Chapter § 35.4 COMMON AREAS OF COMMERCIAL LEASE DISPUTES

• Jurisdiction: Oregon

§ 35.4 COMMON AREAS OF COMMERCIAL LEASE DISPUTES

§ 35.4-1 Sublease and Lease Assignment

Subleases and lease assignments are a common area of dispute in the commercial lease context. Although they often involve similar issues, subleases and assignments have important differences.

With a sublease, the lessee creates a new tenancy between the lessee and the sublessee for all or part of the premises; however, the lessee remains liable to the lessor for the performance of the lease. Lamonts Apparel, Inc. v. SI-Lloyd Associates, 157 Or App 44, 49, 967 P2d 905 (1998) ("[I]n a sublease the original lessee remains liable to the lessor for payment of rent and the performance of the other covenants of the lease.").

With an assignment, the lessee conveys all or part of the lessee's interest in the existing lease to the assignee, and the assignee "steps into the shoes" of the assignor lessee. Lamonts Apparel, Inc., 157 Or App at 49 ("An assignment is the outright transfer of all or part of an existing lease, so that the assignee steps into the shoes of the assignor . . ."). Many lessors require, as a condition of their consent to an assignment, that the assignor (i.e., the original lessee) remain liable on the lease. Although leases are usually assigned by written agreement, courts will also imply a lease assignment when a party other than the lessee is in possession of the premises and fulfilling the lease obligations. Abbott v. Bob's U-Drive, 222 Or 147, 156, 352 P2d 598 (1960). In either a written or an implied lease assignment, the assignee is bound by and entitled to all covenants in the existing lease that run with the land. Abbott, 222 Or at 156; see also Lamonts Apparel, Inc., 157 Or App at 49.

Courts disfavor restrictions against subleases and assignments. Dolph v. Lennon's, Inc., 109 Or 336, 349, 220 P 161 (1923). As a result, absent a lease provision to the contrary, the lessee has the right to sublet or assign the lease without first obtaining the lessor's consent. See Dolph, 109 Or at 348. In addition, courts strictly construe lease covenants purporting to restrict the lessee's power to sublease or assign the lease. Dolph, 109 Or at 349. Because restrictions against subleases and assignments are for the lessor's benefit, the lessor may also validly waive any of these restrictions orally or in writing. Perrigo v. Boehm, 194 Or 507, 517, 242 P2d 791 (1952).

Many commercial leases permit assignments as long as the lessor's prior consent is obtained. Although courts disfavor restrictions on subleases and assignments, parties may contract to provide the lessor with complete discretion to withhold consent to any proposed sublease or lease assignment. However, unless contract terms evidence a contrary expectation, courts will imply a requirement that the lessor not unreasonably withhold consent. Carey v. Lincoln Loan Co., 165 Or App 657, 670-71, 998 P2d 724 (2000); Pac. First Bank v. New Morgan Park Corp., 319 Or 342, 876 P2d 761 (1994) (joining the jurisdictions that provide "if [a] lease states tenant may assign only with landlord's consent or tenant may not assign without landlord's consent there is engrafted on this language by implication the phrase which consent shall not be unreasonably withheld" (citation and internal quotation omitted)).

Although the parties' intent to grant the lessor complete freedom to withhold consent should be reflected in the lease, that intent need not be express. For example, in Pac. First Bank, 319 Or at 353-54, the court concluded that a lease covenant that prohibited transfer of the lease without the lessor's prior consent provided the lessor with "unilateral, unrestricted" discretion to withhold consent to the lease transfer. In reaching this conclusion, the court contrasted this clause with another clause in the lease agreement that expressly imposed a reasonableness requirement. Thus, because the parties included the reasonableness clause in one provision of the lease agreement, but not in the assignment clause, the court found that the parties expressly agreed to the lessor's complete discretion to withhold consent to lease assignments. Pac. First Bank, 319 Or at 353-54.

