the same property (i.e., one holds a present interest while the other holds a future interest or they both hold future interests, one after another).

The Assignment

An assignment is a full transfer of the lease between the tenant and the assignee. Therefore, since the tenant no longer has any ownership interest in the property, there is no longer any relationship between the landlord and the tenant as far as the property ownership is concerned. Therefore, there is no longer “privity of estate” between the landlord and the tenant. On the other hand, there now is privity of estate between the landlord and the assignee. This is because the assignee now owns the present interest in the property. This present interest will end only at the end of the lease when it will go back to the landlord. Since the landlord’s right to possession is now successive to the possession of the assignee, the landlord and assignee are in privity of estate.

Privity of contract, on the other hand, still exists between the landlord and the tenant. This is because the original contract that existed between the landlord and the tenant is still fully valid even after the assignment. In other words, the landlord does not give up his or her right to enforce the lease agreement with the tenant just because the tenant transfers his or her interest to the third party. There is no privity of contract, of course, between the landlord and the assignee because those two parties never agreed to anything between themselves. For example:

Ethel owns Blackacre. She leases Blackacre to Lucy for 5 years. During year 2, Lucy assigns her interest in Blackacre to Ricky. Ethel is in privity of estate with Ricky and not Lucy and in privity of contract with Lucy and not Ricky. Also note that Lucy and Ricky are in privity of contract (because they made an agreement with each other), but not in privity of estate (Lucy has no possession interest in Blackacre, and so she does not have an interest that either follows or is followed by Ricky’s interest).

The sublease.

The sublease is only a partial transfer of interest from the tenant to the sublessee. The tenant is transferring part of his or her interest in time to the sublessee. Therefore, there is no privity of contract or privity of estate between the landlord and the sublessee in a sublease. The reason that there is no privity of estate between the landlord and the sublessee is that the landlord’s right to possession of the property does not follow the sublessee’s right to possession. Instead, it still follows the tenant’s right of possession. The landlord is, however, still in both privity of estate and privity of contract with the tenant. Privity of contract is still applicable for the same reason as with the assignment (the landlord and the tenant agreed on the terms of the original lease). In addition, there is privity of estate between the landlord and the tenant because the right to possession of the landlord still follows the right of possession of the tenant. For example:

Ethel owns Blackacre. She leases Blackacre to Lucy for 5 years. During year 2, Lucy subleases Blackacre to Ricky for one year. Ethel is not in privity of estate or privity of contract with Ricky because she did not make an agreement with Ricky and because her interest in possession of Blackacre does not follow Ricky’s (it follows the end of Lucy’s five year lease). On the other hand, Ethel and Lucy are in both privity of contract (because their agreement is still valid) and privity of estate (because Ethel’s interest follows the end of Lucy’s lease). Note that Lucy and Ricky are in both privity of estate and privity of contract. They are in privity of contract because they made an agreement with each other. They are in privity of estate because Lucy’s interest (in the remainder of her lease) follows Ricky’s interest (Lucy will get Blackacre at the end of Ricky’s one year sublease).

The ramifications of who is in privity of what with whom can be crystalized in a few rules:

• A party collecting rent (landlord from the tenant or tenant from assignee or sublessee) can collect rent from someone with whom he or she is in privity of contract or privity of estate.
• A party looking to enforce obligations of the landlord can only enforce those obligations against a party with whom he or she is in privity of estate.
• The contractual terms of the lease itself can only be enforced against a party with whom the party seeking to enforce the terms is in privity of contract.

For example:

1. Ethel owns Blackacre. She leases Blackacre to Lucy for 5 years. During year 2, Lucy assigns her interest in Blackacre to Ricky.

• Ethel may collect rent from Ricky or Lucy.
• Lucy may not collect rent from Ricky.
• Ricky may enforce landlords’ obligations against Ethel, but not against Lucy. Lucy may not enforce landlords’ obligations against Ethel.

2. Ethel owns Blackacre. She leases Blackacre to Lucy for 5 years. During year 2, Lucy subleases Blackacre to Ricky for one year.

• Ethel may collect rent from Lucy, only, not Ricky.
• Lucy may collect rent from Ricky.
• Ricky may enforce landlords’ obligations against Lucy, but not against Ethel.
• Lucy may enforce landlords’ obligations against Ethel.

What's the difference between privity of contract and privity of estate?

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Is a Contract to Lease Binding in California?

This question is about california residential lease agreement.

Yes, a contract to lease is legally binding in California. Before a lease can be enforced, the terms within the lease must be executed, delivered to the tenant, and accepted by both parties.

However, both parties do not have to sign the lease in order for the contract to be binding. A lease delivered and signed by the landlord is enforceable if the tenant fails to sign. Alternatively, by paying the rent and moving onto the property, the tenant is presumed to accept the lease even if they do not sign it.

Additionally, a lease may be considered void if it contains certain illegal provisions, such as waiving certain tenant rights.