PRACTICE TIP: Parties will achieve greater predictability and reduce disputes about lease assignments and subleases if the lease agreement clearly designates the lessor's authority to withhold consent to lease assignments or subleases. Thus, if the lessee wants the lessor to be bound by a reasonableness requirement in withholding consent, the lessee should bargain for inclusion of an express duty of reasonableness. Similarly, if the lessor prefers complete discretion to withhold consent to lease assignments and subleases, the lessor is wise to bargain for a provision expressly granting the lessor that authority.

Whether the lessor has an express or implied duty to act reasonably, the lessor's decision to withhold consent must only be "within the range of reasonableness" for the situation. Chiles v. Robertson, 94 Or App 604, 633, 767 P2d 903, modified on recons, 96 Or App 658, 774 P2d 500, rev den, 308 Or 592 (1989). The proposed use of the property and the financial status of the proposed assignee are examples of reasonable grounds for the lessor to withhold consent. Chiles, 96 Or App at 631-32; McKeon v. Williams, 104 Or App 106, 110-11, 799 P2d 198 (1990), aff'd, 312 Or 322, 822 P2d 699 (1991).

§ 35.4-2 Option to Renew

An option to renew the lease agreement is a common covenant found in commercial leases. For a renewal option to be enforceable, the option may not leave the renewal terms for future negotiation but, instead, must provide definite terms for the renewal lease or define a method for determining those terms. Slayter v. Pasley, 199 Or 616, 627-28, 264 P2d 444 (1953). A renewal option, however, is not invalid because its terms are ambiguous. Instead, as with other ambiguous lease terms, courts may take into account available extrinsic evidence to resolve ambiguity. This includes evidence of the circumstances and conduct of the parties during the life of the agreement. Harris v. Warren Family Properties, LLC, 207 Or App 732, 738, 143 P3d 548 (2006) (citing Yogman v. Parrott, 325 Or 358, 364, 937 P2d 1019 (1997)).

To obtain a binding renewal, the lessee must unequivocally accept the option to renew. Blakeslee v. Davoudi, 54 Or App 9, 13-14, 633 P2d 857, rev den, 292 Or 108 (1981). Exercise of a renewal option must generally occur before the lease agreement expires. Blakeslee, 54 Or App at 13. If the lease does not specify an exact time for exercising a renewal option, courts will imply a requirement that the lessee exercise the option at a reasonable time within the term of the lease. Music Tree, Inc. v. Tallman Piano Store, Inc., 45 Or App 651, 655, 608 P2d 1228 (1980). Because renewal notice requirements are for the lessor's benefit, the lessor may waive lease provisions requiring that the lessee provide written notice to exercise the renewal option. Wherry v. Lacey, 236 Or 307, 308, 388 P2d 279 (1964).

The lessee's remedies for breach of an option to renew may include specific performance as well as damages resulting from the deprivation of the leasehold interest. As with other equitable remedies, the remedy of specific performance is available only if the renewal option is clear and definite. Edwards v. Tobin, 132 Or 38, 41, 284 P 562 (1930). A renewal clause that provides that the lease will be renewed at a fair and reasonable rental rate is not too indefinite for specific performance. Edwards, 132 Or at 42-43.

The standard measure for damages for breach of a renewal option is the difference between the reasonable rental value of the premises and the stipulated renewal rent amount. Buck v. Mueller, 221 Or 271, 279-80, 351 P2d 61 (1960). In addition, the lessee may claim damages for the lessee's loss of profits as a result of the lessor's breach of an option to renew. To claim lost profits, the lessee must demonstrate the amount of lost profits with "reasonable certainty." Buck, 221 Or at 282.

§ 35.4-3 Right of First Refusal to Relet the Premises

Similar to an option to renew, the right of first refusal to relet the premises is a common covenant found in commercial leases. The right of first refusal requires a lessor to disclose to the lessee any lease offers for the premises that the lessor has received during the lease term, and grants the lessee the right to match the offer upon expiration of the lease term. To exercise the right of first refusal, the lessee's "acceptance must be positive, unconditional, unequivocal and...