The information for this answer was found on our California Residential Lease Agreement answers.

Related questions

• How Long Can a Residential Lease Be in California?
• Do Lease Agreements Need to Be Notarized in California?
• Can a Lease Automatically Renew in California?

What to Include in Your California Lease Agreement

A written lease agreement legally binds a landlord and a tenant. But, exactly what do you as a landlord include in your California lease agreement?

A lease agreement lays out the rights and responsibilities of you as the landlord and your tenant. Thus, knowing what to include becomes essential.

Include These in Your California Lease Agreement

Lawyers define a written lease agreement as a “ bilateral ” contract between two parties. What goes into the lease agreement determines whether you profit or fail as a landlord.

Leaving out important items lets tenants take advantage of you. Also, not including California legal requirements subjects you to fines and lesser profits.

So, What’s Necessary for a General Lease Agreement?

Let’s begin with what’s generally included in lease agreements before explaining California laws.

The following topics must appear in every lease agreement:

• Description of the property and the parties;
• Agreed rental amount;
• When the rental period begins and ends;
• When the rent becomes due and payment frequencies;
• Condition of the property when the lease begins;
• Maintenance and expectation that the tenant keeps everything in good condition;
• Landlord’s inspections, repairs; and
• How the tenant leaves the property.

Most Important Essentials of a Residential Lease Agreement

Let’s explore the important essentials of a general lease agreement:

1. Names of the tenant and occupiers

Every adult (persons over 18 years of age) living in the rental should sign the lease agreement.

This makes every adult legally responsible for paying the rent and following the responsibilities mentioned in the lease agreement. Thus, if an adult bails out and fails to pay the rent, you may seek full payment of the rent from the remaining adult tenants.

Also, this allows you to evict anyone you didn’t approve including friends, relatives, boarders, and sublets.

2. Limits on occupancy

Your lease should specify that it’s used only as a residence (no business purposes) by the tenants.

If you allow some business activities in the home or unit make sure to specify the types of business tenants may run from the home. And, include all required business permits.

3. Contact information

Require full contact information for all parties including ways to communicate in writing.

Requiring tenants to contact you in writing for certain events protects you in case a problem occurs. Keeping records of all written communications comes in handy in case a dispute ends up before a judge.

For instance, your lease agreement may require tenants to contact you in writing when needing repairs. Failing to contact you in writing protects you in case a known leaking water pipe erupts causing damage to the tenants’ personal property.

4. Description of the property

Lease agreements must include the complete address of the rental property (including building name and unit number).

Specify any included parking spaces and storage areas. Also, specify areas tenants not allowed to access like a locked backyard shed.

5. Term of the tenancy

Lease agreements always specify the starting date and ending period. Usually month-to-month for one or more years. Or, automatic renewal until either you or the tenant provides written notice to terminate the lease by a specific date.

No matter which method you use, make sure the lease agreement states the starting date, the length of the tenancy, and the expiration date or event.

Besides writing in the rent amount, include the due date (i.e. first of the month) and how to pay. Include acceptable payment methods like:

• Mailing to your home or office.

Note: California maintains laws about when rent is due ( California Civil Code Section 1947 ) and where rent gets paid ( California Civil Code Section 1962 ). See a detailed explanation below.

We also published a blog post explaining the many ways a California landlord collects rent here .

7. Deposits and fees

Avoid confusion by spelling out the required security deposit , how much, what for, and how & when you return the deposit. If you intend for part of the security deposit to cover “last month’s rent” specify it in the lease.

Include any legal non-refundable fees like for pets or mandatory cleaning.

Learn more about what entails reasonable landlord’s cleaning and repair costs to deduct from security deposits here .

8. Maintenance and repairs

Clearly set forth your and the tenant’s responsibilities for maintenance and repairs like:

• Tenant’s responsibility to keep the property sanitary and clean and pay for damages caused by tenant’s abuse or neglect (except for normal wear & tear);
• The tenant must notify you of any defects or dangerous conditions in the property;
• Your policies for repairs;
• Restricting tenant’s alterations and self-repairs without your permission; and
• Your right to entry to make repairs, inspections, and maintenance with specifics about your advance notice before entering.

We also published a blog post about how California landlords handle tenants’ emergencies here .

9. Restricting tenant’s illegal activities

Prevent property damage, avoid trouble, and limit your exposure to lawsuits.

Include specific clauses prohibiting bad behavior like illegal activities (dealing drugs), and excessive noise.

If you don’t allow pets, make sure your lease says it. Also, if the building prohibits pets. Or, if the building allows pets, include their pet policies.

If you allow pets, specify restrictions like breeds, types, sizes, and how many. Also, if leashes required on pets outside the unit. Plus, require the tenant to keep the interior and yard free of animal waste.

Make the tenant pay for all damages caused by pets.

11. Smoking

If you want to restrict or prohibit smoking inside or in the yard, you must include them in your lease. State where and what tenants may smoke (cigars, pipes, cigarettes, pot, etc.).

Note: Although California legalized smoking marijuana, landlords maintain the right to prohibit or restrict where and what to smoke on the property.

12. Other restrictions

Your lease must follow all relevant laws. These include:

• Health and safety codes;
• Rent control laws and ordinances;
• Anti-discrimination laws (Read our blog post about California Fair Housing Laws here );
• Occupancy rules;
• State disclosure laws (Read our recent post about the California Sex Offender Disclosure Law here );
• Rules about parking space usage; and
• Common areas use.

California Laws about Paying Rent

Like every other state, California maintains laws about various aspects of rent. These include:

• Rent controls;
• Deposits and fees;
• Landlord access to rented properties;
• When rents due and what happens if rent not paid by the due date;
• What happens when the rent due date occurs on a holiday or weekend;
• Rental grace periods;
• Where to pay the rent;
• Check bounce fees;
• Landlord notice to increase rent; and
• Terminating a lease for not paying rent.

California Rent Control Laws

California’s rent control law along with several city ordinances spell out how much landlords may charge for rent.

Learn more about California and local ordinances rent control in our recent blog post here .

California Security Deposit Law

California enacted a security deposit law. (Cal. Civ. Code Sections 1950.5 , and 1940.5(g) .)

View a summary of California’s security deposits law here .

Recently, we published a post about California’s Security Deposits Law here ;

The security deposit limits in California include:

• “Two months’ rent for unfurnished rentals;
• Three months’ rent for furnished rentals; and
• Add an extra half month’s rent for a waterbed.” ( Source )

New Law: Beginning on January 1, 2020, active service members only pay one month’s rent for unfurnished; or two months’ rent for furnished. ( Source )

The deadline for returning security deposits in California is 21 days. ( Source )

Late Rent Payments in California

Every state maintains different laws about when rents get paid (holidays, Sundays, weekends, etc.), grace periods for penalizing late payments, and late fees.

California doesn’t require landlords to give tenants extra days to pay the rent. It’s due on the date the lease states. But, landlords may voluntarily include a grace period. ( Source )

Read our blog post about “What to do when Your California Tenants Pay Rent Late” here .

Late Fees in California

California requires lease agreements to specify all late fees to become legal.

When tenants fail to fully pay by the specified rent due date, landlords may charge a late fee . But, California laws require landlords to only charge a late fee penalty based on a “reasonable estimate that the lateness costs the landlord” .

Here’s the court case for the California law on late fees: Orozco v. Casimiro 121 Cal.App.4th Supp. 7 (2004) . Read a good explanation of it here .

California Bounced Check Fees

California limits landlords to charge $25 maximum for the first bounced check and $35 for each bounced check afterwards.

Here’s the California law about bounced checks fees: Cal. Civil Code. § 1719 . Read a good explanation of the law here .

California Increase in Rent Notice Law

California requires landlords to give tenants at least 30 days to increase rents. Unless the lease agreement locks in the rental amount until it expires.

Also, time for the notice of rent increases to 60 days when the increased rent becomes more than 10% of the lowest rent charged over the past 12 months.

We published a blog post explaining “How to Raise Rent in California” here .

Rent Control Law:  Since January 1, 2020, California landlords must abide by the statewide rent control law limiting how much to increase rents. ( Source )

California Landlord Right of Entry Law

California landlords must respect their tenant’s privacy. But, sometimes landlords need to make repairs or maintenance to preserve their properties.

Thus, California laws allow landlords to provide:

• “Reasonable notice” before entering a rented property; where
• 24 hours presumed reasonable; and
• 48 hours for the initial moving out inspection. ( Source )

Read our post about the Landlord Right of Entry Law in California here .

California Law about Terminating Leases for Nonpayment of Rent

California landlords must give tenants at least 3 days’ notice to pay the rent or move after the due date expires. The 3 days exclude Saturdays, Sundays, and holidays. ( Source )

If the tenant doesn’t move out or fully pay the rent, the landlord may file for an eviction.

Read our post explaining California’s Eviction Laws here .

View a law firm’s explanation of the California law about terminating leases for non-payment of rent here .

So, what to include in your California lease agreement?

This post explains the important terms of every lease agreement. Then it focused on California laws affecting lease agreements.

Consider these as the vital backbone of terms needed so you as an investor and a landlord protect your assets.

You need to establish a policy and procedures for: 

• Collecting rents;
• Protecting your property, appliances, and fixtures while making needed maintenance and repairs; and
• Ensuring the tenant leaves on time and keeps your property in good condition.

Confused by all the Lease Terms and California Laws?

Don’t rely on simple lease agreements found online or in books.

Instead, rely on a professional property management company to safeguard your properties and collect rents on time.

Contact Us for all your property management needs in the greater San Diego area.

Steven Rich, MBA – Guest Blogger

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